UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-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 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 o xNo 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 $27,563,000$42,307,000 as of March 31, 201029, 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 294,309,4525,860,398 shares of the registrant'sregistrant’s common stock outstanding as of December 23, 2010March 29, 2013. In addition, at a par value of $0.0001 per share.
TheMarch 29, 2013, the registrant also had issued and outstanding at March 31, and December 23, 2010, 35,825 and 38,924468 shares of Series D Convertible Preferred Stock, respectively, 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 respectively, 214,950,000 and 233,544,00014,040 common share equivalents as of such dates.date.
Note: This Form 10-K/A is being filed solely for the purpose of including the officer certifications (Exhibits 31-1, 31-2 and 32), which were inadvertently omitted from the Form 10-K as originally filed. No other changes have been made to this Form 10-K.SECUREALERT, INC.FORM 10-KFor the Fiscal Year Ended September 30, 2010
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GeneralBackground
UnlessSecureAlert, Inc. (“we,” “us,” “our,” “SecureAlert” or the context otherwise requires, all references“Company”) is a Utah corporation originally formed to manufacture and market medical diagnostic stains, solutions and related equipment. In July 2001 we expanded into the elder care market with hardware products and monitoring services for Personal Emergency Response Systems (PERS) and Global Positioning System (GPS) location tracking. In 2006, we introduced GPS tracking technology and monitoring services for the corrections industry with a line of wearable, interactive GPS tracking devices that we manufacture and distribute, combined with offender monitoring and intervention services.
SecureAlert marketsWe market and deploysdeploy offender management programs, combining patented GPS (Global Positioning System) 1 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 (Radio Frequency) (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.
SecureAlert’s TrackerPAL™ IIe (“enhanced”) and our evolved ReliaTrack™ devices are manufactured in the USA and include aOur ReliAlert portfolio of products, e-Arrest Beacons and monitoring services designed to create “Jails without Walls”. The productsdevices and services are customizable byto provide secure reintegration solutions for various offender types, (e.g.,including domestic abusers, sexual predators, gang members, pre-trial defendants, or juvenile offenders) and offer practical solutions and options for the reintegration and re-socialization of select offenders back into society. Additionally, ouroffenders. Our proprietary software, and device firmware support the dynamic accommodation ofand processes accommodate agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned hom ehome restrictions. Our technologies
Our GPS devicesattempts to breach applicable electronic supervision terms or to remove or otherwise tamper with device elements. They are securely attached around thean offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can be adjusted or removed without detection only by. We also have a supervising officer, and which is activated through services provided by our SecureAlert Monitoring Center (or other agency-based monitoring centers). In 2010, we also added an upgraded,unique patented, dual-steel banded SecureCuff™ strapSecureCuff for “at-risk”high risk or high flight risk offenders who have qualified for electronic monitoring supervision, but who require an incremental level of security and supervision, provided through both hardware andsupervision.
1By way of explanation, GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense. These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times. Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmittingsituational context that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz. A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms w ithin the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level. The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.
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According to the Bureau of Justice Statistics (Press Release 6/3/10 from Bureau of Justice Statistics regarding local jails and Press Release 6/23/10 regarding prisons), by calendar year end 2009, the U.S. prison population (state and federal prisoners combined) reached 1,613,656. As of December 31, 2009, more than 1.6 million prisoners were under the jurisdiction or legal authority of state and federal correctional officials. At midyear 2009, about one in every 198 U.S. residents was imprisoned with a sentence of more than one year, a rate of 504 prisoners per 100,000 U.S. residents. According to the Bureau of Justice Statistics in the Office of Justice Programs, U.S. Department of Justice, as of midyear 2009, approximately 767,620 inmates were held in custody of county and city jail authorities. &# 160;In 2009, approximately 62 percent of jail inmates were unconvicted and being held pending arraignment, awaiting trial, or conviction. The remaining 38 percent had been convicted and were awaiting sentencing, had been sentenced to serve time in jail or were awaiting transfer to serve time in state or federal prisons.According to the same sources, at midyear 2009, jail authorities were also responsible for supervising more than 70,000 offenders outside of the jail facilities, including 11,800 under electronic monitoring (which is underutilized), 11,200 in weekend programs, 17,700 in community service programs, and 12,400 in other pretrial release programs. Local jails admitted an estimated 12.8 million persons during the 12 months ended June 30, 2009, or about 17 times the size of the midyear inmate population (767,620 inmates). We anticipate that this is one area of future growth for electronic monitoring.According to previously published statistics by the Bureau of Justice Statistics for 2008, nearly 5.1 million adults were under community supervision at any point in time, the equivalent of about one in every 45 adults in the United States. Probationers (approximately 4,270,917) represented the majority (84 percent) of the community supervision populations in 2008; parolees (828,169) accounted for a smaller share (16 percent). Sadly by the end of 2008, approximately 7.4 million people were either incarcerated (state or federal prisons or local jails) or on parole or probation in the U.S. Probation and parole statistics for 2009 have not yet been published, but we expect that the number has continued to grow and anticipate that growth to push capacity and resource levels, including facilities, officers and budgets. From a budget perspective, reports on file with the Company indicate that the average cost of incarcerating an inmate ranges from $65 to $350, or more, per day depending upon facility type, security level, services provided, amenities and jurisdiction. We market our services on the basis that electronic monitoringfor behavior management and other supervisory programsmodification. And, if necessary, it allows us to provide cost-effective alternatives to incarceration.Due to continuing economic pressures, it is our view that these costs are unsustainable given ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. In our view, electronic monitoring alternatives to incarceration for low and moderate risk offenders (adult and juvenile), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments continue to be strongly encouraged and seriously considered by legislative and judicial branches of government in many jurisdictions. We estimate that for between 10 to 20 percent of the traditional costs of incarceration or for roughly one-third the variable costs (which include, for example, inmate daily food, laundry, uniforms, medical, and guard overtime), our electronic monitoring solutions can provide reliable alternatives to incarceration, supporting real-time location tracking, interactive voice access and intervention-based contact, thus reducing the potential for subsequent or repeat offenses.The ongoing budget crisis and the lingering impact of “the Great Recession” continue to move many jurisdictions to adopt or reconsider adopting “pay-to-stay,” “offender pay,” “parent pay,” or “partial pay” programs with the effect of shifting the burden of incarceration or tracking and monitoring costs in whole or part directly to the offender and defraying some or all of the costs to the public. We estimate that approximately 30 percent of our gross revenues in fiscal year 2010 and 2009 are derived from offender direct payments under court order. The threat of re-incarceration for non-payment leads the majority of these accounts to remain in compliance to avoid the severe consequences of non-payment. This aspect of our business is stable, but we expect that it will outpace traditional tax-payer obligated payment programs over time, as the realization that current budgeting levels cannot sustain the traditional options for management of offender populations.In support of these continually evolving rehabilitation and re-socialization initiatives, which extendinteraction details to law enforcement and justice agencies beyond the U.S and into other markets, we have made the strategic decisionofficers, giving them greater insights prior to adopt and pursue a broader services charter than most electronic monitoring companies. Our “C.A.R.E.” programs support “Corrections” and “Accountability” objectives in concert with “Rehabilitation” and “Empowerment” agendas. Specifically, our technology is deployed to facilitate a stringent protocol enforcement capability which incorporates restricted movement provisions coupled with enablement of positive reinforcement communications to support of social worker interactions, ongoing ministry options and proactive access by authorized couns elors and sponsors. We design our programs to be uniquely positioned to allow for regular, frequent, and positive interaction and daily affirmations with monitored offenders with the goal that they will become responsible and contributing members of society, even while living within the virtual “electronic fence” boundaries established through our proprietary technologies. The most recent Bureau of Justice Statistics report on recidivism indicates that 65 percent of offenders recommit a violation within three years of release and re-entry. For example, according to this report, released in June 2002, of the 272,111 persons released from prisons in 15 states in 1994, an estimated 67.5 percent were rearrested for a felony or serious misdemeanor within 3 years, 46.9 percent were reconvicted, and 25.4 percent re-sentenced to prison for a new crime. Incredibly, after 15 years, the 272,111 offenders discharged in 1994 accounted for nearly 4,877,000 arrest charges over t heir recorded careers. We believe this rate of recidivism can be dramatically reduced through the utilization of effective monitoring services, timely intervention, and advanced interaction technologies such as those offered by SecureAlert. In our view, society simply cannot sustain these financial costs or the victimization or re-victimization of the public.intervention.
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The expanding offender marketplace, ongoing budget and resource limitations, and facility over-crowding combine to provide a significant opportunity for our global growth. We continue to operationally and strategically position our product and service offerings to capitalize on these global public sector challenges. We offer reliable offender services and tools to provide enhanced effectiveness and coverage for agencies with reduced resources. This results in a force multiplier effect that allows smaller or understaffed agencies to grow, while reducing the number of offenders using valuable resources. Our research indicates that we are also attracting new customers to the industry, who historically have only leveraged “home arrest” technologies, and are now seeking GPS tracking and fulltime intervention monitoring alternatives. Additionally, we are very encouraged by the interest and expansion of many rehabilitation initiatives, which we anticipate will avail themselves of our program offerings in a mutual pursuit to reduce recidivism, encourage re-socialization and to facilitate the earlier release of qualified candidates.
During fiscal year 2010 in response to these evolving market factors, we restructured our direct sales force and implemented Account Management services throughout the United States, while embracing an expanded and growing distributorship model, domestically and internationally. We believe that this will help to ensure localized market knowledge, relationship leverage and enhanced ability to respond effectively to requests for sole-sourced and/or competitive proposals. This model has also allowed us to better focus on expanded market sectors, judicial branch contacts and legislature interfaces in ongoing efforts to work from both the bottom up at agencies, as well as from the top down in county and state governments, securing multi-level commitments to embed our programs into ongoing probation, parole and policing e fforts. Similarly, this has also allowed us to secure international contracts in Brazil and The Bahamas, and we expect to finalize agreements in several more countries in fiscal year 2011.
During fiscal year 2010, we also completed our acquisition of Court Programs, Inc. and its affiliates, which is now a wholly-owned subsidiary with ongoing operations in Florida and Mississippi. We also continue to hold a majority interest in Midwest Monitoring & Surveillance, Incorporated, which provides access to additional revenues in target markets throughout the Midwest United States, especially in Minnesota, Wisconsin and Kentucky. We have an option to acquire 100 percent of Midwest Monitoring that expires in April 2011. Although acquisitions require a commitment of capital, both to consummate the acquisition as well as to integrate the acquired business, we believe that we will be able to integrate Midwest Monitoring effectively and to increase our ongoing revenues by doing so. Howeve r, there is no assurance that revenues will increase as projected or anticipated.
The assimilation of these acquired entities is subject to uncertainties and risks. There can be no assurance that we will successfully integrate these companies into our operations without incurring significant unanticipated costs or experiencing unexpected operational problems. Some of the potential risks include, but are not limited to the following:
In summary, during the fiscal year ended September 30, 2010, we had been engaged to case manage or electronically monitor approximately 22,000 individual offenders domestically throughout the year and we began expanding our sales capabilities and initiatives internationally monitoring 150 offenders outside of the United States (in Brazil). Importantly, we worked to build our domestic and international direct sales force, while solidifying distributors and local business partners. By the end of the fiscal year, we had monitoring agreements with approximately 600 judicial districts, law enforcement and bail bond agencies throughout the United States. We also completed the acquisition of Court Programs and secured over 30 expanded distributorships and service partners. Although there is no assurance th at we will be able to continue these efforts or be able to fully implement our business plan as anticipated, we believe that we are in a good position to move forward and to continue the growth of the business and to take advantage of the market opportunities open to us globally as we move into fiscal year 2011.
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Our exclusive portfolio of products and services balances the need to dynamically track and monitor offenders with the opportunity to positively encourage and transform offenders, with the aim of reducing recidivism rates through our proprietary C.A.R.E.™ (Correction, Accountability, Rehabilitation, Empowerment) programs and client-adapted initiatives.
We will continue to innovate, develop and deploy adaptive, cost-effective and reliable interactive technologies, which meet the ever-changing needs of our global clients, while providing value-driven and enhanced public safety services. Our goal is to continue to manufacture proprietary technologies, while also procuring complementary, best-in-class technologies through world class companies like Alcohol Monitoring Services (SCRAM continuous alcohol monitoring) and ElmoTech, a division of 3M (E3 Presence Monitoring, MEMS Alcohol Monitoring and TRaCE Inmate Tracking). WeIn summary, we are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services targeted atfor the global offender management marketplace. We are currently targeting pilot and operational deployments worldwide. We will continue to work with agencies to increase public safety and officer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and improve monitoring program success rates, all while offering defendants and offenders opportunities for accountable freedom instead of incarceration.
BackgroundMarketing
SecureAlert, Inc., formerly known as RemoteMDx, was originally formed
To complement our own offerings and to drive additional means of capturing a growth positionservices in the offender management market,criminal justice arena. During fiscal year 2013, we worked to meet this purpose by expanding sales and marketing activities, both domestically and internationally through the addition of sales resources and increase of marketing efforts such as trade show participation. As in Decemberfiscal 2012, new account acquisition was aided by the lack of 2007, we acquiredpublic funding, the need to increase jail operating and expansion expenses, and a majority interest in Court Programsdesire for greater monitoring control of high risk and Midwest Monitoring. These acquisitions brought us solid business relationships with ongoing revenue streams,high flight risk device wearers. Also, the view continues to widen that society needs to look at alternative ways of sentencing offenders, as well as keeping track of certain types of offenders, such as those convicted of sexual or domestic violence offenses and which have been released from custody. Several countries including the possibilityUnited States began or continued the process of expanding our presence intoevaluating sentencing laws which would release sentenced felons onto to GPS monitoring, after partially serving their incarceration sentences. We foresee that these views and the existing accountsharsh economic and funding realities will continue to fuel wider implementation of the acquired companies. In addition, these acquisitions brought us business processes and practices in the area of case management, offender payelectronic monitoring programs and attendant services that could be leveraged and integrated into our existing offerings.globally.
Marketing The numberOur unique and patented functionality makes us a good match for these opportunities. In particular, our customers have expressed interest for our patented two- and three-way voice communication technology on our ReliAlert device, and our SecureCuff steel reinforced band. Other SecureAlert features, including our 95 decibel siren, the real-time posting of agencies facing both competing budget constraintslocation traces and increased case load requirements grew during 2010. We believe that because of their impaired resources, these conflicting priorities will force many agencies to consider GPS monitoring as a cost-effective alternative to more expensive traditional methods of incarceration or supervision of offenders. Significant opportunity existsflexible mapping, were also instrumental in juvenile corrections, including juvenile probation departments and juvenile detention centers, where the need is more critical because incarcerating juveniles can start a life-long pattern of recidivism.winning accounts.This situation is exacerbated through first-time and minor crime offenders’ affiliation with more seasoned offenders, who have the means and contacts to encourage and enable repeat and escalated serious criminal activity. Those in charge of juvenile law enforcement and corrections recognize that in many cases, keeping youth at home and in school is a much better option to incarceration. However, with reduced staff and increased case loads, probation officers and other support staff find it increasingly more difficult, if not impossible, to effectively supervise daily and weekly activities of at-risk youth. Now, challenged by increasingly strenuous supervision directives, many agencies are recognizing that the visibility and accountability created through interactive GPS monitoring programs can provi de officers with necessary tools to create a “force-multiplier,” empowering them to focus more quality time on working with jeopardized juveniles. The incarceration of juvenile offenders costs considerably more than adult incarceration, in some areas exceeding $500 per day. Utilizing GPS monitoring on juvenile offenders instead of incarceration makes financial sense as well, especially during periods of budget limitations. In recognizing these market conditionsDuring fiscal year 2013 we continued our commitment to ongoing enhancements to both the ReliAlert device line and our TrackerPAL tracking and monitoring software. Device enhancements centered on the continuous requirement for reliable tracking technologies in supportcontinuation of integrating componentry designed to expand the life span and robustness of the above-mentioned public safety initiatives, both juveniledevices, enhance GPS sensitivity, and adult, we have intensifiedincrease battery operation time. We also enhanced our focus on quality and reliability. This effort has led to evolving our mainstay TrackerPAL™ product series into the new ReliaTrackTM device technologies. These devices, manufacturedTrackerPAL software in the United States, are now being deployed in advanceareas of the introduction of our next generation ReliaTrackTM product offerings, anticipated in late calendar 2011. During 2010, our recommitment to significantly impro ving the qualityselection and reliability of our products led us to move our contract manufacturing to Inovar Inc. (“Inovar”), located in Logan, Utah. Inovar is ISO 9001:2000 and ISO 13485:2003 certified. By investing in a series of process and design improvements, we have improved out-of-box reliability of our key products to 99.7%, the highest quality level in the Company’s history and a rate that is equivalent with or above that of other competitors in our market. This focus on quality also has resulted in improved customer satisfaction, product reliability, and operating costs.reporting features. In our opinion, the SecureAlert GPS tracking solutions provide not only reliable, but cost-effective and proprietarily integrated two and three way calling features, enabling supervisory staff to communicate with any user wearing the device, any place, any time. For many offenders, this feature offers the only phone communication available to them, as many are not able to afford either land-line or cell phones, and without SecureAlert’s intervention technologies, officers would have far less contact with them. All communications are made possible through our 24x7x365 Intervention Monitoring Center, which provides protocol support and real-time, interactive access to our customer agencies, based upon their pre-defined response criteria.7
As critical as our Intervention Active Monitoring is for monitoring high risk and other offenders that require intensive monitoring, less intense monitoring levels may be more appropriate to address lower risk offenders and budget constraints. To address this, we provide the following service offerings:ReliaTrackTM MAX features the patented, stainless steel laminated SecureCuff, three-way communications including Watchdog Services and real-time Live Agent Intervention, and one-minute GPS Trace and Data Reporting Frequency that provides maximum offender visibility and operator intervention, if required by the agency or officer.
ReliaTrackTM Premium Solutions is an answer when budget constraints limit options, but greater offender supervision and real-time notification is required on critical alarms. These active monitoring solutions provide one or five-minute location information throughout the day and report violations as they happen through our cellular communications network. The Premium+ option includes, three-way communications including Watchdog Services and Live Agent Intervention and one-minute GPS Trace and Data Reporting Frequency.
ReliaTrackTM Standard Solutions are also active monitoring solutions, but do not include the Live Agent Intervention and three-way voice communication. Customers do have the option to choose GPS Trace and Data Reporting Frequency.
ReliaTrackTM Passive Solution is an option when staffing or budget constraints dictate minimal offender supervision and immediate response to violations is not required. The same GPS information is provided, but on a delayed basis.
All ReliaTrackTM solutions also include the option of adding the cellular version of the HomeAwareTM RF Solution. Officers can transition offenders to different solutions using the ReliaTrackTM software or by calling the monitoring center for assistance. No equipment change is required. This is a huge advantage because it dramatically reduces the number of devices an agency must keep on hand to be proficient.
In summary, revenues from monitoring services continue to be strengthened globally, based upon a series of product and service-level improvements that were implemented during fiscal year ended 2010. Looking forward, during fiscal year 2011, we anticipate releasing a comprehensive program featuring a new website, marketing materials, advertising and public relations activities driving home the message of “Reliably Delivering Peace of Mind” to our customers, both domestically and globally. We also anticipate introducing our next generation technologies, which will provide leading edge tracking, interaction and security features, accompanied by enhanced, value-driven service level offerings.
Monitoring CenterA core competency and differentiator of our business continues to be our dedicated Intervention Monitoring Center. We believe that the Intervention Monitoring Center is a powerful tool in the monitoring of all offenders, but particularly, high risk offenders such as gang members, and sexual or domestic violence offenders. Through Intervention Monitoring, our Monitoring Specialists augment officers' efforts by acting as the first line of response when monitoring violations occur. They do this by immediately contacting offenders via the voice communication technology on the TrackerPAL™ IIe and ReliaTrackTM after or as monitoring violations occur.To take full advantage of the TrackerPALTM and ReliaTrackTM device improvements that were made in fiscal 2010, as well as to keep pace with evolving market requirements, we also undertook several enhancements to the Monitoring Center software, infrastructure and processes. Key among these was the enhancement of the software to provide for the automation of protocol steps. ParAccel Analytic Database (PADB) was also implemented to reduce data access times on time-sensitive queries. ParAccel will serve as the base for analytic programs which will detect patterns of offender behavior that could predict or provide insights into futur e crimes. Also, an Avaya IP Office 500 system was installed. This version of Avaya has many standard features, but those most beneficial to SecureAlert are VOIP (voice over IP) capability, support for both digital and analog phone lines, and the ability to record 100 percent of in- and outbound phone calls. We believe that implementing this solution has established a solid foundation for seamless expansion to accommodate future growth. 84
Our research indicates that theseMonitoring Center
Strategic Relationships We believe one of our strengths is the high quality of our strategic alliances. Our two primary alliances are described in this section.Competition Inovar, Inc.
Inovar, locatedDuring fiscal year 2013, as in Logan Utah, ispast years, we continued to encounter electronic offender monitoring competition from traditional competitors, a leading contract electronics manufacturer dedicated to providing flexible solutions to OEMs (original equipment manufacturers)few of which had consolidated in 2011 and 2012. We also saw a couple of major new entrants come into the fast growing segments of the electronics, medical, and aerospace industries and the military. Inovar is ISO 9001-:2000 and ISO 13485:2003 certified to provide the most comprehensive and value-added services to our customers. Inovar currently manufactures our ReliaTrackTM United States market. Traditional competition includes:products.
euromicron AG
euromicron AG is an all-round solution provider for communications, data and security networks. Its network infrastructures integrate voice, video and data transport wirelessly, via copper cable and by means of fiber-optic technologies. euromicron builds its leading applications, such as e-health, security, control or surveillance systems, on the basis of these network infrastructures. Founded on its expertise as a developer and producer of fiber-optic components, euromicron AG is a strongly growing, profitable group that is listed on the XETRA and Frankfurt, Germany (FRA) stock markets and focuses on operational growth, integration and further market penetration, internationalization and expansion. euromicon continues to hold their investment and we expect to see continued benefit within the next two years from further introductions and contacts made expanding our market in Europe.
Competition In fiscal year 2010, we encountered various levels of GPS, house arrest and case management competition from the following traditional and evolving competitors:
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During the fiscal year ended September 30, 2009, we switched manufacturing of the TrackerPAL™ devices from Dynamic Source Manufacturingassigned to Inovar. The change in manufacturers was made to increase the reliability of the TrackerPAL™ and ReliaTrackTM and reduce our cost per device. Should the relationship with Inovar cease, we would need to find another vendor to manufacture the device which could limit the ability to lease additional monitoring equipment.customers.
While focusing on providing reliable products and services to our customers, we have significantly improved our devices by incorporating the latest technologies available and improving our documentation and processes. Through these efforts over this pastDuring fiscal year 2013, we have achieved a less than one percent out-of-the-box failure rate of our devices. The quality improvement has minimizedmade improvements to the need for stock replacement due to product failure. Importantly, our devices are deployed for longer periods of time with our customers, generating revenue and reducing the need for replacement or repair.
During the fiscal year ended September 30, 2010, we completed the replacement of the majority of TrackerPAL™ II devices with our next generation ReliaTrackTM ReliAlert device as well as internal processes to improve product reliability and incorporate the latest technologies available, includingreduce product returns. These improvements include the following:
We continue to improve our competitive advantage by building sustainable relationships with key suppliers, which enables cost advantages and performance improvement in terms of cycle times and inventory management.
Trademarks.Trademarks. We have developed and use registered 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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We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently,an effective date of July 1, 2011, we may become involved from time to time in litigation to determineentered into an agreement (the “Royalty Agreement”) with Borinquen Container Corp., a corporation organized under the enforceability, scope, and validity of anylaws of the foregoing proprietary rights. Any patent litigation could resultCommonwealth of Puerto Rico (“Borinquen”) to purchase Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a Puerto Rico corporation (“ISS”) in substantial costconsideration of 310,000 shares of our common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. We also agreed to pay to Borinquen quarterly royalty payments in an amount equal to 20 percent of our net revenues from the sale or lease of our monitoring devices and divertmonitoring services within a territory comprised of South and Central America, the effortsCaribbean, Spain and Portugal, for a term of management20 years. We redeemed and technical personnel.terminated this royalty in February 2013 using the proceeds of a loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). The obligation to Sapinda Asia was converted to common stock and satisfied in full in September 2013.
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Backlog
Timely providing our products to customers continues to be one of our primary goals. Over the past fiscal year, we have implemented several advanced planning techniques coupled with developing more reliable forecasts from our sales organization. This has enabled us to effectively maintain optimal shelf stock to meet customer orders and we had no back orders as of September 30, 2010. Additional Available Information Additional Available Information
An investment in our common stock involvesOur business is subject to significant risks. You should carefully consider the risks described below and the other information in this Form 10-K, including our financial statements and related notes, before you decide to invest in our common stock. If any of the following risks or uncertainties actually occurs, our business, results of operations or financial condition could be materially harmed, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.
TheWe may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial statements contained incondition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Some of this annual report on Form 10-K for the fiscal year ended September 30, 2010 have been prepared on the basisindebtedness is past due and is owed to several vendors and suppliers critical to our operations. We cannot assure you that we will continue asmaintain a going concern, notwithstanding the fact that our financial performance and condition during the past few years raise substantial doubt as to our ability to do so. There is no assurance we will ever be profitable. In fiscal year 2010, we incurred a net losslevel of $13,919,609 and negative cash flows from operating activities of $5,885,787, and as of September 30, 2010 we have an accumulated deficit of $219,164,945. These factors raise substantial doubt about our abilitysufficient to continue as a going concern. The financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty. Our plan with respect to this uncertainty is to focus on increasing the number of TrackerPAL™ and ReliaTrackTM devices in the market place from which we will generate monitoring service revenue and raise capital through the issuance of preferred stock. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay indebtedness. 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 will likely cease operations.
We have a history of losses and anticipate significant future losses and may be unable to project our revenues and expenses accurately. We will incur significant expenses associated with the development and deployment of our new products and promoting our brand. We intend to enter into additional arrangements through current and future strategic alliances that may requirepermit us to pay consideration in various formsthe principal, premium, if any, and in amounts thatinterest on our indebtedness.
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Our relationship with certainWe are dependent upon the services of our stockholders presents potential conflictssenior management team, and the failure to attract and retain such individuals could adversely affect our operations. We are dependent on the services, abilities and experience of interest, which may resultour executive officers. The permanent loss of the services of any of these senior executives and any change in decisions that favor them overthe composition of our other shareholders. Oursenior management team could have a negative impact on our ability to execute on our business and operating strategies. We do not currently have a chief executive officer. In October 2012, the Board of Directors established an Executive Committee and temporarily transferred the executive function to this committee, currently comprised of Guy Dubois and David Boone. Messrs. Dubois and Boone will continue to execute the responsibilities of the Company’s principal executive officer through the Executive Committee, until our search for a new Chief Executive Officer is completed. Our inability to identify, hire and founder, David Derrick, provides managementsubsequently integrate a new Chief Executive Officer could adversely impact our business, financial condition and financial services and assistance to us. When his personal investment interests diverge from our interests, he and his affiliates may exercise their influence in their own best interests. Some decisions concerning our operations or finances may present conflictsresults of interest between us and these stockholders and their affiliated entities.operations. 14
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Penny stock regulations may impose certain restrictions on marketability of our securities. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transa ctions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities. 16
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
Our management is aware of the abuses that have occurred historically in the penny stock market.
During the fiscal year ended September 30, 2010, theThe Board of Directors has designated 50,00085,000 shares of preferred stock as our Series D Preferred stock. Each share of Series D Preferred stock is convertible into 6,000 shares of common stock. 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 stockholders,shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination. In addition, on the issues of an increase in the number of shares of common stock we are authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the common stock, holders of the Series D Preferred stock may vote as a class holding the equivalen t of 60 percent of the issued and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of the date of this report,December 31, there were 38,924468 shares of Series D Preferred issued and outstanding, which were convertible into 233,544,00024,503 shares of common stock. 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 stockholders.
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Item 4. [RemovedIntegratechs 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 Reserved]intentionally interfered with its economic relations. We believe the allegations are inaccurate and will defend the case vigorously.
Holders
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Equity Compensation Plan Information
* Refers to the 2006 SecureAlert, Inc. Stock Incentive Plan, described in the narrative below.The 20062012 SecureAlert, Inc. Stock Incentive Plan On July 10, 2006, theThe Board of Directors approvedhas adopted the 2006 SecureAlert, Inc. Stock Incentive2012 Equity Compensation Plan (“2006(the “2012 Plan”). The stockholders, approved by shareholders at the 2006Annual 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 on July 10, 2006. are an important attraction, retention and motivation tool for participants in the plan.
Shares Issued Upon the Conversion of Preferred Stock In the 4thIssuance of Common Stock for Conversion of Debt fiscal quarter ended September 30, 2010, we issued 37,308,000
In July 2010, the BoardIssuance of Directors approved the issuance of 4,693,307Common Stock for Services
Shares Issued in Connection with Redemption of Preferred Stock
In August 2010, we issued 273,285680 shares of common stock to directors for services valued at $32,794, to former holders of our subsidiary corporation SecureAlert Monitoring, Inc.’s (“SecureAlert Monitoring”) Series A Preferred Stock, as payment for past contingency payments in connection with the redemption of the stockholder’s SecureAlert Series A Preferred Stock. The shares of common stock were issued to six holders of SecureAlert Monitoring Series A Preferred Stock in private transactions.$10,000.
Shares Cancelled Previously Issued to Consultant
During the year ended September 30, 2010, ADP Management returned and we cancelled 1,000,000 shares of common stock previously issued to prepay Mr. Derrick’s base salary.
Issuance of Series D Preferred Stock
During the 4th fiscal quarter ended September 30, 2010, we issued 3,774 shares of Series D Preferred for net cash proceeds of $1,887,000. We issued the shares of Series D Preferred to a total of four accredited investors and debt holders in these private transactions.
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Item 6. Selected Financial Data
[Not required.]
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Recent DevelopmentsSubsequent to the fiscal year ended September 30, 2010, the following transactions or events occurred that are not reflected in the results of operations for the fiscal year:
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Communication costs, $1,159,845parts for the fiscal yearyears ended September 30, 2010, primarily refers to the2013 and 2012 were $213,276 and $1,648,762, respectively. These costs associated with Subscriber Identity Modules (“SIM”). Embedded in each TrackerPAL™ and ReliaTrackTMdevice is a SIM, which enables the device to transfer voice and data information to a monitoring center. We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased.
Impairment costs, $590,801 for the fiscal year ended September 30, 2010, resulted from disposalsthe disposal of obsolete inventory, monitoring equipment and parts.parts as we continue to make enhancements to the device.
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We have not historically financed operations entirely from cash flows from operating activities. During the fiscal year ended September 30, 2010,2013, we fundedwere able to finance our business from cash flows only in part from operating and investing activities by taking on new debt and through sales of equity securities. Seeactivities. We supplemented cash flows with the accompanying Notes (4, 11 and 12) to Consolidated Financial Statements of this report. The cash provided by these transactions was used by us to (i) pay operating expenses, including the costs associated with our monitoring center, (ii) purchase TrackerPAL™ and ReliaTrackTMdevices, (iii) pay down debt and accounts payable, including amounts owed on a line of credit and bank debt, and (iv) pay general and administrative expenses, including the salaries of our employees, officers, and consultants and other expenses as described below.proceeds from borrowings. We made net payments of $953,794 on notes payable, $729,009 on a related-party line of credit, $100,000 on notes payable related to acquisitions, $1,598,596 on a bank line of credit, $550,000 on related-party notes payable, and $25,000 on Series A 15% Debentures. During fiscal year 2010, we had net proceeds of $9,638,851 from the issuance of Series D Convertible Preferred stock, $2,345,996 from bank line of credit borrowings, $500,000 from a related-party note payable, and $4,250 from notes payable.
Going ConcernThe factors described above, as well asindependent registered public accounting firm for the risk factors set out elsewhereyear then ended included an explanatory paragraph in this report raiserespect to the substantial doubt aboutof our ability to continue as a going concern, despite having two consecutive years of improvement in gross profit, operating loss and net loss.concern. The financial statements included in this report dofor fiscal year 2012 and for prior periods did not include any adjustments that might result from the outcome of thisthat uncertainty. Our plan with respectfor continuing as a going concern included obtaining the necessary funding to this uncertainty includes raisingmeet our projected capital investment requirements and operating needs.
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Monitoring Device Product Sales
Although not the focus of our business model, weWe may sell our monitoring devices in certain situations.situations to our customers. In addition, we may sell home securityequipment in connection with the building out and Personal Emergency Response Systems (“PERS”) units.setting up a monitoring center on behalf of 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 TrackerPALTM and ReliaTrackTMReliAlert devices) from us,, customers may, but are not required to, ent erenter 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.
In December 2007, the FASB issued aFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries heldsetting bodies, which are adopted by parties other than the parent, the amount of net income attributable to the parent and to the non-controlling interests, changes in a parent’s ownership interest, and the valuation of any retained non-controlling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interestsus as of the parent andspecified effective date. Unless otherwise discussed, we believe that the interestsimpact of the non-controlling owners. We adopted this new standardrecently issued standards that are not yet effective will not have a material impact on October 1, 2009. Upon adoption, $241,638our financial position or results of non-controlling interest was reclassified to a separate component of total equity within our consolidated balance sheets.operations upon adoption. In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) it eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) it eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the ye ar of adoption. This guidance has not yet been adopted and we do not expect a significant impact to our results of operations and financial position.
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In October 2009, the FASB issued accounting guidance which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue recognition guidance given prior to this new guidance. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We adopted this guidance as of April 1, 2010 which did n ot significantly impact our results of operations and financial position as of September 30, 2010.
In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of this guidance is not expected to significantly impact our results of operations and financial position.
In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing. This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted. The adoption of this guidance is not expected to significantly impact our results of operations and financial position.
In February 2010, the FASB revised the guidance to include additional disclosure requirements related to fair value measurements. The guidance adds the requirement to disclose transfers in and out of Level 1 and 2 measurements and the reasons for the transfers and a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. We adopted this guidance as of March 31, 2010 which did not significantly impact our results of operations and financial position.
In December 2010, the FASB issued Accounting Standards Update No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)—Intangibles—Goodwill and Other (ASU 2010-28). ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We will adopt ASU 2010-28 in fiscal 2011 and any impairment to be recorded upon adoption will be recognized as an adjustment to our beginning retained earnings. We are currently evaluating the impact of the pending adoption of ASU 2010-28 on our consolidated financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Foreign Currency Risks.We had $23,723$8,462,019 and $0$5,716,352 in revenues from sources outside the United States for the fiscal years ended September 30, 20102013 and 2009. Sales of monitoring equipment2012, respectively. We received payments in a foreign currency during the periods indicated, were transacted in U.S. dollars and, therefore, we did not experience any effect from foreign currency exchange in connection with these international sales. We occasionally purchase goods and services in foreign currencies which resulted in currencya foreign exchange rate lossesloss of $8,756$145,612 and $0 for the$28,358 in fiscal years ended September 30, 20102013 and 2009,2012, respectively. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for trading or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
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Interest Rate Risks. As of September 30, 2010, we had $1,000,000 of borrowings outstanding on a line of credit with a bank with an interest rate of 3.28 percent. The interest rate on this line of credit is subject to change from time to time based on changes in an independent index which is the Prime Rate as published in The Wall Street Journal. None.
The Company hasWe have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))Act) to ensure that material information relating to the Company is made known to the officers who certify the Company’sour financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (“SEC”)SEC’s rules and forms.
Management'sManagement’s Report on Internal Control over Financial Reporting
The Company’sOur management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’sreporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed under the supervision of the Company’sour principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’sour financial statements for external purposes in accordance with generally accepted accounting principles.
At September 30, 2010,Under the supervision and with the participation of our management, assessedincluding our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’sour internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and related COSO framework.guidance. Based on the assessment,our evaluation under this framework, our management has concluded that the Company’sour internal control over financial reporting was effective as of September 30, 2010 and provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.2013.
Since completing the acquisition of Court Programs, the CompanyThere has focused on improvingbeen no change in our internal control weaknessesover financial reporting (as defined in connection with cash collection and cash disbursements processes by implementingRule 13a-15(f) under the following procedures at these offices:
Previously, the CompanyExchange Act) during our fourth fiscal quarter ended September 30, 2013, that has reported weaknesses over leased equipment, inventory, andmaterially affected, or is reasonably likely to materially affect our internal control over financial reporting. With the addition of improved processes and procedures coupled with improved supervision and training of staff, management believes that the Company's controls and procedures are adequate and effective as of September 30, 2010. 27
Dr. Edgar Bernardi joined our board in January 2010. He graduated from the University of Wuppertal, Wuppertal, Germany, in 1976 in physics and mathematics. He received his master’s degree in physics from University Bonn, Physics Institute, Bonn, Germany in 1984, emphasizing elementary particle physics. In 1988, he received his Ph.D. from the University Hamburg, Hamburg, Germany, specializing in elementary particle physics. From 2001 through 2009, Dr. Bernardi served as CTO, COO, CSO and CIO for euromicron AG, a holding company with buy and build strategy in the core business of network and fiber op tics technology in Germany. From 1999 through 2001, he served as the general manager for Christian Schwaiger GmbH & Co., KG, an entity engaged in the production and trade of antenna, satellite and cable TV reception systems. From 1998 through 1999, Dr. Bernardi was the director of network operator services for Alcatel Sel AG, a worldwide manufacturer of telecommunication network equipment. From 1991 through 1998, he served in two capacities for Mannesmann Mobilfunk GmbH (Vodafone GmbH), which was the first private mobile network operator in Germany, of which he was the head of the department of network planning and optimization and head of the department of system aspects. From 1988 through 1990, he was with Robert Bosch GmbH, a worldwide manufacturer of automotive and telecommunication equipment and served as the main adviser of the business unity public telecommunications and development center, and an adviser in the business unit for public telecommunication s development center.Robert E. Childers joined our board in July 2001. Since 1977, he has served as the Chief Executive Officer of Structures Resources Inc., a firm which he founded in 1972. He has more than 30 years of business experience in construction and real estate development. Mr. Childers has served or is currently serving as General Partner in 16 public limited partnerships in the Middle Atlantic States. Partners include First Union Bank and Fannie Mae. Structures Resources has successfully completed over 300 projects (offices, hotels, apartments, and shopping centers) from New York to North Carolina. Recently Mr. Childers has founded a new company providing construction services to major companies developing gas wells in the Marcellu s shale. He is a co-founder of Life Science Group, a boutique biotech investment-banking firm. Mr. Childers was the founding President of Associated Building Contractors for the State of West Virginia and served as a director of The Twentieth Street Bank until its merger with City Holding Bank. He is a former naval officer serving in Atlantic fleet submarines. Mr. Childers is a member of the Compensation Committee and the Nominating Committee of our Board of Directors.David G. Derrick has been our CEO and Chairman since February 2001. Prior to joining us, Mr. Derrick occupied directorship and management positions in other companies. From 1979 to 1982, Mr. Derrick was a faculty member at the University of Utah, College of Business. Mr. Derrick graduated from the University of Utah with a Bachelor of Arts degree in Economics and a Masters in Business Administration degree with an emphasis in Finance.David P. Hanlon has been a member of our Board of Directors since October 2006. He served previously as Chief Executive Officer and President of Empire Resorts, Inc., a public company in the gaming industry, until May 2009. Prior to starting his own gaming consulting business in 2000, in which he advised a number of Indian and international gaming ventures, Mr. Hanlon was President and Chief Operating Officer of Rio Suites Hotel & Casino from 1996-1999, a period in which the Rio Suites Hotel & Casino underwent a major expansion. From 1994-1995, Mr. Hanlon served as President and Chief Executive Officer of International Game Technology, the world's leading manufacturer of microprocessor gaming machines. From 1988-1993, Mr. Hanlon serv ed as President and Chief Executive Officer of Merv Griffin's Resorts International, and prior to that, Mr. Hanlon served as President of Harrah's Atlantic City (Harrah's Marina and Trump Plaza). Currently, he serves as President and Chief Executive Officer of the Las Colinas Group organized for the purpose of developing a major entertainment center in partnership with the city of Irving Texas. Mr. Hanlon's education includes a B.S. in Hotel Administration from Cornell University, an M.S. in Accounting, an M.B.A. in Finance from the Wharton School, University of Pennsylvania, and completion of the Advanced Management Program at the Harvard Business School. Mr. Hanlon is a member of the Audit Committee of our Board of Directors. 2823
John L. Hastings, IIIDavid S. Boone is the CEO of Paranet Solutions, LLC, in Dallas, Texas. He became a director of our Company on December 21, 2011. He has served in executive roles with a variety of publicly 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. Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011, a NASDAQ traded company. He was the 2009 Ernst and Young Entrepreneur of the Year winner for Health Care in the Southwest Region. Mr. Boone serves on June 19,a number of private company boards and serves on the board 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. Larry G. SchafranWinfried 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, where he served in executive positions. Mr. Kunz worked as an executive at Precision Software Ltd., Contact 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 member of our Board of Directors since October 2006.consultant to JK Wohnbau GmbH, a Munich-based real estate developer, where he served as COO from 2009 until the company’s initial public offering in 2010. From 2009 to 2011, Mr. Kunz has also worked with us as an investor.
We assessThe Board of Directors intends 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 an annual basis.the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer and Dan L. Mabey meet the standards to be considered independent. The Board has determined, after careful review that Mr. Childers, Mr. Hanlon, Mr. Klinkhammer, Mr. Bernardi, and Mr. Schafran arenot appointed a lead independent based on the applicable regulations of the SEC.director. 29
Audit Committee. The Audit Committee of the Board of Directors (the "Audit Committee") is a standing committee of the Board, which has been established as required by the Securities Exchange Act of 1934 (“Exchange Act”). The Audit Committee met four times during fiscal year 2010. Members of the Audit Committee during fiscal year 2010 and at the date of this report are Larry Schafran (Chairman), Rene Klinkhammer, and David Hanlon. The Board has determined that Mr. Schafran is an "audit committee financial expert," as defined by the applicable regulations promulgated by the SEC under the Exchange Act. The Board also believes that each member of the Audit Committee meets the NASDAQ composition requirements, including the requirements regarding fi nancial literacy and financial sophistication.The primary purpose of the Audit Committee is to oversee (i) management’s conduct of our financial reporting process, on behalfincluding reviewing the financial reports and other financial information provided by the Company, and reviewing our systems of internal accounting and financial controls, (ii) our independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of our independent auditors. The Audit Committee assists the Board in providing oversight of Directors. 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.On April 8, 2004, our board adopted a Charter for the Audit Committee. The Charter establishes the independence of our Audit Committee met four times during both fiscal years 2012 and sets forth the scope of the Audit Committee's duties. The purpose2013 and all members of the Audit Committee is to conduct continuing oversight of our financial affairs. A copyattended at least 75 percent of the Chartercommittee’s meetings.
Compensation Committee Interlocks and Insider ParticipationThe Compensation Committee during fiscal 2010 was composed of Robert Childers, Edgar Bernardi and Larry Schafran. All members of the Compensation Committee are independent directors. No member of our Compensation Committee is a current or former officer or employee of SecureAlert or any of our subsidiaries, and no director or executive officer of SecureAlert is a director or executive officer of any other corporation that has a director or executive officer who is also a director of SecureAlert.30
Current Executive Officers
David G. Derrick has been our CEO and Chairman since February 2001. His work and education information is detailed with ourThe Executive Committee of the Board of Directors table above.was established to act temporarily in the principal executive officer function following the resignation of our Chief Executive Officer in October 2012. Current members of the Executive Committee are Guy Dubois and David S. Boone. On April 16, 2013, Mr. Dubois was granted warrants equal to $300,000 for his additional work as a director and member of the Board’s Executive Committee. This grant is of warrants to purchase 64,665 shares of common stock at an exercise price of $9.00 per share; that vest in equal monthly increments over a period of one year or immediately upon the hiring of a new Chief Executive Officer. These warrants were valued at the date of grant using the Black-Scholes model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer. John L. Hastings, III became our President on June 19, 2008 and Chief Operating Officer on November 20, 2008. His work and education information is detailed with our Board of Directors table above.
Bernadette Suckel joined us on April 24, 2008. Prior to joining us, Ms. Suckel served as the VP/Solution and Client Principal, for The Nielsen Company/ACNielsen from 2000 through April 2008. From November 2006 through April 2008, she consulted on a part-time basis to Klever Marketing, Inc. to focus on cost reduction strategies. Ms. Suckel also worked previously for Cogit.com and NCR/AT&T GIS/Teradata. She received a BS in Business Administration, Marketing Option, from California State University, Fresno.
Our Chief Executive Officer, Mr. Derrick, is paid a base salary of $240,000 per year. The amount of the base salary was determined after negotiations between Mr. Derrick and our Compensation Committee. Factors considered in determining the base salary included Mr. Derrick’s status as one of our founders; his experience and length of service with us; his experienceOur President and Chief Operating Officer, Mr. Hastings, is paid a base annual salary of $325,000. The amount of the base salary was determined after negotiations between Mr. Hastings and our Compensation Committee. Factors considered in determining Mr. Hastings’ base salary included his background in the industries in which we operate; his educational and work background, and reviews of sample salaries at companies of comparable size and industry. Summary Compensation TableThe following table summarizes the total compensation paid or earned by our principal executive officer, our principal financial officer and two other most highly compensated executive officers (the “Named Executive Officers”) who served as executive officers during the last two fiscal years ended September 30, 2010.
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We have noSubsequent to the fiscal year ended September 30, 2013, 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 the Company; or (ii) November 30, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment agreements with any executive officersterminates as a result of an involuntary termination other than for cause or at this time. Bythe end of the term of the agreement, however, thehe will be entitled to receive separation benefits which include payment of salary of Mr. Derrick is$192,000 paid by ADP Management Corporation fromover 120-day period and other benefits as outlined in the proceeds of a management fee paid by us to ADP Management Corporation.agreement.
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2013:
The following table summarizes the re-pricing of previously granted common stock valued on the last date of the quarter or the director may elect warrants towith an exercise price at the current market price at the date of $0.13 per share, includedgrant in column (d)the amount of three times the amount had the director elected to take shares, valued at the date of grant using the Black-Scholes valuation method. Additionally, the Chairman and Chairman of the Director Compensation Table:Audit Committee accrue $5,000 per month rather than $2,500. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013.
Reimbursement of Expenses 34
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. SecurityWe have determined beneficial ownership information for beneficial owners is taken from statements filedin accordance with the Securities and Exchange Commission pursuant to Sections 13(d), 13(g) and 16(a) and information made known to the Company. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respectSEC. Except as indicated by the footnotes below, we believe, based on the information furnished to securities. Unless indicated below, to our knowledge,us, that the persons and entities named in the table below have sole voting and sole investmentdispositive power with respect to all sharessecurities they beneficially owned, subject to community property laws where applicable. Sharesown. As of the Table Date, the applicable percentage ownership is based on 9,811,946 shares of common stock underlyingissued and outstanding and 468 shares of Series D issued and outstanding, convertible securities,into 24,503 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 warrantsconvertible debt or other securities held by that person that are currently exercisable or exercisable within 60 days of December 23, 2010, are deemed to bethe Table Date. We did not deem these shares outstanding, and to be benefi cially owned by the person holding such securities, options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstandinghowever, for the purpose of computing the percentage ownership of any other person.
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The Company hasWe have entered into certain transactions with related parties.parties during the fiscal year ended September 30, 2013. These transactions consist mainly of financing transactions and consulting arrangements.service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Related-Party LineRoyalty Agreement
As of September
During the fiscal year ended September 30, 2010, the interest rate increased from 11 percent to 16 percent on the line-of-credit. The decrease in the balance consisted of net cash repayments of $729,009 offset, in part, by $652,987 of expenses owed to ADP Management that are reimbursable by us.
Related-Party Notes PayableNote #1. In November 2008, we borrowed $1,000,000 from Mr. Derrick, our Chief Executive Officer. The unsecured note payable accrues interest at 15 percent and was due and payable upon our receiving cash proceeds of $1,000,000 or more from the sale of common stock or other additional financing activities or February 4, 2009, whichever comes first. We paid to Mr. Derrick a loan origination fee of $50,000 in cash and 100,000 shares of restricted common stock. In February 2009, Mr. Derrick loaned us an additional $500,000 resulting in a total of $1,500,000 due to Mr. Derrick. We agreed with Mr. Derrick to extend the due date of the full obligation to February 26, 2010. As of September 3 0, 2009, we owed $1,500,000 plus $12,197 in accrued interest to Mr. Derrick. On January 13, 2010, Mr. Derrick converted the note of $1,500,000 into 1,500 shares of Series D Preferred stock.
Note #2. Effective March 1, 2010, we purchased the remaining 49 percent ownership of Court Programs. We paid $100,000 in cash and entered into an unsecured note payable of $200,000 due in four equal installments of $50,000 each on July 15, 2010, October 15, 2010, January 15, 2011, and April 15, 2011, together with interest on any unpaid amounts at 8 percent per annum. As of September 30, 2010 and 2009, we owed $150,000 and $0 in principal plus $9,181 and $0, respectively, in accrued interest under this note, which is payable to the former principal of Court Programs, Inc.
Note #3. We entered into a promissory note on March 16, 2010 with Mr. Derrick for $500,000, accruing interest at a rate of 12 percent per annum or a one percent origination fee of $5,000, whichever is greater, maturing on April 15, 2010. On April 1, 2010, we paid off the promissory note for $505,000 in outstanding principal and accrued interest resulting in an effective interest rate of 21.5 percent per annum.
Note #4. On June 24, 2010, we entered into an agreement with ADP Management whereby ADP Management agreed to loan and/or invest between $1,000,000 and $5,000,000 to finance the manufacturing of TrackerPAL™ IIe devices and to provide us additional working capital. We agreed to pay a 10 percent origination fee to ADP Management for money loaned and/or invested (for a maximum of $500,000) payable in shares of Series D Preferred stock ($600 to 1 share rate, effective conversion rate of $0.10 per share of common stock). As of September 30, 2010, ADP Management loaned and/or assisted in facilitating $3,443,700 of financing to us resulting in $344,370 in origination fees in connection with the agreement.
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All amounts loaned pursuant to this agreement bear interest at a rate of 16 perfect per annum. Interest is payable quarterly to ADP Management and may be paid in shares of Series D Preferred stock ($600 per share rate, effective conversion rate of $0.10 per share of common stock). The loan matures on July 1, 2011. Additionally, ADP Management has the option to convert the outstanding balance and any unpaid interest into shares of Series D Preferred stock ($600 per share rate, effective conversion rate of $0.10 per share of common stock). During the fiscal year ended September 30, 2010, we recorded $124,642 as interest expense to account for a beneficial conversion feature in connection with the agreement.
Foreclosure Liability
In July 2009, we entered intoLoan. Additionally, $611,308 of interest expense was recorded during the fiscal year ended 2013 to record accretion of a promissory notedebt discount. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in connection with an unrelated entitythe Loan in the amount of $1,000,000 payable on December 31, 2010. The note bears interest at a rate of 15 percent per annum paid quarterly. As additional consideration for the loan to settle a registration rights dispute, the Company granted the lender 8,000,000 shares of common. Additionally, a related-party entity, ADP Management, collateralized this note with 5,000,000 shares of our common stock it owns. In August 2009, we failed to register the 8,000,000 shares of common stock within 30 days of entering$17,576,627 into the agreement, resulting in the lender foreclosing on the 5,000,000 shares of common stock held as collateral. As of September 30, 2009, we accrued $775,000, as a “foreclosure liability” to record the obligation to r epay the 5,000,000 shares of common stock to ADP Management. On January 13, 2010, we issued 833 shares of Series D Preferred stock to ADP Management in full satisfaction of $775,000 that we had accrued on this liability. As of September 30, 2010, there was no outstanding foreclosure liability.
Related-Party Series A 15% Debenture
On May 1, 2009, we issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an officer of the Company for $250,000 in cash. In addition to the rights and terms of the debenture, the entity received one-year warrants to purchase 2,200,0003,905,917 shares of common stock at a rate of $4.50 per share.
Consulting Arrangements
We agreed to pay consulting fees to ADP Management for assisting us to develop our new business direction and business plan and
The ADP Management agreement also requires ADP Management to paysecurity of all data and the salaryintegrity of Mr. Derrick assuch 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 Chief Executive Officer of Paranet. The arrangement can be terminated by either party for any reason upon 90 days written notice to the other party.
As of the date of this report, our common stock is traded on the OTC Bulletin Board (the “Bulletin Board”). The Bulletin Board does not impose standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence. Nevertheless, we have undertaken to appoint five individuals to our Board of Directors Messrs. Bernardi, Childers, Hanlon,intends 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, Rene Klinkhammer, and Schafran, who are independent underDan L. Mabey meet the NASDAQ Marketplace Rules and those standards applicable to companies trading on NASDAQ.be considered independent. The Board has not appointed a lead independent director.
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Hansen Barnett & Maxwell, P.C. had notHBM provided any consultingtax services (including tax consulting and compliance services or any financial information systems design and implementation services) to us in fiscal years 20102013 and 2009. Subsequent to year end, Hansen Barnett & Maxwell, P.C. was engaged to perform tax compliance services2012. Tax fees paid for the Company.
The Audit Committee oversees our financial reporting process on behalf of We have reviewed and discussed with management ourSecureAlert, Inc.’s audited financial statements as of and for the fiscal year ended September 30, 2010.We have2013 with our management. The Audit Committee discussed with Eide Bailly, LLP, our independent registered public accountant, Hansen Barnett & Maxwell, P.C.,accounting firm for the fiscal year ended September 30, 2013, the matters that are required to be discussed under applicable PCAOB standards. The Audit Committee also received the written communication from Eide Bailly, LLP required by U.S. Auditing Standards as established by the Auditing Standards Board of the American Institute of Certified Public Accountants, which includes a review of the findings of the independent registered public accountant during its examination of our financial statements.We have receivedPCAOB Ethics and reviewed written disclosuresIndependence Rule 3526, Communication with Audit Committees Concerning Independence, and the letter from Hansen Barnett & Maxwell, P.C., which is required by Independence Standard No. 1, Independence DiscussionsAudit Committee has discussed the independence of Eide Bailly, LLP with Audit Committees, as amended, by the Independence Standards Board, and we have discussed with Hansen Barnett & Maxell, P.C. their independence under such standards. We have concluded that the independent registered public accountant is independent from us and our management.them. 3934
Respectfully submitted by the members of the Audit Committee:
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SecureAlert, Inc.
Date: December 29, 2010
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StockholdersShareholders of SecureAlert, Inc. (formerly RemoteMDx, Inc.)
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for non-controlling interests effective October 1, 2008.HANSEN, BARNETT & MAXWELL, P.C. 
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SECUREALERT, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2010
See accompanying notes to consolidated financial statements.
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SECUREALERT, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2010
See accompanying notes to consolidated financial statements.
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SECUREALERT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2010 AND 2009
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SECUREALERT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2010 AND 2009
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SECUREALERT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2010 AND 2009
See accompanying notes to consolidated financial statements.
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Going Concern
In order The Company’s plan for the Company to continuecontinuing as a going concern it must generate positive cash flows from operating activities and obtainincluded obtaining the necessary funding to meet its projected capital investment requirements. Management’s plans with respect to this uncertainty include raising additional capital from the issuance of preferred stockrequirements and expanding its market for its ReliaTrackTM portfolio of products. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and may have to cease operat ions.needs.
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The Company had sales to entities which represent more than 10 percent of total revenues as follows for the years ended September 30:
No customer represented more than 10% of the Company’s total revenues for Subsequent to the fiscal year ended September 30, 2010 or 2009.2013, the Company received $387,483 from Customer A and $518,137 from Customer B for a total of $905,620.
One customer accounted for $185,752 (11%) of the Company’s total accounts receivable for the fiscal year ended September 30, 2010. No customer represented more than 10% of the Company’s total accounts receivable for the fiscal year ended September 30, 2009.Cash Equivalents
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company had $395,911$3,128,187 and $15,670$350,716 of cash deposits in excess of federally insured limits as of September 30, 20102013 and 2009,2012, respectively.
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As of September 30, 2010 and 2009, $249,536 and $0 of assets included in the property and equipment, respectively, have not been put into use and were not depreciated. Property and equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are included in the results of operations. During the fiscal years ended September 30, 20102013 and 2009,2012, the Company disposed of net property and equipment of $41,597$4,740 and $16,577,$5,374, respectively.
Monitoring Equipment
Assets
Monitoring Device
Although not the focus of the Company’s business model, theThe Company sellsmay sell its monitoring devices in certain situations.situations to its customers. In addition, the Company sells home securitymay sell equipment in connection with the building out and Personal Emergency Response Systems (“PERS”) units.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 ReliaTrackTMReliAlert™ 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.
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In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) it eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) it eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. Thisuncertain tax positions. ASU 2013-11 will be effective for us beginning in the first annual reporting period beginning on or after June 15, 2010, with earlyquarter of fiscal 2014. Early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This guidance has not yet been adopted andpermitted. Since ASU 2013-11 only impacts financial statement disclosure requirements for unrecognized tax benefits, the Company does not expect a significant impact to its results of operations and financial position.60
In October 2009, the FASB issued accounting guidance which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue recognition guidance given prior to this new guidance. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company adopted this guidance as of April 1, 2010 which did not significantly impact its results of operations and financial position as of September 30, 2010.
In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of this guidance is not expected to significantly impact the Company’s results of operations and financial position.
In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing. This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted. The adoption of this guidance is not expected to significantly impact the Company’s results of operations and financial position.
In February 2010, the FASB revised the guidance to include additional disclosure requirements related to fair value measurements. The guidance adds the requirement to disclose transfers in and out of Level 1 and 2 measurements and the reasons for the transfers andhave a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirementsmaterial impact on the level of disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The Company adopted this guidance as of March 31, 2010 which did not significantly impact the Company’s results of operations andCompany's consolidated financial position.statements. In December 2010, the FASB issued Accounting Standards Update No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)—Intangibles—Goodwill and Other (ASU 2010-28). ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We will adopt ASU 2010-28 in fiscal 2011 and any impairment to be recorded upon adoption will be recognized as an adjustment to our beginning retained earnings. The Company is currently evaluating the impact of the pending adoption of ASU 2010-28 on its consolidated financial stat ements.
As of September 30, 2010, the Company had recorded goodwill and intangible assets related to the acquisition of controlling interest of Midwest, Court Programs, and Bishop Rock Software. The Company has also entered into a license agreement related to the use of certain patents. The following table summarizes the activity and balance of goodwill for the fiscal years ended September 30, 2009 and 2010:
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The following table summarizes the classification of the intangibles and goodwill as of September 30, 2010:
Midwest Monitoring & SurveillanceEffective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, in Midwest Monitoring & Surveillance (“Midwest”). Like the Company’s operations prior to the acquisition of interest, Midwest provides electronic monitoring for individuals on parole. The total consideration for the purchase of Midwest was $4,400,427 comprised of notes payable of $1,800,000, shares of common stock valued at $1,752,000 (438,000 shares valued at $4.00 per share), transaction costs of $31,497, and long-term liabilities assumed of $816,930.
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Effective April 1, 2010, the Company and the Midwest minority owners executed an agreement to extend the option period for the purchase of the remaining minority ownership interest of Midwest. As consideration for the extension of the option period for an additional 12 months, the Company paid a fee (to be credited against the purchase price for the remaining shares of Midwest) by issuing 150,000 restricted shares of the Company’s common stock valued at $18,000 ($0.12 per share) and waived the payment of $10,000 owed to the Company by Midwest. In addition, the Company agreed to make cash payments to the sellers totaling $144,000 in equal installments over a 12-month period. In consideration of the payments of cash and stock, the Company was issued additional shares of Midwest’s common stock increasing the Company’s total ownership interest in Midwest from 51% to 53.145%.
The total consideration of $4,562,427 less the tangible assets acquired of $674,679 resulted in an excess over net book value of $3,887,748. The Company recorded impairment of $2,343,753 for the fiscal year ended September 30, 2009, resulting in a net goodwill2013:
TheDuring the fiscal years ended 2013 and 2012, the Company recorded $8,167$673,374 and $0 of amortization expense for Midwestthe 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.
Court ProgramsEffective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, in Court Programs, Inc., a Mississippi corporation, Court Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of Florida, Inc., a Florida corporation (collectively, “Court Programs”). Similar to the Company’s operations prior to the acquisition of interest, Court Programs is a distributor of electronic monitoring devices to courts providing a solution to monitor individuals on parole. The Company acquired Court Programs to utilize its preexisting business relationships to gain more market share and expand available service offerings. Consideration for the purchase of 51% of Court Programs was $1,527,743, it comprised of a note payable of $300,000, shares of common stock valued at $847,500 (212,000 shares valued at approximately $4.00 per share), transaction costs of $45,324, and long-term liabilities assumed of $334,919.
Effective March 1, 2010, the Company purchased the remaining 49% ownership of Court Programs. Consideration for the remaining ownership of Court Programs consisted of the following: $100,000 in cash, a note payable of $200,000, a note payable for $849,631 which was subsequently exchanged for 850 shares of the Company’s Series D Preferred stock (see Note 8), and $335,087 of assumption of non-controlling interest. Non-controlling interest is calculated by allocating the total stockholders’ equity for Court Programs to its non-controlling owners according to their percentage of ownership.
The total consideration of $3,012,461 less the tangible assets acquired of $208,658 resulted in an excess over net book value of $2,692,803 of goodwill and $111,000 of other intangible assets. In March 2010, the Company recorded $204,735 of impairment of goodwill resulting in a net goodwill of $2,488,068, as noted in the table above. The Company recorded $8,300 of amortization expense on intangible assets for Court Programs during the fiscal year ended September 30, 2010 resulting in a total accumulated amortization of $28,100 and net other intangible assets of $82,900. Included in the consolidated statements of operations for the Company for the fiscal years ended September 30, 2009 and 2010, Court Programs contributed $3,086,335 and $3,504,533 of revenue and $110,893 and $749,932 of net loss, respectively.
Bishop Rock SoftwareEffective January 14, 2009, the Company purchased a 100% ownership interest, including a voting interest, in Bishop Rock Software, Inc., a California corporation, (“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at $0.23 per share ($657,176), options to purchase 642,714 shares of the Company’s common stock with an exercise price of $0.09 per share for a value of $114,383 using the Black-Scholes calculation, and $79,268 in debt for a total purchase price of $850,827. The total consideration of $850,827, less crime-scene correlation software recorded as an asset for $390,001, resulted in goodwill of $460,827. During the fiscal year ended September 30, 2009, the Company recorded an impairment expense of $460,827, which eliminated the remaining goodwill.
The Company recorded $127,334 of amortization expense on intangible assets for Bishop Rock Software during the fiscal year ended September 30, 2010, resulting in a total accumulated amortization of $217,688$312,724, and net intangible assets of $172,313.
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Supplemental Pro Forma Results of Operations (unaudited)The following tables present the pro forma results of operations for the fiscal years ended September 30, 2010 and 2009, as though the Midwest, Court Programs, and Bishop Rock Software acquisitions had been completed as of the beginning of each period presented:
During the fiscal year ended September 30, 2009, the Company paid off a $3,600,000 line of credit with a bank that matured on March 1, 2009. The line of credit was secured by letters of credit for a total of $3,600,000 and SecureAlert’s assets, excluding TrackerPAL™ and ReliaTrackTM products. The letters of credit were provided as collateral by six unrelated parties. During the fiscal year ended September 30, 2009, the Company and the six unrelated parties mutually agreed to pay off the line of credit by calling upon the letters of credit and converting into a senior secured convertible note. (See Note 8)
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The Company established a new line of credit for $1,000,000 with a bank during the fiscal year ended September 30, 2009. The interest rate is 3.25% and the line of credit matures on September 22, 2011. In addition to the interest paid to the bank, the Company agreed to pay ADP Management an additional 12.75% of interest totaling $105,385, a 10% loan origination fee of $100,000, and 129 shares of Series D Preferred stock valued at $108,360 for securing the line of credit by pledging certificates of deposit were issued to ADP Management on January 13, 2010. Thus, the total effective interest rate to the Company is 36%. Interest on the line of credit is due monthly. As of September 30, 2010 and 2009, the Company owed $1,000,000 and $252,600, respectively. As of September 30, 2010 and 2009, there were $0 and $747,400 of unused line of credit funds available.
During the fiscal year ended September 30, 2010, theThe Company exchanged 1,999 shares of Series D Preferred stock for the conversion of $1,935,799 of accrued expenses.
As of September 30, 2008, the Company accrued for $291,423 of warranty and manufacturing costs associatedentered into certain transactions with TrackerPAL I and II devices. Duringrelated parties during the fiscal years ended September 30, 20092013 and 2010, the Company used $44,801 and $108,000, respectively, resulting in a remaining balance of $246,622 and $138,622 for the fiscal years ended September 30, 2009 and 2010, respectively, to be used in future periods.
(6) Related Party Transactions
The Company has entered into certain transactions with related parties.2012. These transactions consist mainly of financing transactions and consulting arrangements.service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Related-Party Line of CreditRoyalty Agreement
As
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During the fiscal year ended September 30, 2010, the interest rate increased from 11% to 16% and the Company paid off the line-of-credit. The decrease in the balance consisted of net cash repayments of $729,009 offset, in part, by $652,987 of expenses owed to ADP Management that are reimbursable by the Company.
Related-Party Notes Payable
Note #1In November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief Executive Officer of the Company. The unsecured note payable accrues interest at 15% and was due and payable upon the Company receiving cash proceeds of $1,000,000 or more from the sale of common stock or other additional financing activities or February 4, 2009, whichever comes first. The Company paid to Mr. Derrick a loan origination fee of $50,000 in cash and 100,000 shares of restricted common stock. In February 2009, Mr. Derrick loaned an additional $500,000 to the Company resulting in a total of $1,500,000 due to Mr. Derrick. The Company and Mr. Derrick agreed to extend the due date of the full obligation to February 26, 2010. As of September 30, 2009, the Company owed $1,500,000 plus $12,197 in acc rued interest to Mr. Derrick. On January 13, 2010, Mr. Derrick converted the note of $1,500,000 into 1,500 shares of Series D Preferred stock.
Note #2Effective March 1, 2010, the Company purchased the remaining 49% ownership of Court Programs. The Company paid $100,000 in cash and entered into an unsecured note payable of $200,000 due in four equal installments of $50,000 each on July 15, 2010, October 15, 2010, January 15, 2011, and April 15, 2011, together with interest on any unpaid amounts at 8% per annum. As of September 30, 2010 and 2009, the Company owed $150,000 and $0 in principal plus $9,181 and $0, respectively, in accrued interest under this note, which is payable to an employee of the Company (the former principal of Court Programs, Inc.).
Note #3The Company entered into a promissory note on March 16, 2010 with Mr. Derrick for $500,000 accruing interest at a rate of 12% per annum or a 1% origination fee of $5,000, whichever is greater, maturing on April 15, 2010. On April 1, 2010, the Company paid off the promissory note for $505,000 in outstanding principal and accrued interest resulting in an effective interest rate of 21.5% per annum.
Note #4On June 24, 2010, the Company and ADP entered into an agreement whereby ADP agreed to loan and/or invest between $1,000,000 and $5,000,000 to finance the manufacturing of TrackerPAL™ II (e) and ReliaTrackTM devices and to provide additional working capital to the Company. The Company agreed to pay a 10% origination fee to ADP for money loaned and/or invested (for a maximum of $500,000) payable in shares of Series D Preferred stock ($600 to 1 share rate, effective conversion rate of $0.10 per share of common stock). As of September 30, 2010, ADP Management loaned and/or assisted in facilitating approximately $3,443,700 of financing to the Company resulting in $344,370 in origination fees in connection with the ag reement.
All amounts loaned pursuant to this agreement shall bear interest at a rate of 16% per annum. Interest shall be payable quarterly to ADP in shares of Series D Preferred stock ($600 to 1 share rate, effective conversion rate of $0.10 per share of common stock). The loan matures on July 1, 2011. Additionally, ADP has the option to convert the outstanding balance and any unpaid interest into shares of Series D Preferred stock ($600 to 1 share rate, effective conversion rate of $0.10 per share of common stock). During the fiscal year ended September 30, 2010,2013, the Company recorded $144,184a debt discount of $14,296,296 which was recorded as interest expense to account for a beneficial conversion feature in connection with the agreement.Loan. Additionally, $605,281 of interest expense was recorded during the fiscal year ended 2013 to record accretion of debt discount. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in connection with the Loan in the amount of $17,576,627 into 3,905,917 shares of common stock at a rate of $4.50 per share.
Foreclosure Liability
In July 2009,On February 1, 2013, the Company entered into a promissory noterevolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, the Company may borrow up to $1,200,000 at an unrelated entity in the amount of $1,000,000 payable on December 31, 2010. The note bears interest at a rate of 15%3% per annum paid quarterly. As additional consideration for the loan to settle a registration rights dispute, the Company granted the lender 8,000,000 shares of common. Additionally, a related-party entity, ADP Management, collateralized this note with 5,000,000 shares of the Company’s common stock it owns. In August 2009, the Company defaulted on the loan because it failed to register the 8,000,000 shares of common stock within 30 days of entering into the agreement resulting in the lender foreclosing on the 5,000,000 shares of common stock held as collateral.unused funds and 10% per annum for borrowed funds. As of September 30, 2009,2013, no advances have been made under this loan and the Company had accrued $775,000, as a “foreclosure liability” to record$23,868 in interest liability on the obligation to repay the 5,000,000 shares of common stock to ADP Management.Revolving Loan. On January 13, 2010,October 24, 2013, the Company issued 833 shares of Series D Preferred stock to ADP Managementdrew down the full $1,200,000 for use in full satisfaction of $775,000 foreclosure liability. As of September 30, 2010, there was no outstanding foreclosure liability.
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a performance bond as required under a contract with an international customer.
On May 1, 2009, the Company issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an officer of the Company for $250,000 in cash. In addition to the rights and terms of the debenture, the entity received one-year warrants to purchase 2,200,000 shares of the Company’s common stock at an exercise price of $0.25 per share, valued at $43,926. On January 13, 2010, the entity converted the $250,000 debenture into 250 shares of Series D Preferred stock. As of September 30, 2010 and 2009, the Company owed $0 and $250,000 in principal plus $1,381 and $9,452 in accrued interest, respectively.
Consulting Arrangements
The Company agreed to pay consulting fees to ADP Management for assisting the Company to develop its new business direction and business plan and to provide introductions to strategic technical and financial partners. Under the terms of this agreement, ADP Management was paid a consulting fee of $20,000 per month and the Company agreed to reimburse the expenses incurred by ADP Management in the course of performing services under the consulting arrangement.
The ADP Management agreement also requires ADP Management to pay the salary of Mr. Derrick as Chief Executive Officer and Chairman of the Board of Directors of the Company. The Board of Directors, which at the time did not include Mr. Derrick, approved both of these arrangements.
(7) Convertible Promissory Note
On January 15, 2009,2013, the Company entered into an unsecured convertible promissory note for $2,700,000agreement 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 order to purchase TrackerPAL™ units. The note, at the lender’s option, could be converted into sharesevent 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’s Executive Committee, is the Chief Executive Officer of Paranet.
(8) Senior Secured Convertible Notes
During the fiscal year ended September 30, 2009, the Company issued senior secured convertible notes 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 the 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. As of September 30, 2010 and 2009, the outstanding balance of the Senior Secured Convertible Notes was $0 and $3,419,631 with a remaining debt discount balance of $0 and $529,109, respectively.
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During the fiscal year ended September 30, 2009, the Company received $4,400,000 in cash from the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company. As of September 30, 2010 and 2009, the total outstanding balance of the debentures was $0 and $4,506,750, respectively. The debentures earned interest at a rate of 15% interest per annum, with interest due quarterly and principal due at maturity 18 months after issuance. In addition, for every $1 invested in the debenture the holder received one share of the Company’s common stock. At the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0.20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the debentures were subject to derivative accounting treatment (see Note 10). This resulted in a debt discount valued at $3,130,423. Additionally, with the issuance of these debentures, the Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000 warrants valued at $43,926 recorded as a debt discount. The shares and options were valued upon an allocation on a prorated basis between the debt and equity instruments issued to the debenture holders and the debt discount was expensed over the life of the debentures.
In September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per share to an investor. Shortly following the transaction, the market price of the Company’s common stock fell to approximately $0.20 per share. The Company agreed upon the investor’s investment of an additional $3,000,000 (included in the $4,506,750 discussed in the paragraph above) in the Series A 15% debenture that the Company would issue 9,796,636 additional shares of its common stock to the investor. Furthermore,Facility Agreement, the Company agreed to re-price outstanding warrants held by the investor from $1.00pay Tetra House an arrangement fee equal to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing3% of the warrants attributed an additional $587,248aggregate maximum amount under the Facility 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 debt discount resulting in a total $3,130,423 in a debt discount to be amortized over the lifeUtilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the debentures. During the fiscal year ended September 30, 2010,Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. As of January 14, 2014, the Company amortized $1,821,720borrowed $10,000,000 under the Facility Agreement.
The Company does not hold or issue derivative instruments for trading purposes. However, the Company had convertible notes and debentures that contained embedded derivative features that required separate valuation from the convertible instruments during the fiscal years ended September 30, 2010 and 2009. The Company recognized these derivatives as liabilities on its balance sheet, and measured them at their estimated fair value, and recognized changes in their estimated fair value in earnings (losses) in the period of change. During the fiscal year ended September 30, 2010, the holders of these convertible notes and debentures converted into Series D Preferred stock (see Note 12) eliminating the derivative liabilities. As of September 30, 2010 and 2009, the derivative liabilities had a fair value of $0 and $1,219,426, respectively, resulting in a derivative valuation gain of $200,534 for the fiscal year ended September 30, 2010.
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(11)(6) Debt Obligations
Debt obligations are secured by assets with a book value of $439,692 net of related accumulated depreciation of $124,994 as of September 30, 2010.69
(12)(7) Preferred Stock
The Company designated 40,000 shares of preferred stock as Series A 10% Convertible Non-Voting Preferred stock ("Series A Preferred stock"). During the year ended September 30, 2010, there were no outstanding shares of Series A Preferred Stock. During the year ended September 30, 2009, all 19 outstanding shares of Series A Preferred Stock converted into 9,306 shares of the Company’s common stock.
DividendsThe Series A Preferred stock was entitled to dividends at the rate of 10% per year on the stated value of the Series A Preferred stock (or $200 per share), payable in cash, additional shares of Series A Preferred stock, or common shares of SecureAlert, Inc. (formerly known as RemoteMDx) at the discretion of the Board of Directors. Dividends were fully cumulative and accrued from the date of original issuance to the holders of record as recorded on the books of the Company at the record date or date of declaration if no record date is set. During the fiscal year ended September 30, 2009, the Company recorded $175 in dividends on Series A Preferred stock.
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Series B Convertible Preferred StockThe Company designated 2,000,000 shares of preferred stock as Series B Convertible Preferred stock ("Series B Preferred stock"). Each share of Series B Preferred stock was convertible into shares of common stock at an initial rate of $3 per share of common. The Company has issued shares of common stock or securities convertible into common stock for consideration per share less than $3 per share. The conversion rate automatically adjusted to a price equal to the aggregate consideration received by the Company for that issuance divided by the number of shares of common stock issued. During the fiscal year ended September 30, 2009, all 10,999 shares of Series B Preferred stock outstanding were converted into 10,999 shares of common stock. As of September 30, 2010, there were no shares of Series B Preferred stock outstanding.
Series D Convertible Preferred Stock
During the fiscal year endedAs of September 30, 2010, the Company issued and vested2012, 5,400 warrants to purchase a total of 4,000 Series D Preferred stock at an exercise price of $500 per share. The warrants were valued using the Black-Scholes option-pricing model as if the shares were converted into common stock. The related expense associated with these four-year warrants was $2,700,447 based upon the following inputs: volatility of 110.71%, risk-free rate of 1.67%, exercise price of $0.08, and market price on grant date of $0.14. The warrantsshare were issued in connection with a financial advisory service agreement to restructure debt and raise additional capital.
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SecureAlert Monitoring, Inc. (formerly SecureAlert, Inc.) Series A Preferred Shares
ConvertibilityAs a group, all SMI Series A Preferred stock may be converted at the holder’s option at any time into an aggregate of 20% ownership of the common shares of SMI.
On March 24, 2008, SMI redeemed all outstanding shares of SMI Series A in exchange for 7,434,249 shares of the Company’s common stock valued at $8,549,386. The former SMI Series A stockholders were entitled to receive quarterly contingency payments through March 23, 2011 based on a rate of $1.54 per day times the number of parolee contracts calculated in days during the quarter, payable in either cash or common stock at the Company’s option. The Company is to make quarterly adjustments as necessary to reflect the difference between the estimated and actual contingency payments to the former SMI Series A stockholders.
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 of2013, no Series D Preferred stock. During the fiscal years ended September 30, 2010 and 2009, the Company accrued $114,032 and $3,148,943, respectively, for future and past contingency payments due to former SMI Series A stockholders.
During the fiscal years ended September 30, 2010 and 2009, the Company recorded an expense (income) of $19,095 and ($95,816), respectively, to reflect the change between the estimated and actual contingency payments. During the fiscal year ended September 30, 2010, the Companystock warrants were issued 5,434,143 shares of common stock to satisfy $642,566 in contingency payments on SMI Series A Preferred stock.
DividendsThe holders of shares of SMI Series A Preferred stock were entitled to receive quarterly dividends out of any of SMI’s assets legally available therefore, prior and in preference to any declaration or payment of any dividend on the common stock of SMI, at the rate of $1.54 per day times the number of SMI’s parolee contracts calculated in days during the quarter.Since the SMI Series A Preferred stock was redeemed, no dividends were recorded during the fiscal years ended September 30, 2010 and 2009.
On June 30, 2010,
During the fiscal year ended September 30, 2009,2012, the Company issued 54,484,728578,524 shares of common stock. Of these shares, 9,3062,700 shares were issued upon conversion of 1990 shares of Series AD Preferred stock; 10,99971,969 shares were issued upon conversionas part of 10,999 shares of Series B Preferred stock; 5,400,000 shares were issued to settle lawsuits and obligations; 25,953,016 shares were issued in connection with debt; 2,254,121a royalty agreement, valued at $819,972; 4,315 shares were issued for services rendered to the Company valued at $728,874; 17,850,000$40,000; 8,449 shares were issued in connection with debt and accrued interest of $118,280; 210,689 shares were issued to pay dividends from Series D Preferred stock of $2,391,568; 121,700 shares were issued to employees for compensation of $732,634; 3,000 shares were issued to pay Board of Director fees of $48,060 and 155,703 shares were issued for net$1,033,000 in cash proceeds of $3,250,000; and 3,007,286 shares were issued to purchase Bishop Rock and to extend an option to purchase the remaining percentage of ownership of Midwest.proceeds.
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DuringAt the fiscal year ended September 30, 2006,annual meeting of shareholders on December 21, 2011, the stockholdersshareholders approved the 20062012 Equity Incentive AwardCompensation Plan (the “2006“2012 Plan”)., which had previously been adopted by the Board of Directors of the Company. The 20062012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who have important relationships with the Company. A total of 10,000,00090,000 shares are authorized for issuance pursuant to awards granted under the 20062012 Plan. During the fiscal yearyears ended September 30, 2010, the Company granted 7,487,2862013 and 2012, 0 and 30,000 options were issued under this plan. No more2012 Plan, respectively. As of September 30, 2013, 60,000 shares of common stock options arewere available to distribute unde rfor future grants under the 20062012 Plan.
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.
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Deferred income taxes are determined based on the estimated future effects of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in place.
RACO Wireless LLC vLazar Leybovich et al v. SecureAlert, Inc. On October 12, 2010, RACO WirelessMarch 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint alleging that the Company breached a contract by failing to place a sufficient number of RACO SIM chips in the SecureAlert monitoring devices. The Company denies these allegations and intends to vigorously defend against this complaint. 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.Aculis, Inc. v. SecureAlert, Inc. Aculis, Inc. filed a complaint against us in the Fourth District11th Circuit Court in and for UtahMiami-Dade County, Utah, on June 7, 2010,Florida alleging breach of contract unjust enrichment, and a claim for $208,889 in unpaid products and services, incrementalwith regard to certain Stock Redemption Agreements with the $4,840,891 we have already paid to Aculis. We filed a Motion to Dismiss for Improper Venue or for Change of Venue and supporting memorandum on July 16, 2010. Aculis filed its Memorandum in Opposition toCompany. The complaint was subsequently withdrawn by the Motion to Dismiss on August 5, 2010. Our reply memorandumplaintiffs. An amended complaint was filed by the plaintiffs on August 16, 2010. WeNovember 15, 2012. The Company believes these allegations are inaccurate and intend to vigorously defend our interests and to pursue appro priate counterclaims against Aculis.the case vigorously. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
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Indemnification AgreementsIntellectual Property Settlement
Cellular Access AgreementInternational Importation Audit
7) 50,000 shares of common stock were cancelled for services that were never rendered to the Company
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As of December 31, 2013, the registrant had outstanding 9,811,946 shares of common stock and 468 shares of Series D Convertible Preferred Stock, convertible into 24,503 shares of common stock, which may be voted on an as-converted basis with the registrant’s common stock.
| SecureAlert, Inc. | |||||||||
| FORM 10-K | |||||||||
| For the Fiscal Year Ended September 30, 2013 | |||||||||
| INDEX | |||||||||
| Page | |||||||||
| PART I | |||||||||
| Item 1 | 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 | |||||||
| PART III | |||||||||
| Item 10 | Directors, Executive Officers and Corporate Governance | 23 | |||||||
| Item 11 | Executive Compensation | 27 | |||||||
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 29 | |||||||
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 30 | |||||||
| Item 14 | Principal Accounting Fees and Services | 33 | |||||||
| PART IV | |||||||||
| Item 15 | Exhibits and Financial Statement Schedules | 35 | |||||||
| Signatures | 40 | ||||||||
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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-l ooking 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 impact upon their accuracy, see the “Risk Factors” section of this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of the “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, y ou 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 federal, state and local agencies to provide location trackingpromptly notify intervention monitoring centers of designated individuals within the criminal justice system.
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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 offen der, 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 TrackerPAL™ IIemonitoring 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 ReliaTrack™ 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 globalprofessionals in security, law enforcement, corrections and rehabilitation professionalsorganization worldwide with sole-sourcedsingle-sourced offender management solutions that integrate reliable interactionintervention technologies into support of interventionre-socialization and re-socializationmonitoring initiatives. The use of our services and products is intended to provide law enforcement and judicial agencies the ability to provide offenders a level of accountability while preserving public safety costs that are lower than those associated with incarceration or other 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 that can alsoservices. These may include GPS, RF, drug and alcohol testing for not only defendants and drug tracking 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 and re-socialization initiatives.manufacturer, as well as other critical data sources.
Our strategic purpose is to manufactureproduce or acquire and market medical diagnostic stains, solutions and related equipment. In July 2001, we expanded our product sales and monitoring services related to the Personal Emergency Response Systems (“PERS”) and mobile GPS tracking for the elderly. In 2006, we introduced the GPSglobally deploy leading edge tracking technology and monitoring business for the incarceration industry, which includes manufacturing, distributing, and monitoring mobile emergency and interactive GPS tracking products worn on the body that focus on the defendant and offender tracking, monitoring and intervention marketplace.
Research and Development Program
During the fiscal year ended September 30, 2010,2013, we spent $1,483,385$987,934 on research and development, compared to research and development expenditures of $1,777,873$1,248,654 in the fiscal year ended September 30, 2009.2012. These costs of $1,483,385$987,934 were to further develop our TrackerPAL™TrackerPAL and ReliaTrackTMReliAlert portfolio of products and services.
During fiscal year 2013, we continued to realize productivity enhancements had a positive impact onand additions to our key core competency and differentiator, our Intervention Monitoring Center. Productivity gains were achieved through monitoring center metrics,software enhancements as well as continuous optimization of processes and more importantly, our customers’ experience. Average Speed of Answer (ASA) was reduced by more than 50 percentprocedures and Average Handle Time (AHT) by one third. Offender to Monitoring Specialist ratio (the number of offenders to Monitoring Specialists) was 235:1. These changes also positively influencedongoing training. The Intervention Monitoring Center employs bilingual Spanish-speaking staff turnover which was approximately 14 percent forwho provide 24/7 coverage. The bilingual staff addresses the year compared to averagesneeds of 35-45 percent at similar call center operations. From the beginning of offender monitoring operations in April 2006 through the end of fiscal 2010, the Monitoring Center has logged more than 4.1 million two-both domestic and three-way intervention calls .international customers.
| · | BI Incorporated, |
| · |
| iSECUREtrac Corp., Omaha, |
| · | Omnilink Systems, Inc., Alpharetta, |
| · |
| · | Satellite Tracking of People, LLC, |
| · | Sentinel Offender Services, LLC, Augusta, |
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 2010. 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
We had sales to entities which represent more than 10 percent of gross revenues as follows for the years ended September 30:
| 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, 20102013 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 2009. Oneit is uncertain if we will provide services to this customer accounted for $185,752 (11 percent)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 foras 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, 2010.2013, 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 a total of $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, 20102013 and 20092012, was approximately $1,159,845$974,709 and $2,422,541,$961,994, respectively. We reducedOur cellular costs increased by approximately 52one percent in 2010, while increasing revenues from2013 compared to 2012, due to the increase in the number of monitoring services by successfully negotiating new and existing contracts.
Product Returns
| · | We redesigned the shell of the ReliAlert device addressing several issues related to devices that were returned to us by our customers. |
| · | |
| · | 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 Company have visibility into current |
| · | We cross-trained technical support staff and returns analysis staff to enable them to have improved visibility of the customer experience. This has helped our staff to quickly and correctly diagnose issues in the field. |
Intellectual Property
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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 Services® | 78/ | 3,100,192 | Registered | |||
TrackerPAL® | 78/ | 3,345,878 | Registered | |||
Mobile911® | 78/ | 3,212,937 | Registered | |||
TrackerPAL® | 749,417 | Registered | ||||
TrackerPAL® | 960954 | Registered | ||||
Foresight® | 3481509 | Registered | ||||
Bishop Rock Software® | 3481474 | Registered | ||||
| 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 1115 patents issued and seventwo patents pending in the United States. At foreign patent offices we have twothree 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 Summoning Multiple Emergency Response Services | 09/173645 | 16-Oct-98 | 6226510 | 1-May-01 | Issued | ||||||||||
Combination Emergency Phone and Personal Audio Device | 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 | ||||||||||
| Remote Tracking and Communication Device | 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 | ||||||||||
| Remote Tracking and Communication Device | 12/028088 | 8-Feb-08 | 7804412 | 28-Sep-10 | Issued | ||||||||||
A Remote Tracking System with a Dedicated Monitoring 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 | ||||||||||
| Remote Tracking and Communication Device | 12/875988 | 3-Sep-10 | 8031077 | 4-Oct-11 | Issued | ||||||||||
Tracking Device Incorporating Enhanced Security Mounting Strap | 12/818,453 | 18-Jun-10 | 8514070 | 20-Aug-13 | Issued | ||||||||||
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device | 12/399151 | 6-Mar-09 | 8232876 | 31-Jul-12 | Issued | ||||||||||
| Emergency Phone with Single-Button Activation | | ||||||||||||||
| 11/174191 | 30-Jun-05 | 7251471 | 7/31/2007 | Issued | |||||||||||
| | |||||||||||||||
Tracking | | 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 | |||||||||||||||
| Tracking Device Incorporating Enhanced Security Mounting Strap | 12/818,453 | 18-Jun-10 | - | - | Pending |
| Remote Tracking and Communication Device | 12/875988 | 3-Sep-10 | - | - | Pending |
| Secure Strap Mounting System for an Offender Tracking Device (Provisional Patent) | 61/321,788 | 7-Apr-10 | - | - | Pending |
| International Patents | Application# | Date Filed | Patent# | Issued | Status |
| Emergency Phone with Single-Button Activation - China | 01807350.6 | 28-Mar-01 | 01807350.6 | 5-Oct-05 | Issued |
| Remote Tracking and Communication Device - Mexico | MX/a/2008/ 001932 | 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 | 07812596.0 | 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 Device - Brazil | Filed. Number not yet available | 1-Sep-10 | - | - | Pending |
| A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Mexico | MX/a/2010/ 009680 | 2-Sep-10 | - | - | Pending |
| A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Canada | Filed. Number not 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.
8
Trade Secrets.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 continued and steady increaseconsistency in recurring domestic monitoring revenues by customer throughout 2010,2013, 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 3, 2010,31, 2013, we had 186 full time94 full-time employees and 24four 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.
We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 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) o ror 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. |
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may significantly exceed current estimatesbe forced to reduce or delay investments and expectations.capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These guaranteed payments, promotionsalternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other arrangements will result in significant expense. If we do achieve profitability, we cannot be certain that we willobligations. We may not be able to sustainconsummate those dispositions or increase profitability in t he future. In addition, because of our limited operating history in our newly targeted markets, we may be unable to project revenues or expenses with any degree of certainty. Management expectsobtain the proceeds that we will continuecould realize from them and these proceeds may not be adequate to incur significant sales and marketing, product development and administrative expenses. We cannot guarantee that we will be able to generate sufficient revenues to offset operating expenses or the costs of development and marketing described above, or that we will be able to achieve or maintain profitability. If revenues fall short of projections, our business, financial condition and operating results would be materially adversely affected.meet any debt service obligations then due.
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 recent months.the past 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 res ervesreserves 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 U.S.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 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 our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government 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. The change in 2010 of ourOur 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, itwe 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. “Dir ectors,“Directors, Executive Officers and Corporate Governance,” on page 2823 and Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”Matters,” on page 35.29.
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 operati ons.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 ReliaTrackTM 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 regulat oryregulatory 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 c ases,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.
11
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 i sis 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 fu rtherfurther 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 an dand 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 stockholders (including the purchasers of the shares),shareholders, 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.
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 U.S.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 exist ingexisting 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 1315 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 pros ecutionprosecution 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 technolo gy.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 U.S.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 liabiliti esliabilities 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 wil lwill 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.Our business is subject to a variety of regulations and political interests that could affect the timing of 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 stockholdersshareholders 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 stockholdershareholder 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 share sshares 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 stockholdersshareholders 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 8,106approximately 7,500 square feet of space located at 150 West Civic Center Drive, Suite 400, Sandy, Utah. Monthly leaseLease payments are approximately $16,700.$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
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, 2009 | High | Low | |||
| First Quarter ended December 31, 2008 | $ | 1.20 | $ 0.18 | ||
| Second Quarter ended March 31, 2009 | $ | 0.27 | $ 0.10 | ||
| Third Quarter ended June 30, 2009 | $ | 0.26 | $ 0.14 | ||
| Fourth Quarter ended September 30, 2009 | $ | 0.20 | $ 0.11 | ||
| 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, 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 23, 2010, there were31, we had approximately 3,0002,500 holders of record of our common stock and 294,309,4529,811,946 shares of common stock outstanding. We also have granted options and warrants for the purchase of 27,740,451 shares399,591shares of common stock and 4,00042,000 shares of Series D Preferred stock. We have also issued and outstanding 38,924had 468 shares of Series D Preferred stock outstanding, which are convertible into 233,544,00024,503 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, 20102013 and 2009,2012, we recorded $1,494,481$1,042,897 and $175$2,480,298 in stock dividends,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 stockholders.shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level,6201 15th Avenue, Brooklyn, New York, NY 11219.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of September 30, 2010, with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance. No equity securities have been authorized for issuance under plans that were not previously approved by security holders.
| 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 |
| Equity compensation plans approved by security holders* | 10,000,000 | $0.18 | 0 |
Under the 20062012 Plan, we were authorized to issue90,000 options or shares of common stock may be awarded. As of the date of this report, options stock appreciation rights, restricted stock awards and other incentives to our employees, officers and directors. The 2006 Plan provided for the awardpurchase of incentive30,000 shares of common stock options to our key employees and directors and the award of nonqualified stock options, stock appreciation rights, bonus rights, and other incentive grants to employees and certain non-employees who have important relationships with us or our subsidiaries. A total of 10,000,000 shares were authorized for issuance pursuant to awards grantedbeen awarded under the 20062012 Plan. During the fiscal years ended September 30, 2010 and 2009, awards covering a total of 7,487,286 and 1,517,714 shares, respectively, were granted under this plan to employees of the Company. As
The following table includes information as of September 30, 2010, no shares were available2013 for future awards under the 2006 Plan.our equity compensation plans:
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, 2009 and 2010,2013, we issued the following securities without registration under the Securities Act 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.Act:
We converted $17,576,625 of principal and accrued interest debt payable to Sapinda Asia, a shareholder, into 3,905,917 shares of common stock upon conversionat a rate of 6,218$4.50 per share.
Issuance of Common Stock for Payment of Preferred Dividends
We issued 799 shares of common stock as payment of dividends on our Series D Preferred.Convertible Preferred stock, valued at $9,325.
We issued 1,813 shares of common stock to pay $579,892employees and consultants for services valued at $35,535.
Issuance of accrued Series D Preferred dividends. The shares wereCommon Stock for Board of Director Services
We issued to pay the accrued and unpaid 8 percent dividends on the Series D Preferred as of June 30, 2010.
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 and should be read in conjunction with the “Risk Factors” section of Part I of this Form 10-K.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 forwar d-lookingforward-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 “RiskItem 1A.,“Risk Factors” included in Part I of this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of this Management’sItem 7. “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 cons iderconsider 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 2013 refers to the year ended September 30, 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, 20102013 and 20092012 and the accompanying notes thereto contained in this report. This introduction summarizes MD&A, which includes the following sections:
| · | Overview |
| · |
| Results of Operations |
| · | Liquidity and Capital Resources |
| · | Critical Accounting Policies |
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. The discussion also provides information about the financial results of the two segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole.
Overview
We market and deploy offender management programs, combining patented GPS (Global Positioning System) 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 (Radio Frequency) and an interactive 3-way voice communication system into a single piece device, deployable on offenders 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.”prison”. This provides for greater public safety at a lower cost compared to incarceration or traditional resource-intensive alternatives.
Our TrackerPAL™ IIe (“enhanced”)ReliAlert and our evolved ReliaTrack™ReliAlert XC devices are manufactured in the USAUnited States and include a portfolio of products, e-Arrest Beacons and monitoring services designed to create “Jails without Walls.” TheyWalls”, 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, andor juvenile offenders) and offer practical solutions and options for the reintegration and effective re-socialization of select offenders safely back into society, any society worldwide.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 restriction s.restrictions. Our technologies are designed for domestic or international, federal, state and local agencies to provide location tracking of qualifieddesignated individuals within the criminal justice system.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). In 2010,During fiscal year 2011, we also addeddeployed 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.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 supervisin gsupervising agency and/or when the offender is in violation of any established restrictions or protocols. IntelligentThe ReliAlert and ReliAlert XC units are intelligent devices with integrated computer circuitry and constructed from case-hardened plastics the TrackerPAL™ IIe and ReliaTrack™ unitsdesigned to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or to otherwise tamper with the device or optical strap housing.
Results of Operations
Continuing Operations - Fiscal Year 20102013 compared to Fiscal Year 20092012
Net Revenues
During the fiscal year ended September 30, 2010,2013, we had net revenues of $12,450,971$15,641,062 compared to net revenues of $12,625,908$13,114,979 for the fiscal year ended September 30, 2009, a decrease2012, an increase of $174,937$2,526,083, or approximately one19 percent. Revenues from monitoring services for the fiscal year ended September 30, 2010,2013, totaled $12,079,757,$15,028,625, compared to $12,055,159$11,519,727 for the same period ended 2009, resulting infiscal year 2012, an increase of $24,598$3,508,898 or approximately 0.230 percent. AlthoughRevenues increased as a result of our continued expansion into international markets, which contributed an additional $2,745,667 to monitoring revenues appear to be relatively flat,for fiscal year 2013. Of the number of net billable days$15,028,625 in revenues, $5,252,959 (35 percent) derived from our offender electronic monitoring devices from our subsidiary, SecureAlert Monitoring, increased approximately 26 percent froman international contract that was completed during the fiscal year ended September 30, 2009 as comparedand it is uncertain if we will provide services to this customer in the same period ended 2010. Additionally, overfuture. Domestic revenues decreased by $219,584, or three percent, from fiscal year 2012. This decrease resulted primarily from lowering our monitoring daily charge to compete in the same period, our average billable rate decreased from $ 6.28 per day to $5.04 as we continued to expand our portfolio of services offered to our customers which includes several levels of services with lower rates to meet their budgetary requirements. Net billable days and average billable rate are non-GAAP terms used by management. Net billable days refers to the total number of days that devices were deployed to our customers that are billable under their contract terms. Average billable rate refers to net revenues for monitoring services divided by the total number of net billable days.domestic marketplace. Revenues from product sales for the fiscal year ended September 30, 20102013 were $371,214,$612,437, compared to $570,749$1,595,252 for the same period ended 2009,prior year, a decrease of $199,535.$982,815, or 62 percent. This decrease iswas primarily due to the sale and installation in fiscal year 2012 of an increased focus to leasing monitoring equipment instead of device sales. For the years ended September 30, 2010 and 2009, revenues from one piece activated GPS tracking devices supported entirely about a single limb of the monitored person equated to $5,635 ,198 and $5,646,414.onsite charging solution.
Cost of Revenues
During the fiscal year ended September 30, 2010,2013, cost of revenues, excluding impairment of equipment and parts, totaled $6,978,974 or 56 percent of net revenues,$7,816,892, compared to cost of revenues during the fiscal year ended September 30, 20092012 of $10,138,613 or 80 percent$7,305,602, an increase of $511,290. These net costs of revenues, as a percentage of net revenue, a decrease of $3,159,639 or 31 percent.revenues, decreased six percent, from 56 percent in 2012 to 50 percent in 2013. The improvementincrease in cost of revenues of $511,290 in 2013 resulted primarily from decreasesincreases in the costs of $1,262,696 in communicationroyalty fees of $347,483 and higher international costs $438,231 in manufacturing costs, $397,381 in monitoring center costs, $362,954 in equipment amortization related to impairments from previous years, $230,557 in device costs and $194,944of $227,808. These increases were partially offset by a decrease in freight costs. These cost savings resulted as management improved budgetary planning processescosts of $72,010.
Impairment costs for equipment and focused on monthly budget awareness and accountability.
Amortization $875,312 for the fiscal yearyears ended September 30, 2010, is2013 and 2012, totaled $1,230,293 and $1,231,773, respectively. Amortization costs are based on a three-year useful life for TrackerPAL™TrackerPAL and ReliaTrackTMReliAlert 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 international revenues, that have lower cost than domestic sales, 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, 2010,2013, gross profit totaled $4,881,196,$7,610,894, or 3949 percent of net revenues, compared to $167,765,$4,160,615, or one32 percent of net revenues during the fiscal year ended September 30, 2009,2012, an improvementincrease of $4,713,431.$3,450,279. Included in cost of revenues are costs attributable to impairment of inventory and monitoring equipment of $590,801$213,276 and $2,319,530$1,648,762 for thefiscal years ended September 30, 20102013 and 2009,2012, respectively. These impairment costs from disposal and reduction in value of obsolete monitoring equipment wereare expenses not expectedwe expect to decrease in future periods. Excluding impairment costs, adjusted gross marginprofit for the fiscal year ended September 30, 20102013 was $5,471,997$7,824,170 or 4450 percent of net revenues, compared to $2,487,295$5,809,377 or 2044 percent of net revenues, for the same period in 2009,2012, an improvementincrease of $2,984,7 02.$2,014,793.
Research and Development Expenses
During the fiscal year ended September 30, 2010,2013, we incurred research and development expenses of $1,483,385$987,934 compared to similar expenses recognized during fiscal year 20092012 totaling $1,777,873.$1,248,654. This decrease of $294,488$260,720 is due primarily to management’s decision during the fiscal year ended September 30, 2009 to bring software enhancementsa reduction in research and product design in-house as opposed to using third-party vendors.development staff.
Selling, General and Administrative Expenses
During the fiscal year ended September 30, 2010,2013, our selling, general and administrative expenses totaled $12,126,413,$7,689,124, compared to $16,540,645$12,623,114 for the fiscal year ended September 30, 2009.2012. The improvementdecrease of $4,414,232$4,933,990 is the result of decreasesreductions in the following expenses: bad debt expense ($202,782), consulting ($2,334,122), legal and professional fees ($959,250), payroll and related taxes ($295,649), depreciation of property and equipment ($262,958), board of director fees ($164,702)2,286,737), insurance ($142,953)182,191), outside serviceslegal fees ($94,450)170,011), operating leasespayroll, payroll taxes and employee benefits ($84,345)1,426,001), and other selling, generaltravel expenses ($102,810). Consulting and administrative ($372,557). These decreases in selling, general and administrative expense were partially offset by increases in rent and storage expenses ($165,933) and other selling, general and admini strative expenses ($130,821). Consultingnon-cash compensation as a part of employee expense for the fiscal year ended September 30, 2010 was $1,911,5632013 totaled $445,971, compared to $4,245,685$3,904,527 for the fiscal year ended September 30, 2008,2012, a decrease of $2,334,122. This$3,458,556. The decrease is primarily due to a significant reduction ofin consulting and non-cash compensation totaling $2,046,289 throughto employee expenses resulted primarily from the issuance of common stock and acceleration of expense in connection with cancellation of stock options and warrants issued to Board of Directors, executive officers and employees.
during fiscal year 2012.
Other Income and Expense
For the fiscal year ended September 30, 2010,2013, interest expense was $4,146,459,$17,048,519, compared to $5,012,803$1,431,416 for the fiscal year ended September 30, 2009.2012. This amount includesincrease of $15,617,103 is a result primarily of non-cash interest expense of approximately $3,087,744$15,960,382 related to the amortization of deferred financing costs associateddebt discounts on convertible debentures. Also included in interest expense is $939,770 in accrued interest on a loan and security agreement with warrants, sharesa related party, of which $936,627 was converted into common stock issued for interest, and a beneficial conversion feature expense.in fiscal year 2013.
Net Loss
We had a net loss from continuing operations for the fiscal year ended September 30, 20102013 totaling $13,919,609,$18,334,070 (approximately $3.79 per share), compared to a net loss of $23,081,500$17,150,288 (approximately $6.27 per share) for the fiscal year ended September 30, 2009.2012. This decreaseincrease of $9,161,891$1,183,782 is due primarily to reductions in impairmentthe amortization of equipment and parts, communication and device costs, bringing software enhancements and product design in-housethe beneficial conversion feature of our convertible debentures recorded as opposed to using high priced third-party vendors, the reduced use of consulting services by bringing these services in-house, and the reduction ofnon-cash interest expense related to debt that was converted into shares of Series D Preferred stock.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 | ) | ||
18
Liquidity and Capital Resources
As of September 30, 2010,2013, we had unrestricted cash of $1,126,232,$3,382,428, compared to unrestricted cash of $602,321$458,029 as of September 30, 2009.2012. As of September 30, 2010,2013, we had a working capital deficitsurplus of $3,394,932,$6,836,442, compared to a working capital deficit of $16,476,897$13,600,345 as of September 30, 2009.2012. The increase in working capital in fiscal year 2013 primarily resulted from reductions in our accrued liabilitiesthe conversion of amounts owed to a related party under a loan and notes payable balances and increases in cash and prepaid balances offset by decrease in our inventory and increase in our lines of credit during the fiscal year ended September 30, 2010.security agreement.
During fiscal year 2010,2013, our operating activities usedprovided cash of $5,885,787,$838,910, compared to $8,521,326$1,910,067 of cash used during fiscal year 2009.2012. This decreaseimprovement in cash usedprovided from operating activities of $2,635,539$2,748,977 resulted primarily from a decreasean increase in net loss which was driven by an improvement in gross profitrevenues of $4,713,431. The decrease in net loss was offset, in part, by increases in the derivative liability valuation of $1,666,473, settlement expense of $1,150,000, amortization of debt discount of $887,546, related-party line of credit for services of $380,706, and inventories of $183,195.$2,526,083.
Investing activities during the fiscal year ended September 30, 2010,2013, used cash of $2,123,000,$560,425, compared to $1,676,467$2,847,274 during the fiscal year ended September 30, 2009.2012. The increasedecrease in cash used by investing activities of $2,286,849 during fiscal year 20102013 resulted primarily from an increasethe decrease in purchases of additional monitoring equipment. We purchased $1,834,173 and $1,312,397cash used for the purchase of monitoring equipment during the fiscal years ended September 30, 2010 and 2009, respectively.equipment.
Financing activities during the fiscal year ended September 30, 2010,2013, provided $8,532,698$2,500,724 of net cash compared to $8,017,161$4,396,563 of cash provided during the fiscal year ended September 30, 2009.2012.
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, 2012, we made net payments of $687,354 on notes payable, and we paid $207,578 on related-party notes payable and $1,147,250 of commissions in connection with capital raises. During fiscal year 2012, we had proceeds of $2,004,000 from the sale of Series D Convertible Preferred stock, proceeds of $500,000 from the issuance of convertible debentures, proceeds of $2,900,000 from the issuance of convertible debentures to related parties, and $1,033,000 from the sale of common stock to a related party.
During the fiscal year ended September 30, 2013, we incurred a net loss from continuing operations of $13,919,609$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 $5,885,787, 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 $23,081,500losses and negative cash flows from operating activities of $8,521,326 fora significant accumulated deficit. For the fiscal year ended September 30, 2009.2012, we did not have enough cash on hand to meet our current liabilities. As of September 30, 2010,a result, the report from our working capital deficit was $3,394,932, stockholders’ equity of $3,129,851, and accumulated deficit of $219,164,945.
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 and expanding its market for its ReliaTrackTM 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 debt holders will be willing to convert the debt obligations to equity secur ities or that we will be successful in raising additional capital from the sale of equity or debt securities. 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 financial statementsConsolidated Financial Statements for the fiscal year ended September 30, 20102013, 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 finished goods inventory at the lower of standard cost, which approximates actual cost (first-in, first-out method) or market. Rawand raw materials are stated at the lower of cost, (first-in, first-out method), or market.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 2010 derivedhas historically been from two sources: (i) monitoring services; (ii) monitoring device and other(ii) product sales.
Monitoring Services
Monitoring services include two components: (a) lease contracts in which we provide monitoring services and lease devices to distributors or end users and we 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 seven7 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.
We sell and install standalone tracking systems that do not require our ongoing 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 use 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. OnHowever, on occasion, we haveenter into revenue transactions that have multiple elements (suchelements. 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 product sales and monitoring services).the customer utilizes our services. For revenue arrangements that have multiple elements, we consider whether: (i)whether the delivered devices have standalone value to the customer; (ii)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;services, and (iii) 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 to be provided to the customer. In accordance with FASB ASC Subsection 605-25, ifcustomer as the fair value of the undelivered element exists, but the fair value does not exist for oneproducts or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteriaservices are met.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, and normal payment terms for device sales are between 120 and 180 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 we sell to 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 other thansuch as goodwill and intangibles for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. An evaluation is maderecoverable and in the case of goodwill, at each balance sheet date, to determineleast annually. We evaluate whether events and circumstances have occurred which indicate possible impairment. An estimate is madeimpairment as of future undiscounted net cash flowseach balance sheet date. We use an equity method of the related asset or group of assets over our estimated remaining life in measuring whether the assets are recoverable. DuringIf the fiscal years ended September 30, 2010 and 2009, we disposedcarrying amount of $590,801 and $2,319,530, respectively.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.
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
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 princ ipalprincipal financial officer an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 20102013 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, 2010.2013.
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'smanagement’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 temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.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, 2010:December 16, 2013:
| Name | Age | Position | ||
| 53 | Director | |||
| 55 | Director | |||
| Rene Klinkhammer | 33 | Director | ||
| 48 | Director | |||
| Dan L. Mabey | 62 | Director | ||
| George F. Schmitt | 70 | Director |
Guy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director at Singapore-based Tetra House Pte. Ltd., that provides consulting and advisory services worldwide. Mr. Dubois was Chief Executive Officer of gategroup AG from September 2008 until April 2011. He previously held the positions of President, Executive Vice President Finance and Administration, Chief Administrative Officer and Chief OperatingFinancial Officer on November 20, 2008.of Gate Gourmet Holding LLC. He served as a manager of the Board of Managers of Gate Gourmet Holding LLC from March 2007 until April 2011, and as a member of the Board of gategroup AG from February 2008 until April 2011. Prior to joining Gate Gourmet in July 2003, Mr. Hastings hasDubois was Vice President Finance, Administration, Demand and Supply Chain for Roche’s Vitamins Inc. in New Jersey from 2000 to 2003. He was Area Manager, Finance and Administration for Roche’s Vitamins Asia-Pacific Pte. Ltd. in Singapore from 1997 to 1999, and Finance Manager from 1995 to 1997. Mr. Dubois worked in corporate finance for Nestle/Stouffer’s, Kraft/General Foods, Nissan Motor Acceptance Corp., NCR/Teradata, Unisys Corp. and VNU/AC Nielsen. He hasHoffman-La Roche in 1994. Mr. Dubois also served on the boards of small entrepreneurial companies. From 1998 through 2006, Mr. HastingsEuropean Organization for Nuclear Research (CERN) team in Switzerland in various roles, including Treasurer and Chief Accountant, Manager General Accounting and Financial Accountant from 1989 to 1994. He also worked with VNU – AC NielsenIBM in several executive posts, last servingSweden from 1984 to 1988 as its Senior Vice PresidentProduct Support Specialist for Financial Applications. He attended the Limburg Business School in Diepenbeek, Belgium, and General Managerhas a degree in Financial Science and Accountancy. Mr. Dubois’ appointment to the Board of Global Business Intelligence, reporting directly to VNU’s chief executive officer. Upon acquisition and privatizationDirectors was a requirement of VNU in 2006, and until his appointmenta financing arrangement as our President, Mr. Hastings served aspart of the interim President and CEOterms of Klever Marketing, Inc., a Utah-based retail marketing company. Mr. Hastings received a BA from Cal State University, Fullerton CA (1985) and an MBA from Pepperdine University, Malibu CA (1987). loan agreement with Sapinda Asia.
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 London.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 threesix years, Mr. Klinkhammer has worked with the Companyus as both an investor and advisor.
Dan L. Mabeybecame a director on December 21, 2011. He is associated with Providence Capital,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), Chief Operating Officer and Director of In Media Corporation IPTV service company (California), President of Interactive Devices, Inc. (“PCI”) as a Managing Director. PCIvideo compression company (Folsom, California) and Vice President of Broadcast International, a satellite broadcast company ( Salt Lake City, Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development 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 B.A. degree from Boise State University in 1974.
George F. Schmitt became a director on December 21, 2011. He is a New York City-based investmentdirector and advisory firm. Additionally,CEO of MBTH Technology Holdings. He has held this position since December, 2010. Mr. Schafran was Lead Director and Audit Committee Chairman and later a consultant to the Chairman of WorldSpace, Inc. In addition, Mr. SchafranSchmitt is also a director of the followingXG Technology, Inc. a publicly traded U. S. corporations: Sulphco, Inc., New Frontier Energy, Inc., DollarDays International, Inc., Subaye Corp.company, Kentrox and National Patent Development Corporation. In recent years,Calient. Mr. SchafranSchmitt previously served in several capacities, including, as a director of PubliCard, Inc., Tarragon Corporation,TeleAtlas, Objective Systems Integrators, Omnipoint and ElectroEnerg y,LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and Trustee, Chairman/Interim-CEO/President and Co-Liquidatingserves as a Trustee of Special Liquidating TrustSt. Mary’s College. In addition, Mr. Schmitt has served as a director of Banyan Strategic Realty Trust; Director and/or Chairmanmany 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 Executive Committeesaudit committee of Dart Group Corporation, Crown Books Corporation, TrakAuto Corporation,Objective Systems Integrations and Shoppers Food Warehouse, Inc. (Vice-Chairman); director and member of the Strategic Planning and Finance Committees of COMSAT Corporation, and Managing General Partner of L. G. Schafran & Partners, LP,TeleATLAS. Mr. Schmitt received an M.S. in Management from Stanford University, where he was a real estate investment and development firm. Mr. Schafran is Chairman of the Audit and Nominating CommitteesSloan Fellow, and a member of the Compensation Committee of our Board of Directors.B.A. in Political Science from Saint Mary’s College.
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Board of Directors
Election and Meetings
Directors hold office until the next annual meeting of the stockholdersshareholders and until their successors have been elected or appointed and duly qualified. Executive officers are electedappointed by the Board of Directors and hold office until their successors are elected or appointed and duly qualified. Vacancies on the boardBoard 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,Board, with such new director serving the remainder of the term or until hishis/her successor shall be elected and qualify.
The Board of Directors is elected by and is accountable to our shareholders. The boardBoard establishes policy and provides our strategic direction, oversight, and control. The boardBoard met 1118 times during fiscal year 2010.2013. All directors attended at least 80 percent of the meetings of the boardBoard and the board committees of the Board of Directors, of which they are members.
Director Independence
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 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. All membersThese committees assist the Board of Directors to perform its responsibilities and make informed decisions.
Audit Committee. The primary duties of the Audit Committee Compensation Committee, and Governance and Nominating Committee meet the definition of "independent," described above.
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.
Members of the Audit Committee can be found on our website at www.securealert.com. Theas of September 30, 2013, are Messrs. Boone, Schmitt and Kunz. Each member of the Audit Committee conducts an ongoing reviewsatisfies, according to the full Board of our financial reports and other financial information prior to their being filedDirectors, 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 designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the Securities and Exchange Commission, or otherwise provided to the public. The Audit Committee also reviews our systems, methods and procedures of internal controls in the areas of: financial reporting, audits, treasury operations, corporate finance, managerial, financial and SEC accounting, compliance with law, and ethical conduct. The Audit Committee is objective, and reviews and assesses the work of our independent registered public accounting firm.Commission.
The Audit Committee reviewed and discussed the matters required by U.S. Auditing StandardsUnited States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 20102013 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 financial statements for the fiscal year September 30, 2010 be included in this report.
Compensation Committee. Members of the Compensation Committee are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee was restructuredmet two times during the fiscal year ended September 30, 2010, with Robert Childers, one2013. Members of our directors,the Compensation Committee are appointed by the Board of Directors. Messrs. Mabey, Boone, and Schmitt are independent directors, as determined by the Board of Directors to serve asin accordance with the chair. In addition, Larry Schafran and Edgar Bernardi serve as members of the Compensation Committee.NASDAQ listing standards. The Compensation Committee met three times during fiscal year 2010. 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.
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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 stockholders.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 stockholdershareholder value, rewards superior performance, and is justified by the returns available to stockholders.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. During the fiscal year ended September 30, 2010, Larry Schafran, one of our directors, was appointedMr. Schmitt serves as the chair of the Nominating and Corporate Governance Committee. Messrs. Kunz and Klinkhammer also currently serve as members of this committee. The Nominating Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created boardBoard positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for CEO and senior management succession. In addition, Robert Childers serves
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 a memberwell 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.Committee held one meeting during fiscal 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 func tionsfunctions 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, 2010, regarding the current executive officers of the Company.December 16, 2013:
| Name | Age | Position | ||
| Principal Executive Officer | ||||
| Chad D. Olsen | 42 | Chief Financial Officer | ||
Chad D. Olsen becamewas appointed to be our Chief Financial Officer in January 2010. Prior to that time,Previously, he served as our corporate controller sincebeginning in September 2001. From 1992Additionally, he served as the Company’s corporate secretary from January 2010 to 1997, Mr. Olsen worked in the banking and investment industry where he assisted clients with tax, investment and banking services.November 2011. From 1997 to 2001, Mr. Olsen worked withat Kartchner and Purser, P.C., a certified public accounting firm in performing tax, auditing, and business advisory services. Additionally,In 1996 while working at Fidelity Investments, Mr. Olsen ownedheld Series 6 and operated his own accounting practice performing63 licenses with the National Association of Securities Dealers (NASD), now known as Financial Industry Regulatory Authority (FINRA), registered to sell mutual funds, variable annuities and insurance premiums. Additionally, he worked with clients specializing in tax accounting, and consulting services.investment strategies with high net-worth clients. From 1992 to 1996, Mr. Olsen worked in the banking industry with Universal Community Credit Union where he supervised member services employees. Mr. Olsen received a Bachelor of Science Degree in Accounting from Brigham Young University.
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Set out in the industries in which he operates; educational and work background; and reviewsfollowing summary compensation table are the particulars of sample salaries at companies of comparable size and industry. The Compensation Committee also considered the fact that Mr. Derrick has provided and facilitated credit agreements and other financing for us. The salary payable to Mr. Derrick is paid by ADP Management Corporation from amountscompensation paid to ADP Management Corporationthe following persons for consulting and other services by the Company. Of the total base salary expense related to Mr. Derrick’s compensation in theour fiscal years ended September 30, 20102013 and 2009, $420,000 was attributable to the amortization of restricted shares of common stock which were returned and cancelled, resulting in no cash payment to Mr. Derrick and $60,000 was accrued for, but unpaid at September 30, 2010. In effect Mr. Derrick’s actual compensation paid in cash was $0 for the past two years.2012:
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
| Nonqualified | ||||||||||||||||||||||||||||||||||||
| Non-Equity | Deferred | |||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||||||||
| Principal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
David G. Derrick (1) Chief Executive Officer | 2010 2009 | $ $ | 240,000 240,000 | $ $ | - 300,000 | $ $ | - - | $ $ | 83,991 185,571 | $ $ | - - | $ $ | - - | $ $ | 74,197 5,929 | $ $ | 398,188 731,500 | |||||||||||||||||||
John L. Hastings, III (2) President Chief Operating Officer | 2010 2009 | $ $ | 325,000 302,885 | $ $ | - 94,330 | $ $ | - - | $ $ | 131,326 46,393 | $ $ | - - | $ $ | - - | $ $ | 174,853 18,868 | $ $ | 631,179 462,476 | |||||||||||||||||||
Michael G. Acton (3) Chief Financial Officer | 2010 2009 | $ $ | 3,076 81,538 | $ $ | - - | $ $ | - - | $ $ | - - | $ $ | - - | $ $ | - - | $ $ | - 9,806 | $ $ | 3,076 91,344 | |||||||||||||||||||
| �� | ||||||||||||||||||||||||||||||||||||
Chad Olsen (4) Chief Financial Officer | 2010 | $ | 165,000 | $ | 17,580 | $ | - | $ | 14,264 | $ | - | $ | - | $ | 25,845 | $ | 222,689 | |||||||||||||||||||
Bernadette Suckel (5) Managing Director of Sales and Marketing | 2010 2009 | $ $ | 121,541 126,161 | $ $ | - - | $ $ | - 11,500 | $ $ | 81,313 104,520 | $ $ | - - | $ $ | - - | $ $ | 5,259 - | $ $ | 208,113 242,181 | |||||||||||||||||||
| (b) | our most highly compensated executive officer who was serving as an executive officer at the end of the fiscal year ended September 30, |
| (c) | an additional individual for whom disclosure would have been provided under |
| 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. |
| Mrs. Suckel has served as Managing Director of |
| Outstanding Equity Awards at Fiscal Year-End |
| Option awards | Stock Awards | ||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | ||
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities 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 ($) | ||
| David G. Derrick | 2,000,000 | - | - | $0.13 | Various (1) | - | $ - | - | $ - | ||
| John L. Hastings, III | 1,500,000 | - | - | $0.13 | Various (2) | - | $ - | - | $ - | ||
| Chad D. Olsen | 2,461,000 | - | 538,500 | Various (3) | Various (3) | ||||||
| Bernadette Suckel | 1,000,000 | - | 525,000 | Various (4) | Various (4) | - | $ - | - | $ - | ||
| 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 ($) | Option expiration date | Number of shares or units of stock tha t have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | |||||||||||||||||||||
| Chad D. Olsen | 1,000 | - | - | $ | 15.00 | 1/15/14 | - | - | - | ||||||||||||||||||||
| 125 | - | - | $ | 15.00 | 3/14/14 | - | - | - | |||||||||||||||||||||
| 3,590 | - | - | $ | 15.00 | 9/29/15 | - | - | - | |||||||||||||||||||||
| 30,000 | - | - | $ | 16.66 | 9/29/14 | - | - | - | |||||||||||||||||||||
| Bernadette Suckel | 1,000 | - | - | $ | 60.00 | 1/15/14 | - | - | - | ||||||||||||||||||||
| 18,750 | - | - | $ | 16.66 | 9/29/14 | - | - | - | |||||||||||||||||||||
| 3,500 | - | - | $ | 30.00 | 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, 2010.2013.
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 Securities and Exchange Commission.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 2010,2013 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
The following table below summarizes the compensation we paid by us to our non-employee directors infor the fiscal year ended September 30, 2010, who were serving as directors as of such date.
| (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 | ||||||||
28
Effective January 1, 2012, we accrued $2,500 per month for each director to be issued in shares of |
Name | Grant Date | Expiration Date | Exercise Price | Number of Options | Compensation Expense |
| David Hanlon | 9/8/06 | 9/7/11 | $1.41 | 50,000 | $ 3,107 |
| 8/29/07 | 8/28/12 | $2.15 | 100,000 | $ 6,761 | |
| 7/14/08 | 7/13/13 | $1.22 | 459,000 | $ 23,530 | |
| Robert Childers | 10/5/06 | 10/4/11 | $1.73 | 50,867 | $ 3,336 |
| 8/29/07 | 8/28/12 | $2.15 | 150,000 | $ 10,141 | |
| 7/14/08 | 7/13/13 | $1.22 | 610,000 | $ 31,271 | |
| Larry Schafran | 9/8/06 | 9/7/11 | $1.41 | 53,900 | $ 3,350 |
| 8/29/07 | 8/28/12 | $2.15 | 150,000 | $ 10,141 | |
| 12/5/07 | 12/4/12 | $4.05 | 50,000 | $ 3,894 | |
| 7/14/08 | 7/13/13 | $1.22 | 610,000 | $ 31,271 |
The table below summarizes outstanding warrants previously issued to our current non-employee directors for compensation as of September 30, 2013:
| Name | Grant Date | Expiration Date | Exercise Price | Number of Options |
| David Hanlon | 9/8/06 | 9/7/11 | $1.41 | 50,000 |
| 8/29/07 | 8/28/12 | $2.15 | 100,000 | |
| 7/14/08 | 7/13/13 | $1.22 | 459,000 | |
| Robert Childers | 10/5/06 | 10/4/11 | $1.73 | 50,867 |
| 8/29/07 | 8/28/12 | $2.15 | 150,000 | |
| 7/14/08 | 7/13/13 | $1.22 | 610,000 | |
| Larry Schafran | 9/8/06 | 9/7/11 | $1.41 | 53,900 |
| 8/29/07 | 8/28/12 | $2.15 | 150,000 | |
| 12/5/07 | 12/4/12 | $4.05 | 50,000 | |
| 7/14/08 | 7/13/13 | $1.22 | 610,000 |
| 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 | ||||||||||||||
We also reimburse travel expenses of members of the Board of Directors for their attendance at boardBoard meetings. Messrs. Derrick
Compensation Risks Assessment
As required by rules adopted by the SEC, management has made an assessment of our compensation policies and Hastingspractices with respect to all employees to determine whether risks arising from those policies and practices are not included in these tables because as employeesreasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the Company they receive no additional compensation for their services as directors.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. The following table presents information regarding beneficial ownership as of December 23, 201031, 2013 (the “Table Date”), of all classes of our voting securities by:
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 Stock are entitled to 6,00030 votes per share. share and vote with the common stock shareholders on an as-converted basis.
| Title or Class of Securities: | |||||||||||||
| Common Stock | Series D Preferred Stock | ||||||||||||
Name and Address of Beneficial Owner (1) | Shares | % | Shares | % | |||||||||
| 5% Stockholders: | |||||||||||||
Winfried Kill (2) | 53,361,305 | 18.1% | - | * | |||||||||
Advance Technology Investors, LLC (3) | 34,690,665 | 11.8% | 3,403 | 8.7% | |||||||||
Borinquen Container Corp (4) | 29,400,000 | 10.0% | 4,900 | 12.6% | |||||||||
Kofler Ventures S.a.r.l (5) | 24,456,161 | 8.3% | - | * | |||||||||
Radenko Milakovic (6) | 24,726,562 | 8.4% | 4,000 | 10.3% | |||||||||
Laemi Real Estate, Inc. (7) | 21,040,304 | 7.1% | 3,330 | 8.6% | |||||||||
Stephan Goetz (8) | 18,635,901 | 6.3% | 3,000 | 7.7% | |||||||||
Commerce Financial, LLC (9) | 13,684,508 | 4.6% | 2,149 | 5.5% | |||||||||
Comediahill Business S.A. (10) | 14,026,868 | 4.8% | 2,220 | 5.7% | |||||||||
Tim Whyte (11) | 12,349,010 | 4.2% | 2,000 | 5.1% | |||||||||
| Directors and Named Executive Officers: | |||||||||||||
David G. Derrick (12) | 19,698,313 | 6.7% | 2,233 | 5.7% | |||||||||
Chad D. Olsen (13) | 3,285,656 | 1.1% | 172 | * | |||||||||
John L. Hastings, III (14) | 1,500,000 | * | 0 | * | |||||||||
Robert Childers (15) | 2,374,975 | * | 50 | * | |||||||||
Larry Schafran (16) | 1,933,500 | * | 110 | * | |||||||||
David Hanlon (17) | 1,716,635 | * | 115 | * | |||||||||
Bernadette Suckel (18) | 525,000 | * | 0 | * | |||||||||
Edgar Bernardi (19) | 1,400,000 | * | 200 | * | |||||||||
Rene Klinkhammer (20) | 200,000 | * | 0 | * | |||||||||
All directors and executive officers as a group (9 persons) (21) | 32,634,079 | 11.1% | 2,880 | 7.4% | |||||||||
29
| 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 |
| 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) |
| 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 August 4, 2011, with an effective date of CreditJuly 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to purchase its wholly-owned subsidiary ISS for 310,000 shares of our common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. As additional consideration, we also granted Borinquen a royalty in the amount of 20 percent of our 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, payable quarterly for a term of 20 years.
30 2009,
On February 1, 2013, we owed $76,022 under a line-of-creditentered into an agreement with ADP Management, an entity ownedSapinda Asia and controlled by Mr. Derrick, our Chief Executive Officer. Outstanding amounts onBorinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the linerepurchase of credit accrue interest at 11 percent per annumthe royalty (at a cost of $11,616,984) and were due upon demand.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, 2009, the net decrease under this line2013, a debt discount of credit$14,290,269 was $466,782. This decrease consisted of cash repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP Management that are reimbursable by us.
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 exercise priceinterest rate of $0.25three percent per share, valued at $43,926. On January 13, 2010, the entity converted the $250,000 debenture into 250 shares of Series D Preferred stock.annum for unused funds and 10 percent per annum for borrowed funds. As of September 30, 20102013, no advances had been made under this loan and 2009, we owed $0 and $250,000had accrued $23,868 in principal plus $1,381 and $9,452interest liability on the Revolving Loan. On October 24, 2013 we drew down the full $1,200,000 for use in accrued interest, respectively.a performance bond as required under a contract with an international customer.
Related-Party Service Agreement
During the quarter 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, ADP Management was paidfollowing services for a consultingmonthly fee of $20,000 per month$4,500: (1) procurement of hardware and we agreedsoftware necessary to reimburse the expenses incurred by ADP Managementensure that vital databases are available to us in the courseevent of performing services undera disaster (backup and disaster recovery system); and (2) the consulting arrangement.
Related-Party Loan
During fiscal year 2012, we borrowed $500,000 from David Derrick, who was then an executive officer and Chairmandirector of our Board of Directors. The Board of Directors, which at the time did not include Mr. Derrick, approved both of these arrangements.
Company. During the fiscal year ended September 30, 2008,2013, we issued 1,000,000established 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 valuedstock.
Related-Party Convertible Debenture #1
During fiscal year 2012, we borrowed $500,000 from George F. Schmitt, a director of the Company, with an interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 and secured by our domestic patents. During the fiscal year ended September 30, 2013, the debenture was convertible at $1.52$4.50 which created a beneficial conversion feature expense of $110,556 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 117,784 shares of common stock.
Related-Party Convertible Debenture #2
During fiscal year 2012, we borrowed $2,000,000 from Sapinda Asia with an interest rate of 8 percent per shareannum. The debenture was to mature on December 17, 2012 and secured by our domestic patents. During the fiscal year ended September 30, 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 for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Republic of Singapore and is 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 $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8 percent per annum; interest 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 3, 2016. We may prepay consulting fees(in minimum amounts of $1,000,000) borrowed amounts without penalty. In consideration of the Facility Agreement, we agreed to ADP Management. Effective July 1, 2010,pay Tetra House an arrangement fee in the amount of 3 percent of the aggregate maximum amount under the Facility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) is due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) is to be withheld from the first draw down of funds under the Facility Agreement. We 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 Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and ADP Management mutually agreed thatGeorge F. Schmitt. As of January 14, 2014, we borrowed $10,000,000 under the 1,000,000 sharesFacility Agreement.
31
Additional Related Party Transactions and Summary of common stock previously issued would be returned and cancelled resulting in no prior obligation outstanding, but we would accrue $20,000 per month going forwardAll 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 evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to pay Mr. Derrick’s base salary. Even though ADP Management received no monetary compensation in connection with these shares, since the shares were returned and cancelled, we recorded $180,000 and $240,000 of expense associated with the issuance of these shares during each of the fiscal years ended September 30, 2010 and 2009. In effect, Mr. Derrick’s actual compensation paid in cash was $0 for2013, the past two years.following events occurred:
| · | We 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. |
| · | We issued 483 shares of common stock as payment of fourth quarter Series D Preferred stock dividends, valued at $5,650. |
| · | We issued a total of 760 shares of common stock to several of our directors for services rendered, valued at $15,000. |
| · | We issued 500 shares of common stock to a consultant upon the exercise of warrants at an exercise price of $16.00 per share and received cash proceeds of $8,000. |
| · | 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 required under the agreement, to post a performance bond in the amount of $3,382,082. In addition, we 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 us. The maximum sum to be paid for the services provided by us is approximately $70,000,000, at current exchange rates, over the term of the agreement. |
| · | We borrowed $1,200,000 under a line-of-credit with a related party to be used with other available cash on hand to post the performance bond under our agreement for the Chilean contract described above. |
| · | We borrowed $1,500,000 from Sapinda Asia, a shareholder, for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014. |
| · | 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 and intent of the parties and we will pursue the matter vigorously. |
| · | 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 a rate of 8% per annum due and payable in arrears semi-annually, with a maturity date for all principal and unpaid interest of January 3, 2016. In addition, we agreed to pay an arrangement fee equal to 3 percent of the aggregate maximum amount under the loan. As of the date of this report, we borrowed and received $10,000,000 from the Facility Agreement. |
32
Director Independence
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 AccountantAccounting 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 20102013 and 20092012 totaled approximately $158,000$49,750 and $168,000,$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
fiscal years 2013 and 2012 totaled approximately $16,750 and $14,000, respectively. The Audit Committee of the Board of Directors considered and authorized all services provided by Hansen Barnett & Maxwell, P.C.HBM. No tax services were provided to us during the fiscal years ended September 30, 2013 or 2012 by Eide Bailly. The Company paid Eide Bailly $9,064 in audit related fees for the year ended September 30, 2013.
Auditor Independence
Our Audit Committee considered that the work done for us in fiscal 2010year 2013 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. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The directors who serve on the Audit Committee are all independent for purposes of applicable SEC Rules.Directors:
The Audit Committee operates under a written charter that has been adopted by the Board of Directors.
Based on ourthe Audit Committee’s review and discussions referred tonoted above, we havethe Audit Committee recommended to theour Board of Directors that ourthe Company’s audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, for filing with the Securities and Exchange Commission.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 | |
| Report of Hansen, Barnett & Maxwell, P.C. | 44 |
| 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, |
| 3(i)(11) | |
| 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 (previously filed as Exhibit to Definitive Proxy Statement, filed October 25, 2011) |
| 3(i)(14) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed April 11, 2013 (previously filed as Exhibit on Form 10-Q filed May 15, 2013). |
| 3(ii) | Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997). |
| 3(iii) | 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 | ||
| 4.02 | |||
| 10.1 | |||
| 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
| 10.5 | |||
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 (previously filed with Form 8-K in November 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 | ||
| 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 13, 2013 (previously filed on Form 10-Q in August 2013). | ||
| 10.14 | Notice of Conversion from Sapinda Asia Limited, dated September 24, 2013 (filed herewith). |
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). | |
| 99.1 | Insider Trading Policy Adopted, dated April 16, 2013 (filed herewith). | |
| 99.2 | 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 | |||||||
/s/ Guy Dubois | |||||||||
| Guy Dubois | (Acting Principal Executive Officer) | ||||||||
| Chief | |||||||||
| Chad D. Olsen | Officer and Principal Accounting Officer) | ||||||||
| David S. Boone | |||||||||
| Winfried Kunz | |||||||||
| Director | |||||||||
| Rene Klinkhammer | |||||||||
| Director | |||||||||
| Dan L. Mabey | |||||||||
| Director | January 14, 2014 | ||||||||
| George F. Schmitt | |||||||||
SecureAlert, Inc. (formerly RemoteMDx, Inc.)
Consolidated Financial Statements
September 30, 20102013 and 20092012
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 | ||
| 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, 2010 and 20092013 and the related consolidated statementsstatement of operations, stockholders’ equity, (deficit), 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 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, 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 auditsaudit 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, 2010 and 2009,2012, 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
 |  |
44
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 20102013 AND 20092012
| Assets | 2010 | 2009 | ||||||
| Current assets | ||||||||
| Cash | $ | 1,126,232 | $ | 602,321 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $366,800 and $266,000, respectively | 1,339,513 | 1,441,648 | ||||||
| Prepaid expenses and other | 791,986 | 275,390 | ||||||
| Inventory, net of reserves of $47,118 and $83,092, respectively | 345,529 | 603,329 | ||||||
| Total current assets | 3,603,260 | 2,922,688 | ||||||
| Property and equipment, net of accumulated depreciation of $2,235,683 and $2,525,180, respectively | 1,485,322 | 1,313,306 | ||||||
| Monitoring equipment, net of accumulated depreciation of $2,788,309 and $2,944,197, respectively | 1,683,356 | 1,316,493 | ||||||
| Goodwill | 3,910,063 | 2,468,081 | ||||||
| Intangible assets, net of amortization of $274,159 and $126,655, respectively | 398,842 | 496,346 | ||||||
| Other assets | 107,618 | 76,675 | ||||||
| Total assets | $ | 11,188,461 | $ | 8,593,589 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Bank line of credit | $ | 1,000,000 | $ | 252,600 | ||||
| Accounts payable | 2,059,896 | 2,339,786 | ||||||
| Accrued liabilities | 1,904,295 | 3,506,680 | ||||||
| Dividends payable | 555,110 | - | ||||||
| Deferred revenue | 80,890 | 56,858 | ||||||
| Related-party note payable and line of credit | 150,000 | 1,576,022 | ||||||
| SecureAlert Monitoring Series A Preferred stock redemption obligation | 114,032 | 3,148,943 | ||||||
| Derivative liability (Note 10) | - | 1,219,426 | ||||||
| Promissory notes payable, net of debt discount of $0 and $41,556, respectively | �� | - | 2,008,444 | |||||
| Senior secured note payable, net of debt discount of $0 and $529,109, respectively | - | 2,890,522 | ||||||
| Current portion of Series A 15% debentures, net of debt discount of $0 and $1,272,189, respectively | - | 2,127,811 | ||||||
| Current portion of long-term debt | 1,133,969 | 272,493 | ||||||
| Total current liabilities | 6,998,192 | 19,399,585 | ||||||
| Series A 15% debentures net of current portion, net of debt discount of $0 and $549,531, respectively | - | 557,219 | ||||||
| Long-term debt, net of current portion, net of debt discount of $0 and $525,665, respectively | 1,060,418 | 1,009,606 | ||||||
| Total liabilities | 8,058,610 | 20,966,410 | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock: | ||||||||
| Series D 8% dividend, convertible, voting, $0.0001 par value: 50,000 shares designated; 35,407 and zero shares outstanding, respectively (aggregate liquidation preference of $23,009,086) | 4 | - | ||||||
| Common stock, $0.0001 par value: 600,000,000 shares authorized; 280,023,255 and 210,365,988 shares outstanding, respectively | 28,002 | 21,037 | ||||||
| Additional paid-in capital | 222,501,863 | 193,371,638 | ||||||
| Subscription receivable | (50,000 | ) | - | |||||
| Accumulated deficit | (219,164,945 | ) | (205,380,903 | ) | ||||
| Total SecureAlert, Inc. stockholders’ equity (deficit) | 3,314,924 | (11,988,228 | ) | |||||
| Non-controlling interest | (185,073 | ) | (384,593 | ) | ||||
| Total equity (deficit) | 3,129,851 | (12,372,821 | ) | |||||
| Total liabilities and stockholders’ equity | $ | 11,188,461 | $ | 8,593,589 | ||||
| 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 | ||||
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20102013 AND 20092012
| 2010 | 2009 | |||||||
| Revenues: | ||||||||
| Products | $ | 371,214 | $ | 570,749 | ||||
| Monitoring services | 12,079,757 | 12,055,159 | ||||||
| Total revenues | 12,450,971 | 12,625,908 | ||||||
| Cost of revenues: | ||||||||
| Products | 45,131 | 275,688 | ||||||
| Monitoring services | 6,933,843 | 9,862,925 | ||||||
| Impairment of monitoring equipment and parts (Note 2) | 590,801 | 2,319,530 | ||||||
| Total cost of revenues | 7,569,775 | 12,458,143 | ||||||
| Gross profit | 4,881,196 | 167,765 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative (including $1,269,427 and $3,315,716, respectively, of compensation expense paid in stock, stock options / warrants or as a result of amortization of stock-based compensation) | 12,126,413 | 16,540,645 | ||||||
| Research and development | 1,483,385 | 1,777,873 | ||||||
| Settlement expense | 1,150,000 | - | ||||||
| Impairment of goodwill (Note 2) | 204,735 | 2,804,580 | ||||||
| Loss from operations | (10,083,337 | ) | (20,955,333 | ) | ||||
| Other income (expense): | ||||||||
| Loss on disposal of equipment | (41,597 | ) | - | |||||
| Redemption of SecureAlert Monitoring Series A Preferred | (19,095 | ) | 95,816 | |||||
| Interest income | 23,139 | 18,187 | ||||||
| Interest expense (including $3,087,744 and $2,695,759, respectively, paid in stock, stock options / warrants, or as a result of amortization of debt discount) | (4,146,459 | ) | (5,012,803 | ) | ||||
| Derivative valuation gain (Note 10) | 200,534 | 1,867,007 | ||||||
| Other income (expense), net | 147,206 | 905,626 | ||||||
| Net loss | (13,919,609 | ) | (23,081,500 | ) | ||||
| Net loss attributable to non-controlling interest | 135,567 | 142,955 | ||||||
| Net loss attributable to SecureAlert, Inc. | (13,784,042 | ) | (22,938,545 | ) | ||||
| Dividends on Series A and D Preferred stock | (1,494,481 | ) | (175 | ) | ||||
| Net loss attributable SecureAlert, Inc. to common stockholders | $ | (15,278,523 | ) | $ | (22,938,720 | ) | ||
| Net loss per common, basic and diluted | $ | (0.07 | ) | $ | (0.13 | ) | ||
| Weighted average common shares outstanding, basic and diluted | 227,321,000 | 182,188,000 | ||||||
| 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.
46
SECUREALERT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012 AND 2013
| Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||
| Series D | Paid-in | Accumulated | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| 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 | (90 | ) | - | 2,700 | - | - | - | - | ||||||||||||||||||||
| Royalty payment | - | - | 71,969 | 7 | 819,965 | - | 819,972 | |||||||||||||||||||||
| Services | - | - | 4,315 | - | 40,000 | - | 40,000 | |||||||||||||||||||||
| Debt | - | - | 8,449 | 1 | 118,279 | - | 118,280 | |||||||||||||||||||||
| Dividends from Series D Preferred stock | - | - | 210,689 | 21 | 2,391,547 | - | 2,391,568 | |||||||||||||||||||||
| 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 | - | - | - | - | 1,405,500 | - | 1,405,500 | |||||||||||||||||||||
| 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 | - | - | - | - | (2,480,298 | ) | - | (2,480,298 | ) | |||||||||||||||||||
| Issuance of common stock warrant to settle a lawsuit | - | - | - | - | 253,046 | - | 253,046 | |||||||||||||||||||||
| 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 | 4,008 | - | - | - | 2,004,000 | - | 2,004,000 | |||||||||||||||||||||
| Commission paid in connection with capital raise | - | - | - | - | (1,147,250 | ) | - | (1,147,250 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (17,458,107 | ) | (17,458,107 | ) | |||||||||||||||||||
| 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.
47
SECUREALERT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012 AND 2013
| Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||
| Series D | Paid-in | Accumulated | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance as of October 1, 2012 | 48,763 | $ | 5 | 3,096,641 | $ | 310 | $ | 252,940,448 | $ | (248,513,626 | ) | $ | 4,427,137 | |||||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||||||
| Conversion of Series D Preferred stock | (48,295 | ) | (4 | ) | 1,894,283 | 189 | (185 | ) | - | - | ||||||||||||||||||
| Services | - | - | 21,884 | 2 | 141,758 | - | 141,760 | |||||||||||||||||||||
| Debt | - | - | 4,607,361 | 461 | 20,732,657 | - | 20,733,118 | |||||||||||||||||||||
| Dividends from Series D Preferred stock | - | - | 181,832 | 18 | 1,663,979 | - | 1,663,997 | |||||||||||||||||||||
| Accrued board of director fees | - | - | 3,661 | - | 47,500 | - | 47,500 | |||||||||||||||||||||
| Cash | - | - | (159 | ) | - | (1,996 | ) | - | (1,996 | ) | ||||||||||||||||||
| Vesting and re-pricing of stock options | - | - | - | - | 160,301 | - | 160,301 | |||||||||||||||||||||
| Beneficial conversion feature recorded as interest expense | - | - | - | - | 15,349,074 | - | 15,349,074 | |||||||||||||||||||||
| Series D Preferred stock dividends | - | - | - | - | (1,042,897 | ) | - | (1,042,897 | ) | |||||||||||||||||||
| Issuance of common stock warrants for Board of Director fees | - | - | - | - | 401,059 | - | 401,059 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (17,915,711 | ) | (17,915,711 | ) | |||||||||||||||||||
| Balance as of September 30, 2013 | 468 | $ | 1 | 9,805,503 | $ | 980 | $ | 290,391,698 | $ | (266,429,337 | ) | $ | 23,963,342 | |||||||||||||||
See accompanying notes to consolidated financial statements.
48
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20092013 AND 20102012
| Preferred Stock | ||||||||||||||||||||||||
| Series A | Series B | Series D | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
| Balance as of October 1, 2008 as previously stated | 19 | $ | 1 | 10,999 | $ | 1 | - | $ | - | |||||||||||||||
| Cumulative effect of change in accounting principle | - | - | - | - | - | - | ||||||||||||||||||
| Balance as of October 1, 2008 as adjusted | 19 | 1 | 10,999 | $ | 1 | - | - | |||||||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||
| Conversion of Series A Preferred stock | (19 | ) | (1 | ) | - | - | - | - | ||||||||||||||||
| Conversion of Series B Preferred stock | - | - | (10,999 | ) | (1 | ) | - | - | ||||||||||||||||
| Settlement of lawsuits | - | - | - | - | - | - | ||||||||||||||||||
| Related issuances of debt | - | - | - | - | - | - | ||||||||||||||||||
| Services | - | - | - | - | - | - | ||||||||||||||||||
| Cash | - | - | - | - | - | - | ||||||||||||||||||
| Acquisition of subsidiaries | - | - | - | - | - | - | ||||||||||||||||||
| Acquisition extension | - | - | - | - | - | - | ||||||||||||||||||
| Issuance of warrants for: | ||||||||||||||||||||||||
| Related issuances of debt | - | - | - | - | - | - | ||||||||||||||||||
| Services | - | - | - | - | - | - | ||||||||||||||||||
| Acquisition of subsidiary | - | - | - | - | - | - | ||||||||||||||||||
| Amortization of deferred consulting: | - | - | - | - | - | - | ||||||||||||||||||
| Amortization of financing costs | - | - | - | - | - | - | ||||||||||||||||||
Beneficial conversion feature recorded as interest expense | - | - | - | - | - | - | ||||||||||||||||||
| Forgiveness of debt from related party | - | - | - | - | - | - | ||||||||||||||||||
Issuance of SecureAlert Series A Preferred stock for accrued dividends | - | - | - | - | - | - | ||||||||||||||||||
| Net loss | - | - | - | - | - | - | ||||||||||||||||||
| Balance as of September 30, 2009 | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (17,915,711 | ) | $ | (17,458,107 | ) | ||
| 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 | 2,414,270 | 1,816,945 | ||||||
| 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 | - | 5,514,395 | ||||||
| Factional shares of common stock paid in cash | (1,996 | ) | - | |||||
| Loss on disposal of property and equipment | 4,740 | 5,374 | ||||||
| Loss on disposal of monitoring equipment and parts | 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 | (652,749 | ) | 854,673 | |||||
| Notes receivable | 63,978 | 88,061 | ||||||
| Inventories | 186,913 | (437,421 | ) | |||||
| Prepaid expenses and other assets | 107,576 | (908,673 | ) | |||||
| Accounts payable | (1,473,530 | ) | 572,277 | |||||
| Accrued expenses | 2,186,618 | 1,102,638 | ||||||
| Deferred revenue | (345,896 | ) | 229,321 | |||||
| Net cash provided by (used in) operating activities | 838,910 | (1,910,067 | ) | |||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | (50,682 | ) | (101,875 | ) | ||||
| Purchase of monitoring equipment and parts | (509,743 | ) | (2,745,399 | ) | ||||
| Net cash used in investing activities | (560,425 | ) | (2,847,274 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Borrowings on related-party notes payable | 2,800,000 | 2,980,000 | ||||||
| Principal payments on related-party notes payable | - | (3,187,578 | ) | |||||
| Proceeds from convertible debentures | - | 500,000 | ||||||
| Proceeds from related-party convertible debentures | - | 2,900,000 | ||||||
| Proceeds from notes payable | - | 1,745 | ||||||
| Principal payments on notes payable | (299,276 | ) | (687,354 | ) | ||||
| Net proceeds from issuance of common stock | - | 1,033,000 | ||||||
| Net proceeds from issuance of Series D Convertible Preferred stock | - | 2,004,000 | ||||||
| Commissions paid in connection with capital raise | - | (1,147,250 | ) | |||||
| Net cash provided by financing activities | 2,500,724 | 4,396,563 | ||||||
| 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.
49
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)CASH FLOWS (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20092013 AND 20102012
| Common Stock | Additional | |||||||||||||||||||||||
| Paid-in | Accumulated | Non-Controlling | ||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Total | |||||||||||||||||||
| Balance as of October 1, 2008 as previously stated | 155,881,260 | $ | 15,588 | $ | 182,704,412 | $ | (182,683,996 | ) | $ | - | 36,006 | |||||||||||||
| Cumulative effect of change in accounting principle | - | - | - | 241,638 | (241,638 | ) | - | |||||||||||||||||
| Balance as of October 1, 2008 as adjusted | 155,881,260 | 15,588 | 182,704,412 | (182,442,358 | ) | (241,638 | ) | 36,006 | ||||||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||
| Conversion of Series A Preferred stock | 9,306 | 1 | - | - | - | - | ||||||||||||||||||
| Conversion of Series B Preferred stock | 10,999 | 1 | - | - | - | - | ||||||||||||||||||
| Settlement of lawsuits | 5,400,000 | 540 | 1,029,460 | - | - | 1,030,000 | ||||||||||||||||||
| Related issuances of debt | 25,953,016 | 2,595 | 1,629,955 | - | - | 1,632,550 | ||||||||||||||||||
| Services | 2,254,121 | 226 | 728,648 | - | - | 728,874 | ||||||||||||||||||
| Cash | 17,850,000 | 1,785 | 3,248,215 | - | - | 3,250,000 | ||||||||||||||||||
| Acquisition of subsidiaries | 2,857,286 | 286 | 656,890 | - | - | 657,176 | ||||||||||||||||||
| Acquisition extension | 150,000 | 15 | 19,485 | - | - | 19,500 | ||||||||||||||||||
| Issuance of warrants for: | ||||||||||||||||||||||||
| Related issuances of debt | - | - | 96,844 | - | - | 96,844 | ||||||||||||||||||
| Services | - | - | 345,839 | - | - | 345,839 | ||||||||||||||||||
| Acquisition of subsidiary | - | - | 114,383 | - | - | 114,383 | ||||||||||||||||||
| Amortization of deferred consulting: | - | - | 1,930,678 | - | - | 1,930,678 | ||||||||||||||||||
| Amortization of financing costs | - | - | 665,255 | - | - | 665,255 | ||||||||||||||||||
Beneficial conversion feature recorded as interest expense | - | - | 122,727 | - | - | 122,727 | ||||||||||||||||||
| Forgiveness of debt from related party | - | - | 79,022 | - | - | 79,022 | ||||||||||||||||||
Issuance of SecureAlert Series A Preferred stock for accrued dividends | - | - | (175 | ) | - | - | (175 | ) | ||||||||||||||||
| Net loss | - | - | - | (22,938,545 | ) | (142,955 | ) | (23,081,500 | ) | |||||||||||||||
| Balance as of September 30, 2009 | 210,365,988 | $ | 21,037 | $ | 193,371,638 | $ | (205,380,903 | ) | $ | (384,593 | ) | $ | (12,372,821 | ) | ||||||||||
| 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.
50
| Preferred Stock | ||||||||||||||||||||||||
| Series A | Series B | Series D | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
| Balance as of October 1, 2009 | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||
| Conversion of Series D Preferred stock | - | - | - | - | (9,534 | ) | (1 | ) | ||||||||||||||||
| Services | - | - | - | - | - | - | ||||||||||||||||||
| Acquisition of subsidiaries | - | - | - | - | - | - | ||||||||||||||||||
| Dividends from SMI Series A Preferred stock | - | - | - | - | - | - | ||||||||||||||||||
| Dividends from Series D Preferred stock | - | - | - | - | - | - | ||||||||||||||||||
| Cancellation of shares | - | - | - | - | - | - | ||||||||||||||||||
| Issuance of warrants for services | - | - | - | - | - | - | ||||||||||||||||||
| Amortization of deferred consulting: | - | - | - | - | - | - | ||||||||||||||||||
Beneficial conversion feature recorded as interest expense | - | - | - | - | - | - | ||||||||||||||||||
| Series D Preferred dividends | - | - | - | - | - | - | ||||||||||||||||||
| Conversion effect on derivative liability | - | - | - | - | - | - | ||||||||||||||||||
Issuance of Series D Preferred stock for conversion of debt, accrued liabilities and interest | - | - | - | - | 17,174 | 2 | ||||||||||||||||||
| Issuance of Series D Preferred stock for cash | - | - | - | - | 27,767 | 3 | ||||||||||||||||||
| Net loss | - | - | - | - | - | - | ||||||||||||||||||
| Balance as of September 30, 2010 | - | $ | - | - | $ | - | 35,407 | $ | 4 | |||||||||||||||
| Preferred | ||||||||||||||||||||||||||||
| Common Stock | Additional | Stock | ||||||||||||||||||||||||||
| Paid-in | Subscription | Accumulated | Non-Controlling | |||||||||||||||||||||||||
| 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 | ) | ||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||||||
| Conversion of Series D Preferred stock | 57,204,000 | 5,720 | (5,719 | ) | - | - | - | - | ||||||||||||||||||||
| Services | 250,000 | 25 | 27,475 | - | - | - | 27,500 | |||||||||||||||||||||
| 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 | |||||||||||||||||||||
| Dividends from Series D Preferred stock | 7,619,124 | 762 | 938,609 | - | - | - | 939,371 | |||||||||||||||||||||
| Cancellation of shares | (1,000,000 | ) | (100 | ) | 100 | - | - | - | - | |||||||||||||||||||
| Issuance of warrants for services | - | - | 505,429 | - | - | - | 505,429 | |||||||||||||||||||||
| Amortization of deferred consulting: | - | - | 736,498 | - | - | - | 736,498 | |||||||||||||||||||||
Beneficial conversion feature recorded as interest expense | - | - | 144,184 | - | - | - | 144,184 | |||||||||||||||||||||
| Series D Preferred dividends | - | - | (1,494,481 | ) | - | - | - | (1,494,481 | ) | |||||||||||||||||||
| Conversion effect on derivative liability | - | - | 1,018,892 | - | - | - | 1,018,892 | |||||||||||||||||||||
Issuance of Series D Preferred stock for conversion of debt, accrued liabilities and interest | - | - | 16,910,382 | - | - | - | 16,910,384 | |||||||||||||||||||||
| Issuance of Series D Preferred stock for cash | - | - | 9,688,848 | (50,000 | ) | - | - | 9,638,851 | ||||||||||||||||||||
| Net loss | - | - | - | - | (13,784,042 | ) | (135,567 | ) | (13,919,609 | ) | ||||||||||||||||||
| Balance as of September 30, 2010 | 280,023,255 | $ | 28,002 | $ | 222,501,863 | $ | (50,000 | ) | $ | (219,164,945 | ) | $ | (185,073 | ) | $ | 3,129,851 | ||||||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (13,919,609 | ) | $ | (23,081,500 | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,436,876 | 2,087,949 | ||||||
| Amortization of debt discount | 2,918,050 | 2,030,504 | ||||||
| Amortization of deferred consulting | 736,498 | 2,595,933 | ||||||
| Beneficial conversion feature recorded as interest expense | 144,184 | - | ||||||
| Common stock issued for services | 27,500 | 728,876 | ||||||
| Common stock issued to settle lawsuit | - | 261,521 | ||||||
| Common stock issued for acquisition option extension cost | - | 19,500 | ||||||
| Common stock issued in connection with debt | 25,510 | - | ||||||
| Derivative liability valuation | (200,534 | ) | (1,867,007 | ) | ||||
| Impairment of goodwill | 204,735 | 2,804,580 | ||||||
| Impairment of monitoring equipment and parts | 590,801 | 2,319,530 | ||||||
| Increases in related-party line of credit for services | 652,987 | 272,281 | ||||||
| Loss on disposal of equipment | 41,597 | - | ||||||
| Redemption of SecureAlert Monitoring Series A Preferred stock | 19,095 | (95,816 | ) | |||||
| Settlement expense | 1,150,000 | - | ||||||
| Stock options and warrants issued and re-priced for services | 505,429 | 345,838 | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable, net | 102,135 | (23,490 | ) | |||||
| Deposit held in escrow | - | 500,000 | ||||||
| Inventories | 183,195 | - | ||||||
| Prepaid expenses and other assets | (511,539 | ) | (25,212 | ) | ||||
| Accounts payable | (279,890 | ) | 745,630 | |||||
| Accrued expenses | 263,161 | 1,824,042 | ||||||
| Deferred revenue | 24,032 | 35,515 | ||||||
| Net cash used in operating activities | (5,885,787 | ) | (8,521,326 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | (394,630 | ) | (380,647 | ) | ||||
| Disposal of property and equipment | - | 16,577 | ||||||
| Purchase of monitoring equipment and parts | (1,834,173 | ) | (1,312,397 | ) | ||||
| Disposal of monitoring equipment | 105,803 | - | ||||||
| Net cash used in investing activities | (2,123,000 | ) | (1,676,467 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Payments on related-party line of credit | (729,009 | ) | (739,063 | ) | ||||
| Borrowings on related-party notes payable | 500,000 | 680,229 | ||||||
| Payments on related-party notes payable | (550,000 | ) | - | |||||
| Proceeds in bank line of credit borrowings | 2,345,996 | 388,593 | ||||||
| Payments on bank line of credit | (1,598,596 | ) | - | |||||
| Proceeds from notes payable | 4,250 | 1,055,889 | ||||||
| Payments on notes payable | (953,794 | ) | (1,115,237 | ) | ||||
| Payments on notes payable related to acquisitions | (100,000 | ) | - | |||||
| Proceeds from sale of common stock | - | 3,250,000 | ||||||
| Proceeds from the issuance of Series A 15% debentures | - | 4,496,750 | ||||||
| Payments on Series A 15% Debentures | (25,000 | ) | - | |||||
| Net proceeds from issuance of Series D Convertible Preferred stock | 9,638,851 | - | ||||||
| Net cash provided by financing activities | 8,532,698 | 8,017,161 | ||||||
| Net increase (decrease) in cash | 523,911 | (2,180,632 | ) | |||||
| Cash, beginning of year | 602,321 | 2,782,953 | ||||||
| Cash, end of year | $ | 1,126,232 | $ | 602,321 | ||||
| See accompanying notes to consolidated financial statements. | ||||||||
| 2010 | 2009 | |||||
| Cash paid for interest | $ | 911,997 | $ | 1,963,200 | ||
| Supplemental schedule of non-cash investing and financing activities: | ||||||
| Issuance of zero and 9,306 common shares, respectively, in exchange for zero and 19 shares of Series A Preferred stock, respectively | $ | - | $ | 1 | ||
| Issuance of zero and 10,999 common shares, respectively, in exchange for zero and 10,999 shares of Series B Preferred stock, respectively | - | 1 | ||||
| Issuance of 57,204,000 and zero common shares, respectively, in exchange for 9,534 and zero shares of Series D Convertible Preferred stock, respectively | 5,720 | - | ||||
| Issuance of 5,434,143 and zero common shares, respectively for payment of SecureAlert Monitoring, Inc. Series A Preferred stock contingency payments | 642,566 | - | ||||
| Issuance of 7,619,124 and zero common shares, respectively for Series D Convertible Preferred dividends | 939,371 | - | ||||
| Issuance of 150,000 and zero shares of common stock to purchase an additional 2.145% ownership of Midwest Monitoring & Surveillance, Inc. | 18,000 | - | ||||
| Issuance of zero and 2,000,000 common shares, respectively for deferred consulting services and financing services | - | 338,000 | ||||
| Issuance of common stock and stock options to acquire the assets and liabilities of Bishop Rock Software | - | 856,522 | ||||
| Issuance of common stock to settle accounts payables | - | 550,000 | ||||
| Issuance of shares of Series D Convertible Preferred stock for conversion of debt, accrued liabilities and interest | 16,910,384 | - | ||||
| Issuance of 3,775,000 and 213,500 stock options, respectively, for consulting services | 413,423 | 46,667 | ||||
| Issuance of 7,487,286 and zero stock options, respectively, issued to employees for services | 594,990 | - | ||||
| Series A and D Preferred stock dividends | 1,494,481 | 175 | ||||
| Cancellation of 1,000,000 and 1,750,000 shares of common stock, respectively | 100 | 175 | ||||
| Beneficial conversion feature recorded | - | 122,727 | ||||
| Conversion effect on derivative liability | 1,018,892 | - | ||||
| Patent acquired through accrued liability | 50,000 | - | ||||
| Stock issued in connection with debt | - | 1,739,393 | ||||
| Subscription receivable issued for Series D Preferred stock | 50,000 | - | ||||
| 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 | - | ||||
See accompanying notes to consolidated financial statements. | ||||||
| Non-controlling interest assumed through acquisition of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | 335,087 | - | ||||
| Accrued liabilities issued for Midwest Monitoring & Surveillance ownership | 144,000 | - | ||||
| Acquisition of property and equipment through issuance of note payable | 269,037 | 38,991 | ||||
| Acquisition of monitoring equipment through issuance of note payable | 30,000 | 2,887,987 | ||||
| Debt issued to settle line of credit | - | 3,549,631 | ||||
| Forgiveness of debt from related-party debt | - | 79,022 | ||||
| Stock issued to settle related-party note payable and accrued interest | - | 218,479 | ||||
| Reclassification of monitoring equipment to inventory from recovery of parts | - | 1,450,803 |
SECUREALERT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Organization and Nature of Operations |
General
SecureAlert, Inc. (formerly RemoteMDx, Inc.) and subsidiaries (collectively, the “Company”) markets, monitors and leases TrackerPAL™ and ReliaTrackTMReliAlert™ devices. The TrackerPAL™ and ReliaTrackTMReliAlert™ devices are used to monitor convicted offenders that are on probation or parole in the criminal justice system. The TrackerPAL™ and ReliaTrackTMsystem 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 tech nologiestechnologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. The TrackerPAL™ and ReliaTrackTMReliAlert™ 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, 2010 and 2009. In addition,2012, the Company has accumulated deficits of $219,164,945 and $205,380,903 as of September 30, 2010 and 2009, respectively. Despite having two consecutive years of improvementdid 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 gross profit, operating loss and net loss, these factors raiserespect 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 September 30, 2013, the Company entered into a Facility Agreement, whereby the Company may borrow up to $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 on hand to satisfy its current obligations.
| (2) | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SecureAlert, Inc. (formerly RemoteMDx, 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., Bishop Rock Software, Inc., and Court Programs, Inc., Court Programs of Illinois, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Florida, Inc. (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.
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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.
| 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 collec ted.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.
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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 $74,607$1,555 and $0$359,734 during the fiscal years ended September 30, 20102013 and 2009,2012, respectively.
Inventory consists of productsraw materials that are available for sale and raw materials used in the manufacturing of TrackerPAL™ and ReliaTrackTMReliAlert™ devices. Completed TrackerPAL™ and ReliaTrackTMReliAlert™ devices are reflected in Monitoring Equipment. As of September 30, 20102013 and 2009,2012, respectively, inventory consisted of the following:
| 2010 | 2009 | 2013 | 2012 | |||||||||||||
| Raw materials | $ | 392,647 | $ | 686,421 | $ | 615,144 | $ | 822,566 | ||||||||
| Reserve for damaged or obsolete inventory | (47,118 | ) | (83,092 | ) | (148,043 | ) | (192,000 | ) | ||||||||
| Total inventory, net of reserves | $ | 345,529 | $ | 603,329 | $ | 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 liveslife 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, 20102013 and 2009,2012, respectively:
| 2010 | 2009 | 2013 | 2012 | |||||||||||||
| Equipment, software, tooling, and other fixed assets | $ | 2,595,797 | $ | 2,742,537 | ||||||||||||
| Equipment, software and tooling | $ | 2,002,577 | $ | 1,970,327 | ||||||||||||
| Automobiles | 334,917 | 305,658 | 33,466 | 33,466 | ||||||||||||
| Building | 377,555 | 377,555 | ||||||||||||||
| Leasehold improvements | 127,912 | 127,912 | 127,162 | 127,287 | ||||||||||||
| Furniture and fixtures | 284,824 | 284,824 | 247,218 | 252,951 | ||||||||||||
| Total property and equipment | 3,721,005 | 3,838,486 | ||||||||||||||
| Total property and equipment before accumulated depreciation | 2,410,423 | 2,384,031 | ||||||||||||||
| Accumulated depreciation | (2,235,683 | ) | (2,525,180 | ) | (2,092,222 | ) | (1,879,540 | ) | ||||||||
| Property and equipment, net of accumulated depreciation | $ | 1,485,322 | $ | 1,313,306 | $ | 318,201 | $ | 504,491 | ||||||||
Depreciation expense for the fiscal years ended September 30, 20102013 and 20092012 was $414,056$231,853 and $677,016,$281,791, respectively.
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Monitoring equipment as of September 30, 2010 and 2009 is as follows:
| 2010 | 2009 | |||||||
| Monitoring equipment | $ | 4,471,665 | $ | 4,260,690 | ||||
| Less accumulated depreciation | (2,788,309 | ) | (2,944,197 | ) | ||||
| Monitoring Equipment, net | $ | 1,683,356 | $ | 1,316,493 | ||||
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, 20102013 and 20092012, was $875,312$1,230,293 and $1,300,783,$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, 20102013 and 2009,2012, the Company disposed ofand impaired lease monitoring equipment and parts of $621,997$296,526 and $2,319,530, respectively. Included in the equipment disposals were impairments of $516,194 and $2,319,530 incurred during the fiscal years ended September 30, 2010 and 2009,$1,837,664, respectively. These impairment costs were included in cost of revenues.
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. & #160;As of September 30, 2010In reviewing historical financial performance and 2009, the Company impaired goodwill fromparticipating in selling Court Programs, Inc. by $204,735 and $0, Midwest Monitoring & Surveillance, Inc. by $0 and $2,343,753 and from Bishop Rock Software, Inc. by $0 and $460,827 for a total, the Company recorded an impairment expense of $204,735 and $2,804,580, respectively.expense.
The following summarizes the changes in goodwill during the fiscal years ended September 30, 2013 and 2012:
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| 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) monitoring device and other 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 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. OnHowever, on occasion, the Company hasenters into revenue transactions that have multiple elements (suchelements. 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 product sales and monitoring services).the customer utilizes the Company's services. For revenue arrangements that have multiple elements, the Company considers whether: (i)whether the delivered devices have standalone value to the customer; (ii)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;services, and (iii) 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 to be provided to the customer. In accordance with FA SB ASC subtopic addressing multiple deliverables, ifcustomer as the fair value of the undelivered element exists, but the fair value does not exist for oneproducts or more delivered elements, then revenue is recognized using the residual method. Under the residual method, as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteriaservices are met.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, and normal payment terms for device sales are between 120 and 180 days. The Company sells its devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
Geographical Information
The Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for the fiscal years ended September 30, 2013 and 2012, are as follows:
| 2013 | 2012 | |||||||
| United States of America | $ | 7,179,043 | $ | 7,398,627 | ||||
| Latin American Countries | 5,252,960 | 2,450,984 | ||||||
| Caribbean Countries and Commonwealths | 3,136,908 | 3,217,651 | ||||||
| Other Foreign Countries | 72,151 | 47,717 | ||||||
| Total | $ | 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, 2013 and 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 | ||||||||
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 20102013 and 20092012 were for the development of SecureAlert’s TrackerPAL™ and ReliaTrackTMthe Company’s ReliAlert™ device and associated services. For the fiscal years ended September 30, 20102013 and 2009,2012, research and development expenses were $1,483,385$987,934 and $1,777,873,$1,248,654, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2010,2013 and 2009,2012, was $87,567$30,782 and $76,793,$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, 20102013 and 2009,2012, there were 268,783,361604,006 and 75,789,3482,825,171 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, 2013 and 2012, consisted of the following:
| 2013 | 2012 | |||||||
| Conversion of debt and accrued interest and loan origination fees | - | 863,499 | ||||||
| Conversion of Series D Preferred stock | 14,040 | 1,462,890 | ||||||
| Exercise of outstanding common stock options and warrants | 427,966 | 336,782 | ||||||
Exercise and conversion of outstanding Series D Preferred stock warrants | 162,000 | 162,000 | ||||||
| Total common stock equivalents | 604,006 | 2,825,171 | ||||||
Recent Accounting Pronouncements
In December 2007,July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a new accounting standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other thanNet Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which addresses the parent, the amountfinancial statement presentation of net income attributable to the parent and to the non-controlling interests, changes in a parent’s ownership interest, and the valuation of any retained non-controlling equity investmentan unrecognized tax benefit when a subsidiary is deconsolidated.net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This new accounting standard also establishes disclosure requirementsguidance requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that clearly identify and distinguish between the interestswould apply in settlement of the parent and the interests of the non-controlling owners. The Company adopted this new standard on October 1, 2009. Upon adoption, $241,638 of non-controlling interest was reclassified to a separate component of total equity within the company's consolidated bala nce sheets.
| (3) | Acquisitions |
| Midwest Monitoring & Surveillance | Court Programs, Inc. | Total | ||||||||||
| Balance as of September 30, 2008 | $ | 3,603,748 | $ | 1,208,086 | $ | 4,811,834 | ||||||
| Impairment | (2,343,753 | ) | - | (2,343,753 | ) | |||||||
| Balance as of September 30, 2009 | 1,259,995 | 1,208,086 | 2,468,081 | |||||||||
| Purchase of remaining 49% ownership of Court Programs, Inc. | - | 1,484,717 | 1,484,717 | |||||||||
| Purchase option extension for the remaining 46.855% ownership of Midwest Monitoring & Surveillance | 162,000 | - | 162,000 | |||||||||
| Impairment | - | (204,735 | ) | (204,735 | ) | |||||||
| Balance as of September 30, 2010 | $ | 1,421,995 | $ | 2,488,068 | $ | 3,910,063 | ||||||
| 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 other intangible asset amortization | (24,667 | ) | (28,100 | ) | (217,688 | ) | (3,704 | ) | (274,159 | ) | ||||||||||
| Total goodwill and other intangible assets, net of amortization | $ | 1,519,328 | $ | 2,570,968 | $ | 172,313 | $ | 46,296 | $ | 4,308,905 | ||||||||||
| Fiscal Year | Midwest Monitoring & Surveillance | Court Programs, Inc. | Bishop Rock Software | Patent | Total | |||||||||||||||
| 2011 | $ | 8,000 | $ | 7,800 | $ | 127,334 | $ | 5,556 | $ | 148,690 | ||||||||||
| 2012 | 8,000 | 7,800 | 37,452 | 5,556 | 58,808 | |||||||||||||||
| 2013 | 8,000 | 6,800 | 667 | 5,556 | 21,023 | |||||||||||||||
| 2014 | 8,000 | 6,600 | 667 | 5,556 | 20,823 | |||||||||||||||
| 2015 | 8,000 | 6,600 | 667 | 5,556 | 20,823 | |||||||||||||||
| Thereafter | 57,333 | 47,300 | 5,526 | 18,516 | 128,675 | |||||||||||||||
| Total | $ | 97,333 | $ | 82,900 | $ | 172,313 | $ | 46,296 | $ | 398,842 | ||||||||||
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 | ||||||||
The following table summarizes the activity of $1,421,995 and $122,000intangible assets for the fiscal year ended September 30, 2012:
Borinquen Container Corporation | International Surveillance Services Corp. | Patent | Total | |||||||||||||
| Intangible assets: | ||||||||||||||||
| Patent license agreement | $ | - | $ | - | $ | - | $ | - | ||||||||
| Royalty agreement | 10,768,555 | 5,003,583 | 50,000 | 15,822,138 | ||||||||||||
| Total intangible assets | 10,768,555 | 5,003,583 | 50,000 | 15,822,138 | ||||||||||||
| Accumulated amortization | - | (312,724 | ) | (14,816 | ) | (327,540 | ) | |||||||||
| Intangile assets, net of accumulated amortization | $ | 10,768,555 | $ | 4,690,859 | $ | 35,184 | $ | 15,494,598 | ||||||||
57
The following table summarizes the future maturities of otheramortization of intangible assets as notedof September 30, 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 | ||||||||
Borinquen Container Corporation
On September 5, 2012, the Company entered into an agreement to redeem the royalty held by Borinquen pursuant to a royalty agreement dated July 1, 2011, as amended. Under the terms of the royalty, Borinquen had the right to receive 20 percent of net revenues derived within certain geographic territories.
As of September 30, 2012, the agreement to redeem the royalty had not yet been completed and as a result the Company capitalized $10,768,555 as a non-current asset and recorded a loan payable to Borinquen to reflect the obligation. On February 1, 2013, the Company completed the redemption of the royalty with Borinquen which was funded under a Loan and Security Agreement (“Loan”) from Sapinda Asia Limited (“Sapinda Asia”), see Note 5. The Company capitalized the total cost of the royalty purchase commitment of $11,616,984, as a non-current asset and will amortize the asset over the remaining term of the royalty agreement, subject to periodic analysis for impairment based on future expected revenues. The Company will annually calculate the amortization based on the effective royalty rate and on the revenues in the table above.geographic territory subject to the royalty. The Company’s analysis will be based on such factors as historical revenue and expected revenue growth in the territory.
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 its common stock, valued at $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 Company acquired ISS to utilize the knowledge and connections the company has in Central and South America and to acquire the rights to its territorial commissions that were being paid to ISS.
The Company recorded $250,179 and $250,179 of amortization expense on intangible assets for ISS during the fiscal year ended September 30, 20102013 and 2012, resulting in a total accumulated amortization of $24,667$562,903 and net other intangible assets of $97,333.
$4,440,680 and $4,690,859, respectively.
Patent
On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to Company a non-exclusive license under U.S. Patent No. 6,405,213 and any and all patents issuing from continuation, continuation-in-part, divisional, reexamination and reissues thereof and along with all foreign counterparts, to make, have made, use, sell, offer to sell and import covered products in SecureAlert’s present and future business. The license granted shallwill 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 is due by January 29, 2011. The Company recorded $3,704$5,554 and $5,557 of amortization expense for the patent, during the fiscal year ended September 30, 2010, resulting in a total accumulated amortization of $3,704$20,370 and $14,816, and net intangible assets of $46,296.$29,630 and $35,184, respectively.
Years Ended September 30, | |||||
| 2010 | 2009 | ||||
| Revenues: | |||||
| Products | $ 371,214 | $ 570,749 | |||
| Monitoring services | 12,079,757 | 12,055,841 | |||
| Total revenues | 12,450,971 | 12,626,590 | |||
| Cost of revenues: | |||||
| Products | (45,131) | ) | (275,688) | ) | |
| Monitoring services | (6,933,843) | ) | (9,862,925) | ) | |
| Impairment of monitoring equipment and parts | (590,801 | ) | (2,319,530 | ) | |
| Total cost of revenues | (7,569,775) | ) | (12,458,143) | ) | |
| Gross margin (deficit) | 4,881,196 | 168,447 | |||
| Operating expenses: | |||||
| Selling, general and administrative | (12,126,413) | ) | (16,701,374) | ) | |
| Settlement expense | (1,150,000) | ) | - | ||
| Research and development | (1,483,385 | ) | (1,777,873 | ) | |
| Impairment of goodwill | (204,735 | ) | (2,804,580 | ) | |
| Loss from operations | (10,083,337) | ) | (21,115,380) | ) | |
| Other income (expense): | |||||
| Loss on disposal of equipment | (41,597 | ) | - | ||
| Redemption of SecureAlert Monitoring Series A Preferred stock | (19,095 | ) | 95,816 | ||
| Interest income | 23,139 | 18,187 | |||
| Interest expense | (4,146,459) | ) | (5,012,803) | ) | |
| Derivative valuation gain | 200,534 | 1,867,007 | |||
| Other income (loss) | 147,206 | 905,626 | |||
| Net loss | (13,919,609) | ) | (23,241,547) | ) | |
| Net Loss attributable to non-controlling interest | 60,050 | 88,617 | |||
| Net loss | (13,859,559) | ) | (23,152,930) | ) | |
| Dividends on Preferred stock | (1,494,481 | ) | (175) | ) | |
| Net loss attributable to common stockholders | $ (15,354,040) | ) | $ (23,153,105) | ) | |
| Net loss per common share – basic and diluted | $ (0.07) | ) | $ (0.13) | ) | |
| Weighted average common shares outstanding – basic and diluted | 227,246,000 | 182,063,000 | |||
| Accrued Expenses |
Accrued expenses consisted of the following as of September 30, 20102013 and 2009:2012:
| 2013 | 2012 | |||||||
| Accrued royalties | $ | 714,400 | $ | 641,446 | ||||
| Accrued payroll, taxes and employee benefits | 473,179 | 540,931 | ||||||
| Accrued consulting | 317,300 | 352,072 | ||||||
| Accrued taxes - foreign and domestic | 262,880 | 262,440 | ||||||
| Accrued settlement costs | 76,000 | 50,000 | ||||||
| Accrued board of directors fees | 68,090 | 265,000 | ||||||
| Accrued other expenses | 65,903 | 183,722 | ||||||
| Accrued legal costs | 57,001 | 14,628 | ||||||
| Accrued cellular costs | 55,000 | 27,662 | ||||||
| Accrued outside services | 33,022 | 38,630 | ||||||
| Accrued warranty and manufacturing costs | 30,622 | 30,622 | ||||||
| Accrued interest | 27,394 | 27,831 | ||||||
| Accrued cost of revenues | - | 4,467 | ||||||
| Total accrued expenses | $ | 2,180,791 | $ | 2,439,451 | ||||
| (5) | Certain Relationships and Related Transactions |
| 2010 | 2009 | |||||||
| Accrued payroll, taxes and employee benefits | $ | 536,501 | $ | 561,898 | ||||
| Accrued related-party origination fees | 344,370 | - | ||||||
| Accrued consulting | 304,025 | 436,054 | ||||||
| Accrued interest | 219,791 | 382,424 | ||||||
| Accrued warranty and manufacturing costs | 138,622 | 246,622 | ||||||
| Accrued outside services | 68,730 | 38,132 | ||||||
| Accrued acquisition extension costs | 48,000 | 42,000 | ||||||
| Accrued indigent fees | 45,434 | 34,130 | ||||||
| Accrued legal and settlement costs | 38,111 | 80,208 | ||||||
| Accrued patent liability (see Note 3) | 32,550 | - | ||||||
| Accrued administration fees | 25,000 | - | ||||||
| Accrued board of directors fees | 25,000 | 300,000 | ||||||
| Accrued cellular costs | 6,366 | 27,144 | ||||||
| Accrued research and development costs | 2,993 | 45,000 | ||||||
| Accrued foreclosure liability (see Note 6) | - | 775,000 | ||||||
| Accrued officer compensation | - | 492,280 | ||||||
| Accrued commissions and other costs | 68,802 | 45,788 | ||||||
| Total accrued expenses | $ | 1,904,295 | $ | 3,506,680 | ||||
On August 4, 2011, with an effective date of September 30, 2009,July 1, 2011, the Company owed $76,022 underentered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to 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 $5,003,583. As additional consideration, the Company also granted Borinquen a line-of-creditroyalty in the amount of 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 ADP Management, an entity ownedSapinda Asia and controlled by Mr. Derrick,Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the Company’s Chief Executive Officer. Outstanding amounts onrepurchase of the lineroyalty (at a cost of credit accrue interest at 11% per annum$11,616,984) and were due upon demand.to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance this redemption, the Company borrowed $16,700,000 in connection with the Loan from Sapinda Asia. The Company 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, 2009, the net decrease under this line of credit was $466,782. This decrease consisted of cash repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP Management that are reimbursable by the Company.
Revolving Loan Agreement
Related-Party Series A 15% DebentureService Agreement
During the fiscal year ended September 30, 2008, the Company issued 1,000,000 shares of common stock valued at $1.52 per share to prepay consulting fees to ADP Management. Effective July 1, 2010, the Board of Directors and ADP Management mutually agreed that the 1,000,000 shares of common stock previously issued would be returned and cancelled resulting in no prior obligation outstanding, but the Company would accrue $20,000 per month going forward to pay Mr. Derrick’s base salary. The Company recorded $180,000 and $240,000 of expense associated with the issuance of these shares during each of the fiscal years ended September 30, 2010 and 2009.
As consideration for these services, the Company agreed to 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 other party.
59
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, 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 stockstock.
Related-Party Convertible Debenture #1
During the fiscal year ended 2012, the Company borrowed $500,000 from a director with an interest rate of 8% 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 pricefeature discount of $0.22$110,556 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 117,784 shares of common stock.
Related-Party Convertible Debenture #2
During the fiscal year ended 2012, the Company borrowed $2,000,000 from a significant shareholder with an interest rate of 8 percent per share.annum. The note accrueddebenture 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 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, the Company entered into a loan agreement (“Facility Agreement”) with Tetra House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws 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 Board of Directors. .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 date the Company entered into the agreement resulting in a beneficial conversion feature of $122,727. This was recorded as a debt discount and will be expensed over the life of the note. As of September 30, 2010 and 2009, the outstanding balance due was $0 and $2,050,000 with a remaining debt disco unt balance of $0 and $41,556, respectively. On January 13, 2010 the holder of the convertible promissory note converted the note, including the principal and accrued interest of $2,148,414 into 2,149 shares of Series D Preferred stock.
Additional Related-Party Transactions and Summary of this debt discount and recorded it as interest expense. On January 13, 2010 the holders of debentures of $4,718,197 in principal and accrued interest converted this debt into a total of 4,723 shares of Series D Preferred stock. As of September 30, 2010 and 2009, the debt discount balance was $0 and $1,821,720, respectively.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, 20102013 and 20092012, consisted of the following:
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| SecureAlert Monitoring, Inc. | ||||||||
| Notes payable for testing equipment with an interest rate of 8%. The notes are secured by testing equipment. The notes mature in June 2011 and December 2011. | $ | 17,609 | $ | 12,228 | ||||
| Capital leases with effective interest rates that range between 9.58% and 17.44% that mature from December 2012 to September 2013. | 114,388 | - | ||||||
| Unsecured note payable with an interest rate of 12%. The note was paid off during fiscal year ended 2010. | - | 8,728 | ||||||
| SecureAlert, Inc. | ||||||||
| Unsecured promissory note with an entity bearing an interest rate of 15%. During the fiscal year 2010, the note was exchanged into Series D Preferred stock. | - | 474,335 | ||||||
| Secured promissory note with an individual with an interest rate of 12%. The note matures on July 13, 2011. | 499,631 | - | ||||||
| Settlement liability from patent infringement suit and countersuit settled in February 2010. The liability will be paid quarterly through September 2012. | 887,500 | - | ||||||
| Court Programs, Inc. | ||||||||
| 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. | 220,156 | 225,000 | ||||||
| Unsecured revolving line of credit with a bank with an effective interest rate of 9.24%. As of September 30, 2010, $45,652 was available for withdrawal under the line of credit. | 12,348 | 16,500 | ||||||
| Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.09% and is due in June 2014. | 24,994 | 30,751 | ||||||
| Unsecured note payable with an interest rate of 8%. | - | 1,492 | ||||||
| Capital leases with effective interest rates that range between 14.12% and 14.89% that mature in January 2011 through November 2011. | 26,629 | 14,898 | ||||||
| Midwest Monitoring & Surveillance, Inc. | ||||||||
| Unsecured revolving line of credit with a bank, with an interest rate of 9.25%. As of September 30, 2010, $10,257 was available for withdrawal under the line of credit. | 39,743 | 39,224 | ||||||
| Notes payable to a financial institution bearing interest at 4.51%. Notes mature in July 2011 through July 2016. The notes are secured by property. | 116,328 | 185,274 | ||||||
| Notes payable for monitoring equipment. Interest rates range between 7.8% to 18.5% and mature September 2008 through November 2011. The notes are secured by monitoring equipment. | 5,174 | 57,344 | ||||||
| Automobile loans with several financial institutions secured by the vehicles. Interest rates range between 6.9% and 8.5%, due between January 2010 and July 2015. | 126,905 | 42,463 | ||||||||||||||
| 2013 | 2012 | |||||||||||||||
| Note payable to a stockholder of Midwest. During the fiscal year ended 2010, the note was paid off. | - | 47,704 | ||||||||||||||
| Capital leases with effective interest rates that range between 12.9% and 14.7%. Leases mature between June 2014 and September 2014. | 102,982 | 126,158 | ||||||||||||||
| 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 | 2,194,387 | 1,282,099 | 128,683 | 424,831 | ||||||||||||
| Less current portion | (1,133,969 | ) | (272,493 | ) | (88,095 | ) | (339,151 | ) | ||||||||
| Long-term debt, net of current portion | $ | 1,060,418 | $ | 1,009,606 | $ | 40,588 | $ | 85,680 | ||||||||
The following table summarizes the Company’s future maturities of debt obligations as of September 30, 2010:2013:
| Fiscal Year | Total | |||
| 2014 | $ | 88,095 | ||
| 2015 | 38,945 | |||
| 2016 | 1,643 | |||
| Thereafter | - | |||
| Total | $ | 128,683 | ||
Fiscal Year | Total | SecureAlert | SecureAlert Monitoring | Midwest Monitoring | Court Programs | |||||||||||||||
| 2011 | $ | 1,133,969 | $ | 899,631 | $ | 52,540 | $ | 146,321 | $ | 35,477 | ||||||||||
| 2012 | 494,517 | 350,000 | 46,318 | 75,255 | 22,944 | |||||||||||||||
| 2013 | 264,878 | 137,500 | 33,138 | 80,524 | 13,716 | |||||||||||||||
| 2014 | 73,165 | - | - | 62,623 | 10,542 | |||||||||||||||
| 2015 | 31,630 | - | - | 26,411 | 5,219 | |||||||||||||||
| Thereafter | 196,228 | - | - | - | 196,228 | |||||||||||||||
| Total | $ | 2,194,387 | $ | 1,387,131 | $ | 131,996 | $ | 391,134 | $ | 284,126 | ||||||||||
61
The following table summarizes the Company’s capital lease obligations included in the schedules of debt and debt obligations above as of September 30, 2010:2013:
| Fiscal Year | Total | SecureAlert Monitoring | Midwest Monitoring | Court Programs | ||||||||||||
| September 30, | ||||||||||||||||
| 2011 | $ | 105,153 | $ | 50,488 | $ | 38,354 | $ | 16,311 | ||||||||
| 2012 | 101,024 | 50,488 | 38,354 | 12,182 | ||||||||||||
| 2013 | 75,527 | 35,143 | 38,354 | 2,030 | ||||||||||||
| 2014 | 15,548 | - | 15,548 | - | ||||||||||||
| Thereafter | - | - | - | - | ||||||||||||
| Total minimum lease payments | 297,252 | 136,119 | 130,610 | 30,523 | ||||||||||||
| Less: amount representing interest | (53,255 | ) | (21,731 | ) | (27,629 | ) | (3,895 | ) | ||||||||
| Present value of net minimum lease payments | 243,997 | 114,388 | 102,981 | 26,628 | ||||||||||||
| Less: Current portion | (77,571 | ) | (38,168 | ) | (25,804 | ) | (13,599 | ) | ||||||||
| Obligation under capital leases – long-term | $ | 166,426 | $ | 76,220 | $ | 77,177 | $ | 13,029 | ||||||||
| 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 | ||
As of September 30, 20102013 and 2009,2012, the Company had total capital lease obligations of $243,997$59,266 and $163,064,$272,508, the current portion being $77,571$31,576 and $56,088,$131,072, respectively. Capital leases are secured by assets with a total original cost of $314,395$105,162 and $357,398$234,659 with related accumulated depreciation of $73,161$40,932 and $214,292$83,577 as of September 30, 20102013 and 2009,2012, 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 A 10 % Convertible Non-Voting 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”). During the fiscal yearyears ended September 30, 2010,2013 and 2012, the Company issued a total of 17,1740 and 4,008 shares of Series D Preferred stock in consideration for the conversion of $16,910,384 of debt, accrued liabilities and interest and issued 27,767 shares under securities purchase agreements for $9,688,851$0 and $2,004,000 in net cash proceeds, of which $50,000 has not yet been received and has been recorded as a subscription receivable. respectively.
As of September 30, 2010,2013 and 2012, there were 35,407468 and 48,763 Series D Preferred shares outstanding.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 thirty30 days following the end of the accrual period.
During the fiscal year ended September 30, 2010,2013, the Company issued a total of 7,619,124 shares of the Company’s common stock to pay $939,371 of accrued dividends. Subsequent to September 30, 2010, the Company issued 5,100,774181,832 shares of common stock to pay $555,110$1,663,997 of accrued dividends on the Series D Preferred stock earned for the fourthtwelve months between July 1, 2012 and June 30, 2013. Subsequent to September 30, 2013, the Company issued 483 shares of common stock to pay $5,650 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2013.
During the fiscal quarter.year ended September 30, 2012, the Company issued 210,689 shares of common stock to pay $2,391,568 of accrued 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, 2010, 9,5342013 and under the Exchange Offer, 48,295 shares of Series D Preferred stock converted into 1,894,283 shares of common stock.
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During the fiscal year ended September 30, 2012, 90 shares of Series D Preferred stock were converted into 57,204,0002,700 shares of common 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 stockholders,shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. In addition, on the issues of an increase in the number of shares of common stock the Company is authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series D Preferred stock may vote as a class holding the equivalent of 60 percent of the issued and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of September 30, 2010,2013 and 2012, there were 35,407468 and 48,763 shares of Series D Preferred stoc k outstanding. 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 stockholders.outstanding, respectively. 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 stockholders,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, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. (“SMI”) to designate 3,590,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred stock (“SMI Series A Preferred stock”).
exercised.
| Common Stock |
Authorized Shares
The Company held an Annual Shareholders meeting on February 28, 2013, at which time the Company filed an amendment to its Articlesshareholders approved a reverse stock split at a ratio of Incorporation with200 for 1 and reduced the Utah Department of Commerce, Division of Corporations and Commercial Code. The amendment increased the number oftotal authorized shares of common stock to 15,000,000 shares. The retroactive effect of the Company is authorized to issue from 250,000,000 to 600,000,000 shares.reverse stock split has been reflected throughout these financial statements.
Common Stock Issuances
During the fiscal year ended September 30, 2010,2013, the Company issued 70,657,2676,709,021 shares of common stock. Of these shares, 57,204,0001,894,283 shares were issued upon conversion of 9,53448,295 shares of Series D Preferred stock; 250,00021,884 shares were issued for services rendered to the Company valued at $27,500; 150,000$141,758; 4,607,361 shares were issued to extend an option to purchase the remaining percentage of ownership of Midwest valued at $18,000; 5,434,143 shares were issued to pay contingency payments of $642,566 in connection with the redemptiondebt and accrued interest of SMI Series A Preferred stock; and 7,619,124$20,733,118; 181,832 shares were issued to pay dividends from Series D Preferred stock.stock of $1,663,997; and 3,661 shares were issued to pay Board of Director fees of $47,500.
During the fiscal year ended September 30, 2010, the Company cancelled 1,000,000 shares of common stock previously issued (see Note 6).
| Stock Options and Warrants |
Stock Incentive Plan
Re-pricing of Warrants
During the fiscal year ended September 30, 2010,2013, the Company did not re-price any previously issued warrants.
During the fiscal year ended September 30, 2012, the Company re-priced 24,465 previously issued warrants as follows:
All Options and Warrants
During the fiscal year ended September 30, 2009,2013, the Company issued 4,931,214 options andgranted 143,937 warrants to purchase commonmembers of its Board of Directors, valued at $701,062. As of September 30, 2013, $154,378 of compensation expense associated with unvested stock as follows: 2,200,000 in connection with the settlement of debt; 1,213,500 granted to consultants for services; 875,000 to employees; and 642,714 in connection with the purchase of Bishop Rock. All the options and warrants issued duringpreviously to members of the year vestedBoard of Directors will be recognized over the year or immediately. The exercise prices range from $0.09 to $0.30 per share. The exercise price for the options granted during the fiscal year ended September 30, 2009 were based upon the quoted market price of the Company’s shares on the date of grant. No options or warrants were exercised during the fiscal year ended September 30, 2009.next year.
During the fiscal year ended September 30, 2010,2012, the Company issued 11,262,286granted options and warrants to purchase 54,500 shares of common stock as follows: 7,487,28618,500 to employees (1,871,822 have vested and 5,615,464 are unvested),members of the Board of Directors, valued at $594,990 resulting in $148,747 expensed in$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 three to five years. Additionally during the fiscal year ended September 30, 20102012, the Company cancelled 182,500 of unvested warrants held by executives of the Company and issued 121,700 shares of common stock and accelerated the remaining $446,243 to be recognized annually over next three years; 2,625,000 granted to consultantsvesting of 57,500 of warrants for services valued at $291,656, resultingrendered. The modification of the equity awards resulted in $244,351$2,130,694 of current year expense; and 1,150,000 tocompensation expense which includes the Boardimmediate recognition of Directors (900,000 have vested and 250,000 are unvested), valued at $121,767 resulting in $95,296 expensed in the fiscal year ended September 30, 2010 andunamortized portion of the remaining $26,471 to be recognized in the 1st fiscal quarter ended Decem ber 31, 2010.cancelled unvested warrants.
The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 20102013 and 2009,2012 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, | ||||
| 2010 | 2009 | |||
| Expected cash dividend yield | - | - | ||
| Expected stock price volatility | 119 % | 124 % | ||
| Risk-free interest rate | 1.65 % | 0.98 % | ||
| Expected life of options | 5 years | 5 years | ||
A summary of stock optionthe compensation-based options and warrants activity for the fiscal years ended September 30, 20092013 and 20102012 is presented below:
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||
| Outstanding as of September 30, 2008 | 21,725,451 | $ | 1.48 | ||||||
| Granted | 4,931,214 | $ | 0.25 | ||||||
| Expired | (1,408,500 | ) | $ | 1.95 | |||||
| Outstanding as of September 30, 2009 | 25,248,165 | $ | 1.16 | ||||||
| Granted | 11,262,286 | $ | 0.14 | ||||||
| Expired | (8,770,000 | ) | $ | 1.73 | |||||
| Outstanding as of September 30, 2010 | 27,740,451 | $ | 0.36 | 1.94 years | $ | 28,991 | |||
| Exercisable as of September 30, 2010 | 21,177,320 | $ | 0.40 | 1.98 years | $ | 28,991 | |||
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||
| Outstanding as of September 30, 2011 | 495,891 | $ | 26.00 | ||||||||||
| Granted | 54,500 | $ | 18.00 | ||||||||||
| Expired | (213,609 | ) | $ | 22.00 | |||||||||
| Outstanding as of September 30, 2012 | 336,782 | $ | 28.00 | ||||||||||
| Granted | 143,937 | $ | 11.18 | ||||||||||
| Expired / Cancelled | (52,754 | ) | $ | 76.97 | |||||||||
| 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, 20102013 closing price of $0.105$19.46 per share.
| (10) 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. 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, 20102013 and 2009,2012, the Company incurred net losses of $13,180,293 and $22,761,102, respectively, for income tax purposes.purposes of $3,427,372 and $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, 2010,2013, the Company had net carryforwards available to offset future taxable income of $173,142,768approximately $179,000,000 which will begin to expire in 2017.2020. 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 its U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the year ended September 30, 2013, or on the Company’s net operating loss carryforwards if certain ownership changes have taken place or will take place. The Company will perform an analysis to determine whether any such limitations have occurreddeferred tax asset as the net operating losses are utilized.of September 30, 2013.
The deferred income tax assets (liabilities) were comprised of the following for the periods indicated:
| Fiscal Years Ended | ||||||||
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Net loss carryforwards | $ | 72,700,000 | $ | 72,200,000 | ||||
| Accruals and reserves | 247,000 | 529,000 | ||||||
| Contributions | 8,000 | 6,000 | ||||||
| Depreciation | 42,000 | 26,000 | ||||||
| Stock-based compensation | 5,880,000 | 5,768,000 | ||||||
| Valuation allowance | (78,877,000 | ) | (78,529,000 | ) | ||||
| Total | $ | - | $ | - | ||||
| 2010 | 2009 | |||||||
| Net loss carryforwards | $ | 64,582,000 | $ | 59,401,000 | ||||
| Accruals and reserves | 63,000 | 111,000 | ||||||
| Contributions | 6,000 | 1,000 | ||||||
| Stock-based compensation | 339,000 | 265,000 | ||||||
| Valuation allowance | (64,990,000 | ) | (59,778,000 | ) | ||||
| Total deferred income tax assets (liabilities) | $ | - | $ | - | ||||
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, 20102013 and 20092012 are as follows:
| 2010 | 2009 | |||||||
| Federal income tax benefit at statutory rate | $ | 4,687,000 | $ | 7,799,000 | ||||
| State income tax benefit, net of federal income tax effect | 455,000 | 757,000 | ||||||
| Change in estimated tax rate and gain (loss) on non-deductible expenses | 70,000 | 644,000 | ||||||
| Change in valuation allowance | (5,212,000 | ) | (9,200,000 | ) | ||||
| 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, 2013, the Company began recognizing revenues from international sources from its products and monitoring services. During the fiscal year ended September 30, 2013, the Company accrued $76,732 in value-added taxes which will be due upon collection.
The deferred incomeCompany’s open tax assets (liabilities) and theyears for its federal and state income tax benefits reflects an adjustment in calculatingreturns are for the valuation allowance using a tax rate of 15% used in fiscal yearyears ended 2008 to 37.3% in fiscal year ended 2009.September 30, 2010 through September 30, 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, 2010:2013:
| Fiscal Year | Total | |||
| 2014 | $ | 237,580 | ||
| 2015 | 34,721 | |||
| Thereafter | - | |||
| Total | $ | 272,301 | ||
Fiscal Year | Total | SecureAlert | Midwest Monitoring | Court Programs | ||||||||||||
| 2011 | $ | 416,753 | $ | 274,095 | $ | 27,771 | $ | 114,887 | ||||||||
| 2012 | 378,986 | 278,991 | 22,473 | 77,522 | ||||||||||||
| 2013 | 303,853 | 269,922 | 8,075 | 25,856 | ||||||||||||
| 2014 | 76,618 | 60,564 | 454 | 15,600 | ||||||||||||
| 2015 | 15,600 | - | - | 15,600 | ||||||||||||
| Thereafter | - | - | - | - | ||||||||||||
| Total | $ | 1,191,810 | $ | 883,572 | $ | 58,773 | $ | 249,465 | ||||||||
The total operating lease obligations of $1,191,810$272,301 consist of the following: $1,101,560$272,301 from facilities operating leases and $90,250$0 from equipment leases. During the fiscal years ended September 30, 20102013 and 2009,2012, the Company paid approximately $526,500$350,073 and $487,000,$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, 20102013 and 2009 was approximately $1,159,845 and $2,422,541, 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:
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The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2010,2013, 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) |
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| 3) | The Company issued 760 shares of common stock to several directors for services rendered, valued at $15,000. |
| 4) | The Company issued 500 shares of common stock to a consultant from the exercise of warrants with an exercise price of $16.00 per share which provided cash proceeds to the Company of $8,000. |
| 5) | The Company 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. |
| 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) |
| 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 |
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