UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

or

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The unaudited interim condensed consolidated financial information of SecureAlert, Inc. and subsidiaries (collectively, the “Company” or “SecureAlert”) has been prepared in accordance with the Instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31,June 30, 2014, and results of its operations for the three and sixnine months ended March 31,June 30, 2014 and 2013.  These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013.  The results of operations for the three and nine months ended March 31,June 30, 2014 may not be indicative of the results for the fiscal year ending September 30, 2014.

(2)  PRINCIPLES OF CONSOLIDATION

 

The condensed consolidated financial statements include the accounts of SecureAlert and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation.

(3)  RECENTLY ISSUED ACCOUNTING STANDARDS

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

(4)  IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable 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. If the carrying amount of an asset exceeds its fair 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 value that is independent of other groups of assets.  The Company recorded $75,000 and $150,000 of impairment expenses related to monitoring equipment for the three months ended March 31,June 30, 2014 and 2013, respectively. Additionally, the Company recorded $150,000$225,000 and $300,000$450,000 of impairment expenses related to monitoring equipment for the sixnine months ended March 31,June 30, 2014 and 2013, respectively.

(5)  BUSINESS COMBINATIONS

The Chilean Peso is theand New Israeli Shekel are used as functional currencycurrencies of the operating subsidiarysubsidiaries SecureAlert Chile, SpA.SpA and GPS Global Tracking and Surveillance System Ltd., respectively. The balance sheetsheets of SecureAlert Chile hasall subsidiaries have been translatedconverted into United States Dollars (USD) at the exchange rate prevailing at March 31,June 30, 2014. Additionally, the average exchange rates prevailing during the six months ended March 31, 2014 had an immaterial effect on the statements of operations. Comprehensive loss includes net loss as currently reported under U.S. GAAP and other comprehensive loss. Other comprehensive loss considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net loss, but rather are reported as a separate component of stockholders’ equity.

During the sixnine months ended March 31,June 30, 2014, 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 and services.  The revenues recognized by geographic area for the three and sixnine months ended March 31,June 30, 2014 and 2013, are as follows:

(8)  NET LOSS PER COMMON SHARE

Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common shareholders 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 shareholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding.  The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, and shares issuable upon conversion of preferred stock.  As of March 31,June 30, 2014 and 2013, there were 453,151444,677 and 4,334,6884,460,230 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS as their effect would be anti-dilutive.  No reconciliation for discontinued operations was provided since the impact was immaterial. The common stock equivalents outstanding as of March 31,June 30, 2014 and 2013 consisted of the following:

 

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’s selling price.  Inventory is periodically reviewed in order to identify obsolete, damaged items or impaired items.

 

Property and equipment as of March 31,June 30, 2014 and September 30, 2013, were as follows:

(11)(13)  MONITORING EQUIPMENT

Monitoring equipment as of March 31,June 30, 2014 and September 30, 2013, was as follows:

Depreciation expense related to monitoring equipment for the three months ended June 30, 2014 and 2013 was $151,121 and $342,676. Depreciation expense for the sixnine months ended March 31,June 30, 2014 and 2013 was $382,814$619,351 and $668,081,$1,010,757, respectively.  Additionally, as of March 31,June 30, 2014, the Company reserved $150,000$225,000 for future monitoring equipment impairment. These expenses werehave been recognized in cost of revenues.

The following table summarizes the activity of intangible assets for the secondthird fiscal quarter ended March 31,June 30, 2014:

(16)  ACCRUED EXPENSES

Accrued expenses consisted of the following as of March 31,June 30, 2014 and September 30, 2013:

 

 

(18)  RELATED-PARTY TRANSACTIONS

The Company entered into transactions with certain related parties during the sixnine months ended March 31,June 30, 2014. These transactions consist largely of financing transactions and service arrangements. All transactions with related parties are reviewed in advance and approved by the independent members of the Company’s Board of Directors.

On February 1, 2013, the Company entered into a loan agreement with Sapinda Asia (the “Loan”)., a significant shareholder.  Under the agreement, the Company may borrow up to $1,200,000 at an interest rate stated at three percent per annum for unused funds and 10% per annum for borrowed funds. On October 24, 2013 the Company drew down $1,200,000 for use in a performance bond required under a sales contract with an international customer. As of March 31,June 30, 2014, the Company owed $1,200,000 of principal and $79,550 of accrued interest on the Loan.  The Loan maturesinitially matured on June 30, 2014.2014; however, subsequent to June 30, 2014, the parties agreed to extend the note to the new maturity date of December 31, 2015 (see note 24 below).

On November 19, 2013, the Company borrowed $1,500,000 from Sapinda Asia.Asia, a significant shareholder.  The unsecured note bears interest at a rate of 8% per annum and maturesinitially matured on November 18, 2014. Subsequent to June 30, 2014, the parties agreed to extend the note which now matures on November 19, 2015(see note 24 below). As of March 31,June 30, 2014, the Company owed $1,500,000 of principal and $43,726 of accrued interest on the note.

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 working capital.  In consideration of the Facility Agreement, the Company paid Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the Facility Agreement or $750,000. 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 member of the Company’s Executive Committee, 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. On May 30, 2014, the parties amended the Facility Agreement such that the Company could borrow the remaining principal balance available under the Facility Agreement up to June 30, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8% per annum and 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. The Company may prepay, without penalty, in minimum amounts of $1,000,000, the borrowed amounts.  The Company may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a utilization request to Tetra House.  Tetra House has 10 business days in which to fund the utilization request upon receipt of such request.

The 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 shareholder 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.

In July 2011, theThe Company amendedhas designated 85,000 shares of its Articles of Incorporation and increased the total designated shares ofstock as Series D Preferred stock from 70,000 to 85,000 shares (“Series D Preferred stock”).  During the sixnine months ended March 31,June 30, 2014 and 2013, the Company did not issue any additional new shares of Series D Preferred stock.

The Series D Preferred stock is entitled to dividends at the rate equal to 8% per annum calculated on the purchase amount actually paid for the shares or amount of debt converted.  The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be).  Dividends are payable quarterly, no later than 30 days following the end of the accrual period.

During the sixnine months ended March 31,June 30, 2014 and 2013, the Company issued 9791,249 and 148,942 shares of common stock to pay $18,854$23,957 and $1,260,858 of accrued dividends on the Series D Preferred stock earned during the sixnine months ended March 31, 2014 and 2013, respectively.  Subsequent to March 31, 2014, the Company issued 270 shares

Each share of Series D Preferred stock may be converted into thirty (30) shares of common stock, commencing 90 days after the date of issue. During the sixnine months ended March 31,June 30, 2014 and 2013, 197 and 48,295 shares of Series D Preferred stock were converted into 16,053 and 1,828,283 shares of common stock, respectively. During fiscal year 2013, the Company entered into an employment agreement with an officer. In addition, the officer and the Company mutually agreed that the conversion of the Series D Preferred shares held by the officer will convert into common stock at a rate of 155% of each share’s original investment; provided that the officer must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. As of April 30, 2014, there were no Series D Preferred shares outstanding.

As of March 31,June 30, 2014, 1,400 warrants to purchase Series D Preferred stock at an exercise price of $500 per share were issued and outstanding. During the sixnine months ended March 31,June 30, 2014, no Series D Preferred stock warrants were issued or exercised.

During the sixnine months ended March 31,June 30, 2014, the Company issued the following shares of common stock: 16,053 shares upon the conversion of 197 shares of Series D Preferred stock, 979 shares to pay $18,854 of accrued dividends on Series D Preferred stock, 1,933 shares for Board of Director fees, 5,384 shares upon the exercise of options and warrants for total cash proceeds of $8,000, and 236,469 shares in connection with the acquisition of GPS Global Tracking & Surveillance System Ltd.

(21)  STOCK OPTIONS AND WARRANTS

The expected life of stock options (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. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options (warrants).