Mark | Application Number | Registration Number | Status/Next Action | | | | | MOBILE911 | 75/615,118 | 2,437,673 | Registered | | | | | MOBILE911 SIREN WITH 2-WAY VOICE COMMUNICATION & DESIGN | 76/013,886 | 2,595,328 | Registered | | | | | WHEN EVERY SECOND MATTERS | 76/319,759 | 2,582,183 | Registered | | | | | MOBILEPAL | 78/514,031 | 3,035,577 | Registered | | | | | HOMEPAL | 78/514,093 | 3,041,055 | Registered | | | | | PAL SERVICES | 78/514,514 | 3,100,192 | Registered | | | | | REMOTEMDX | 78/561,796 | pending | Allowed-Awaiting Statement of Use | | | | | TRACKERPAL™ | 78/843,035 | 3,345,878 | Registered | | | | | MOBILE911 | 78/851,384 | 3,212,937 | Registered | | | | | TRACKERPAL™ | CA 1,315,487 | pending | Pending | | | | | TRACKERPAL™ | MX 805,365 | 960954 | Registered |
Patents.We have five patents in the United States and one patent in China. In addition, we have seven patents pending in the United States and ten pending internationally. The following tables contain information regarding our patents and patent applications. There can be no assurance given that the applications will be granted or that they will, if granted, contain all of the claims currently included.
Domestic Patents: | | | | Patent Title | Application/Patent Number | Filing/Issue Dates | Status | Remote Tracking and Communication Device | 7,330,122 | 2/12/08 | Issued | | | | | Remotely Controllable Thermostat | 6,260,765 | 7/17/01 | Issued | | | | | Interference Structure for Emergency Response System Wristwatch | 6,366,538 | 4/2/02 | Issued | | | | | Multiple Emergency Response Services Combination Emergency Phone and Personal Audio Device | 6,285,867 | 9/4/01 | Issued | | | | | Remote Tracking System and Device with Variable Sampling | 11/486,991 | 6/9/09 | Issued | | | | | Alarm and Alarm Management System for Remote Tracking Devices | 11/489,992 | 7/14/06 | Pending | | | | | A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between Device and a Monitoring Center | 11/486,989 | 7/14/06 | Pending | | | | | A Remote Tracking System with a Dedicated Monitoring Center | 11/486,976 | 7/14/06 | Pending | | | | | Methods for Establishing Emergency Communications Between a Communications Device and a Response Center | 11/830,398 | 7/30/07 | Pending | | | | | Remote Tracking and Communications Device | 12/028,088 | 2/8/08 | Pending | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device | US 61/034,720 | 3/7/08 | Pending | | | | | Beacon | 12/394.151 | 9/2009 | Pending |
International Patents: | | | | Patent Title | Application/Patent Number | Filing/Issue Dates | Status | | | | | Emergency Phone with Single-Button Activation | ZL 01807350.6 | 10/5/05 | Issued | | | | | Remote Tracking and Communication Device | Brazil PI0614742.9 | 8/4/06 | Pending | | | | | Remote Tracking and Communication Device | Canada 2617923 | 8/4/06 | Pending | | | | | Remote Tracking and Communication Device | Europe 06836098.1 | 8/4/06 | Pending | | | | | Remote Tracking and Communication Device | Mexico a/2008/001932 | 8/4/06 | Pending | | | | | Emergency Phone with Single-Button Activation | EP 01924386.4 | 3/28/01 | Pending | | | | | Emergency Phone with Single-Button Activation | JP 2001-571568 | 3/28/01 | Pending | | | | | Alarm and Alarm Management System for Remote Tracking Devices | PCT/US2007/072736 | 7/3/07 | Pending | | | | | A Remote Tracking Device and a System and Method for Two-Way Communication Between the Device and a Monitoring Center | PCT/US2007/072740 | 7/3/07 | Pending | | | | | A Remote Tracking System with a Dedicated Monitoring Center | PCT/US2007/072743 | 7/3/07 | Pending | | | | | Remote Tracking System and Device with Variable Sampling and Sending Capabilities Based on Environmental Factors | PCT/US2007/072746 | 7/3/07 | Pending |
During the year ended September 30, 2008, we reacquired Patent Number 6,366,538 which was previously sold in exchange for Patent Number 7,092,695 and Patent Number 7,251,471. Patent Number 6,226,510 and Patent Number 6,044,257 were originally sold subject to terminal disclaimers requiring common ownership with patents owned (Patent Number 7,092,695 and Patent Number 7,251,471) by us but not assigned to purchaser. A terminal disclaimer is used to link two patents filed by the same inventors and claiming the same invention. In order to get the additional patent rights desired by the purchaser, the two patents are linked using a terminal disclaimer that specifies that they have the same term and must be commonly assigned. 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. Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. Seasonality Given the continued and steady increase in revenues throughout 2009,2010, no apparent seasonality, if it existed, could be detected. However, as in previous years, incremental deployment opportunities were found to be slower in the months of July and August. This was due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season. Backlog With the transformation of our supply chain operations and manufacturing capabilities during July through December 2009, the commercial availability of our newly modified and enhanced TrackerPAL™ II(e) devices created an intermittent backlog of units. Monthly backlogs for organic growth and new account implementation have averaged 150 devices from July through December 2009 as we have implemented and improved our internal repair and refurbishment capabilities in conjunction with our new world-class manufacturing partner and production capabilities at Inovar. We view backlogs as undesirable, as they impair deployments, which necessarily reduces revenue. We continue to work on mitigating backlogs, maximizing demand fulfillment, and capitalizing on all available pportunitiesopportunities to secure recurring revenue streams. In a significant development after September 30, 2009, we authorized the initial manufacture of our first 3,000 TrackerPAL™ II(e) units, which we began delivering in mid-December 2009 and expect to continue to deliver over the next few months. We will use these units to replace any remaining TrackerPAL™ I units, as well as to support growth in existing accounts and in support of new domestic and international opportunities. 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 11, 2009,September 30, 2010, we had 170 full time183 full-time employees and 3522 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. Properties Our headquarters and monitoring facility are housed in 8,106 square feet of space located at 150 West Civic Center Drive, Sandy, Utah. Monthly lease payments are approximately $16,200. This lease expires on November 30, 2013. In addition, we signed an additional lease to provide 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 are approximately $5,300. Management believes that these facilities are sufficient to meet our needs for the foreseeable future. Legal Proceedings Frederico and Erica Castellanos, v. Volu-Sol, Inc.RACO Wireless LLC v SecureAlert, Inc. On August 15, 2008, plaintiffs Frederico and Erica CastellanosOctober 12, 2010, RACO Wireless filed a lawsuitcomplaint alleging that the Company breached a contract by failing to place a sufficient number of RACO SIM chips in the Superior Court of the State of California, Los Angeles County.SecureAlert monitoring devices. The complaint names twenty-four defendantsCompany denies these allegations and one hundred unnamed Doe defendants. The complaint asserts claims for negligence, strict liability - failure to warn, strict liability - design defect, fraudulent concealment, breach of implied warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to certain chemicals during the course of his employment. One of the original named defendants was Logos Scientific, Inc. On September 4, 2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as successor in interest to Logos Scientific, Inc." for the previously unnamed Doe 1. “Volu-Sol, Inc.” was the original corporate name of the Company. We intendintends to vigorously defend against Castellanos’ claims. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management.this complaint. SecureAlert, v. David Ezell, et al. We have filed a claim against David Ezell and several related entities for breach of contract, unjust enrichment, conversion, and punitive damages, and seek approximately $290,810 in damages, penalties, attorneys fees, and other amounts to be proven at trial. The defendant has defaulted in responding to our claims, and the court has entered judgment against Mr. Ezell and his entities in excess of $1,000,000. Aculis, Inc. v. SecureAlert, Inc. Aculis, Inc. filed a complaint against us in the Fourth District Court in and for Utah County, Utah, on June 7, 2010, alleging breach of contract, unjust enrichment, and a claim for $208,889 in unpaid products and services, incremental to 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 to the Motion to Dismiss on August 5, 2010. Our reply memorandum was filed on August 16, 2010. We intend to vigorously defend our interests and to pursue appropriate counterclaims against Aculis.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2010. You should read this table in conjunction with the ““MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations”” and our consolidated financial statements and the related notes thereto:
| June 30, | | | 2010 | | Cash and cash equivalents | $ | 1,879,955 | | | | | | Long-term debt: | | | | Total long-term debt | $ | 574,529 | | | | | | Stockholders’ equity: | | | | Common Stock, $0.0001 par value: 600,000,000 shares authorized; 238,748,663 shares issued and outstanding | | 23,875 | | Series D Preferred Stock, $0.0001 par value, 50,000 shares authorized; 37,851 shares issued and outstanding | | 4 | | Additional paid-in capital | | 221,235,284 | | Accumulated deficit | | (216,075,643 | ) | Total stockholders’ equity | | 3,869,330 | | Total capitalization | $ | 27,933,594 | |
| June 30, 2010 | | | | | | | | Cash and cash equivalents | | $ | 1,879,955 | | | | | | | Long-term debt: | | | | | Total long-term debt | | $ | 574,529 | | | | | | | Stockholders’ equity: | | | | | Common Stock, $0.0001 par value: 600,000,000 shares authorized; 238,748,663 shares issued and outstanding | | | 23,875 | | Series D Preferred Stock, $0.0001 par value, 50,000,000 shares authorized; 37,851 shares issued and outstanding | | | 4 | | Additional paid-in capital | | | 221,235,284 | | Accumulated deficit | | | (216,075,643 | ) | | | | | | Total stockholders’ equity | | | 3,869,330 | | | | | | | Total capitalization | | $ | 27,933,594 | |
MARKET PRICE FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our Common Stock trades on the OTC Bulletin Board under the symbol “SCRA”. 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. | | High | | | Low | | Fiscal Year Ended September 30, 2008 | | | | | | | First Quarter | | $ | 4.22 | | | $ | 2.72 | | Second Quarter | | $ | 4.09 | | | $ | 1.00 | | Third Quarter | | $ | 1.84 | | | $ | 1.47 | | Fourth Quarter | | $ | 1.52 | | | $ | 1.11 | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended September 30, 2009 | | | | | | | | | First Quarter | | $ | 1.20 | | | $ | 0.18 | | Second Quarter | | $ | 0.27 | | | $ | 0.10 | | Third Quarter | | $ | 0.26 | | | $ | 0.14 | | Fourth Quarter | | $ | 0.20 | | | $ | 0.11 | |
Holders As of JuneSeptember 30, 2010, there were approximately 3,500 holders of record of our Common Stock and 238,748,663280,023,255 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 43,678,16551,740,451 shares of Common Stock. We have also issued 37,85135,407 shares of Series D Preferred, which are convertible into 227,106,000212,442,000 shares of Common Stock, including the Resale Shares, at a ratio of 6,000 shares of Common Stock for each share of Series D Preferred. 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. During the fiscal years ended September 30, 2009 and 2008, we recorded $175 and $345,356 in stock dividends, respectively, payable on outstanding shares of 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. Transfer Agent and Registrar The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11219. Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth information as of September 30, 2009, our most recently completed fiscal year, 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. Equity Compensation Plan Information 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 | | $1.06 | | 7,487,286 |
The selling stockholdersSelling Stockholders will receive all of the proceeds from the sale of any Resale Shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. The selling stockholdersSelling Stockholders identified in this prospectus are offering up to 166,602,00047,100,000 shares of our Common Stock in this prospectus (the Resale Shares). The Resale Shares being offered by the selling stockholdersSelling Stockholders in this prospectus are issued or issuable to the selling stockholdersSelling Stockholders upon conversion of a total of 27,7677,850 shares of our Series D Preferred acquired for cash by the selling stockholdersSelling Stockholders in a private placement. The selling stockholdersSelling Stockholders may offer the Resale Shares for resale from time to time pursuant to this prospectus. The selling stockholdersSelling Stockholders may also sell, transfer or otherwise dispose of all or a portion of their Resale Shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering those shares. We may from time to time include additional selling stockholdersSelling Stockholders in amendments to this prospectus. The following table sets forth information, as of June 30,November 22, 2010, with respect to the selling stockholders,Selling Stockholders, the shares of Common Stock and Series D Preferred owned by each selling stockholder,Selling Stockholder, and the number of Resale Shares that may be offered pursuant to this prospectus. Unless otherwise indicated below, to our knowledge each selling stockholderSelling Stockholder named in the table has sole voting and investment power with respect to the shares of Common Stock beneficially owned by it. As used in this prospectus, the term “selling stockholders”“Selling Stockholders” has the meaning set forth in the “Plan of Distribution”“PLAN OF DISTRIBUTION” section of this prospectus beginning on page 47.46. The information is based on infor mationinformation provided by or on behalf of the selling stockholders.Selling Sto ckholders. We do not know when or in what amounts any selling stockholderSelling Stockholder may offer Resale Shares for sale. Because (i) the selling stockholdersSelling Stockholders may offer all or some of the Resale Shares pursuant to this offering, (ii) there are currently no agreements, arrangements or understandings with respect to the sale of any of the Resale Shares, and (iii) the selling stockholderSelling Stockholder may acquire additional shares from us or in the open market in the future, no definitive estimate as to the number of shares that will be held by each selling stockholderSelling Stockholder after the offering can be provided. The column captioned “Ownership“Shares Beneficially Owned After this Offering” in the following table has been prepared on the assumption that all Resale Shares offered under this prospectus will be sold to parties unaffiliated with the selling stockholders. Sel ling Stockholders. The selling stockholdersSelling Stockholders have not had a material relationship with us within the past three years other than their ownership of our securities and as otherwise described in the footnotes to the table below or in the footnotes to the table under the heading “Security Ownership of Certain Beneficial Ownership tables.Owners and Management” on page 27. To our knowledge, based on information provided to us by the selling stockholders,Selling Stockholders, none of the selling stockholdersSelling Stockholders is a broker-dealer or an affiliate of a broker-dealer. | | | | | | | | | | Ownership Before Offering | | Ownership After Offering | | | | | | | | | | Name | Number of Shares of Common Stock Owned by or Issuable to Selling Stockholder (Total) (1) | Number of Resale Shares Owned by or Issuable to Selling Stockholder (2) | Number of Shares of Common Stock Owned by or Issuable to Selling Stockholder (Excluding Resale Shares) | Preferred Shares Owned | Securities Offered Hereby (3) | | Number of Shares Owned After Offering (4) | Percentage After Offering (5) | Radenko Milakovic | 24,000,000 | 24,000,000 | - | 4,000 | 24,000,000 | | - | - | Laemi Real Estates, Inc. | 19,980,000 | 19,980,000 | - | 3,330 | 19,980,000 | | - | - | Stephan Goetz | 18,000,000 | 18,000,000 | - | 3,000 | 18,000,000 | | - | - | Advance Technology Investors, LLC | 30,393,222 | 17,388,000 | 13,005,222 | - | 17,388,000 | | 13,005,222 | 2.6% | Comediahill Business S.A. | 13,320,000 | 13,320,000 | - | 2,220 | 13,320,000 | | - | - | Commerce Financial, LLC | 12,894,000 | 12,894,000 | - | 2,149 | 12,894,000 | | - | - | Tim Whyte | 12,000,000 | 12,000,000 | - | 2,000 | 12,000,000 | | - | - | Kofler Ventures S.a.r.1 | 29,000,000 | 12,000,000 | 17,000,000 | 2,000 | 12,000,000 | | 17,000,000 | 3.4% | WDD Management, LLC | 8,184,000 | 8,184,000 | - | 1,364 | 8,184,000 | | - | - | Arfugo Holding Inc. | 6,660,000 | 6,660,000 | - | 1,110 | 6,660,000 | | - | - | Mara Holdings Limited | 6,000,000 | 6,000,000 | - | - | 6,000,000 | | - | - | Clydesdale Partners, LLC | 3,174,000 | 3,174,000 | - | 529 | 3,174,000 | | - | - | Vulcan International Trading Limited | 3,000,000 | 3,000,000 | - | 500 | 3,000,000 | | - | - | American Pension Services, Inc., Administrator for Beneficiary of Mark Peterson FBO Jeff Peterson Roth IRA | 2,880,000 | 2,880,000 | - | 480 | 2,880,000 | | - | - | Soek Ki Kim | 1,920,000 | 1,920,000 | - | - | 1,920,000 | | - | - | Eric John Watson | 1,800,000 | 1,800,000 | - | 300 | 1,800,000 | | - | - | Clydesdale Partners II, LLC | 1,782,000 | 1,782,000 | - | 297 | 1,782,000 | | - | - | V. Mark Peterson Roth IRA, FBO Jeffrey Peterson Stretch Roth IRA | 1,200,000 | 1,200,000 | - | 200 | 1,200,000 | | - | - | Damian Sadza | 300,000 | 300,000 | - | 50 | 300,000 | | - | - | Robert Unger | 120,000 | 120,000 | - | 20 | 120,000 | | - | - | | | | | | | | | | Totals | 196,607,222 | 166,602,000 | 30,005,222 | 23,549 | 166,602,000 | | 30,005,222 | |
| | Shares of Series D Beneficially Owned Prior to this Offering | Shares of Common Stock Beneficially Owned Prior to this Offering (1) | Percentage of Registered Shares | Shares of Common Stock Beneficially Owned After this Offering Assuming the Sale of All Registered Resale Shares | Name | | Number | | Percent | Number | Percent | Number | Percent (2) | Laemi Real Estates, Inc. (3) | 3,330 | | 9.8% | 21,040,304 | 7.1% | 42.4% | 1,060,304 | * | Comediahill Business S.A. (4) | 2,220 | | 6.5% | 14,026,868 | 4.8% | 28.3% | 706,868 | * | Arfugo Holding Inc. (5) | 1,110 | | 3.3% | 6,950,998 | 2.4% | 14.1% | 290,998 | * | Vulcan International Trading Limited (6) | 500 | | 1.5% | 3,046,766 | 1.0% | 6.4% | 46,766 | * | Soek Ki Kim (7) | 320 | | * | 1,929,996 | * | 4.1% | 9,996 | * | Eric John Watson (8) | 300 | | * | 1,828,327 | * | 3.8% | 28,327 | * | Damian Sadza (9) | 50 | | * | 303,021 | * | * | 3,021 | * | Robert Unger (10) | 20 | | * | 123,837 | * | * | 3,837 | * | TOTALS | 7,850 | | 23.0% | 49,250,117 | 16.7% | 100% | 2,150,117 | * | ______________ | | | | | | | | |
46* | Represents beneficial ownership of less than one percent of outstanding shares of the class of voting securities. As of November 22, 2010, there were 34,124 shares of Series D Preferred Stock issued and outstanding. |
Notes:
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock issuable upon conversion of the Series D Preferred, or subject to options or warrants that are currently convertible/exercisable or convertible/exercisable within 60 days of the date of the table, are deemed to be beneficially owned by the person holding those securities or rights. |
| (2) | Each share of Series D Preferred is convertible into 6,000 shares of Common Stock. Resale Shares are those shares of Common Stock issued or issuable upon conversion of Beneficial ownership after the 27,767 shares of our Series D Preferred. |
| (3) | Same as the Resale Shares. |
| (4) | Assumesoffering assumes that all Resale Shares offered under this prospectus will be sold to parties unaffiliated with the selling stockholders. |
| (5) | Selling Stockholders. Shares underlying conversion rights, options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of the person holding those rights, options or warrants , but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The percentageEach share of beneficial ownershipSeries D Preferred is based on a totalconvertible into 6,000 shares of 493,191,970Common Stock. | | | | | (2) | Assumes the conversion and sale of all of the Registered Shares. |
| (3) | 19,980,000 shares issuable upon conversion of 3,330 shares of Series D Preferred and 1,060,304 shares of Common Stock outstanding orpreviously issued as Series D Preferred stock dividends. |
| (4) | 13,320,000 shares issuable upon conversion of the2,220 shares of Series D Preferred Shares.and 706,868 shares of Common Stock issued previously as Series D Preferred stock dividends. |
| (5) | 6,660,000 shares issuable upon conversion of 1,110 shares of Series D Preferred and 290,998 shares of Common Stock issued previously as Series D Preferred stock dividends. |
| (6) | 3,000,000 shares issuable upon conversion of 500 shares of Series D Preferred and 46,766 shares of Common Stock issued previously as Series D Preferred stock dividends. | | | | | (7) | 1,920,000 shares of Common Stock issued previously upon conversion of shares of Series D Preferred and 9,996 shares issued previously as stock dividends. | | | | | (8) | 1,800,000 shares issuable upon conversion of 300 shares of Series D Preferred and 28,327 shares of Common Stock issued as Series D Preferred stock dividends. |
| (9) | 300,000 shares issuable upon conversion of 50 shares of Series D Preferred and 3,021 shares of Common Stock issued previously as Series D Preferred stock dividends. |
| (10) | 120,000 shares issuable upon conversion of 20 shares of Series D Preferred and 3,837 shares of Common Stock issued previously as Series D Preferred stock dividends. |
PLAN OF DISTRIBUTION We are registering the resale of the Resale Shares by the selling stockholders.Selling Stockholders. The sharesResale Shares are issuable to the selling stockholdersSelling Stockholders upon conversion of the shares of Series D Preferred now held by them. As used in this prospectus, the term “selling stockholders”“Selling Stockholders” includes donees, pledgees, transferees or other successors-in-interest selling shares received from a named selling stockholderSelling Stockholder as a gift, distribution, foreclosure on a pledge, or other non-sale related transfer after the date of this prospectus. The selling stockholdersSelling Stockholders will act independently of us in making decisions regarding the timing, manner and size of each sale. Sales may be made on the OTC Bulletin Board or any other exchange or quotation service on which the securities may be listed or quoted at the time of sale, otherwise or in a combination of such methods of sale. Each selling stockholderSelling Stockholder reserves the right, together with its agents from time to time, to accept or reject, in whole or in part, any proposed purchase of the shares of Common Stock for any reason, including if they deem the purchase price to be unsatisfactory at any particular time. In addition, the selling stockholdersSelling Stockholders may sell the Resale Shares from time to time by one or more of the following methods permitted pursuant to applicable law, without limitation: | · | block trades (which may involve crosses) in which a broker or dealer will be engaged to attempt to sell the shares of Common Stock as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| · | direct sales to purchasers; |
| · | purchases by a broker or dealer as principal and resale by the broker or dealer for its own account; |
| · | an over-the-counter distribution; |
| · | ordinary brokerage transactions and transactions in which the broker solicits purchases; |
| · | privately negotiated transactions; |
| · | bidding or auction process; |
| · | closing out of short sales; |
| · | transactions in which the broker solicits purchasers; |
| · | satisfying delivery obligations relating to the writing of options on the shares of Common Stock, whether or not the options are listed on an options exchange; |
| · | one or more underwritten offerings on a firm commitment or best efforts basis; |
| · | any combination of any of these methods; or |
| · | any other method permitted pursuant to applicable law. |
The selling stockholdersSelling Stockholders may distribute the securities from time to time in one or more transactions at a fixed price or prices (which may be changed from time to time), at market prices prevailing at the times of sale, at prices related to these prevailing market prices or at negotiated prices. The selling stockholdersSelling Stockholders may effect these transactions by selling the Resale Shares to market-makers acting as principals or through broker-dealers or agents, and these persons may receive compensation in the form of discounts, concessions or commissions from the selling stockholdersSelling Stockholders and/or the purchasers of the securities for whom such persons may act as agents or to whom they sell as principals, or both (which compensation as to a particular broker-dealerbroke r-dealer might be in excess of customary commis sions)commissions). Market makers and block purchasers purchasing the Common Stock will do so for their own account and at their own risk. It is possible that a selling stockholderSelling Stockholder will attempt to sell shares of Common Stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The shares may be sold according to any one or more of the methods described above. In addition, subject to compliance with applicable law and Company policy, the selling stockholderSelling Stockholder may enter into option, derivative or hedging transactions with respect to the shares, and any related offers or sales of shares may be made under this prospectus. In some circumstances, for example, the selling stockholderSelling Stockholder may write call options, put options or other derivative instruments (including exchange-traded options or privately negotiated options) with respect to the shares, or which it settles through delivery of the shares. These option, derivative and hedging transactions may require the delivery to a broker, dealer or other financial institution of shares offered under this prospectus, and that broker, dealer or other financialfinan cial institution may resell those shares under this prospectus. A selling stockholderSelling Stockholder or his successors in interest may enter into hedging transactions with broker-dealers who may engage in short sales of Common Stock in the course of hedging the positions they assume with a selling stockholder.Selling Stockholder. The selling stockholderSelling Stockholder may offer and sell the shares under any other method permitted by applicable law. If a material arrangement with any broker-dealer or other agent is entered into for the sale of any shares of Common Stock through a block trade, special offering, exchange distribution, secondary distribution, or a purchase by a broker or dealer, a prospectus supplement will be filed, if necessary, disclosing the material terms and conditions of these arrangements. The selling stockholdersSelling Stockholders may from time to time deliver all or a portion of the shares offered hereby to cover a short sale or upon the exercise, settlement or closing of a call equivalent position or a put equivalent position. The Securities and Exchange Commission may deem a selling stockholderSelling Stockholder and any broker-dealers or agents who participate in the distribution of Common Stock to be “underwriters” within the meaning of Section 2(11) of the Securities Act. As a result, the Securities and Exchange Commission may deem any discounts and commissions received by such broker-dealers or agents and any profit on the resale of the Common Stock by the selling stockholderSelling Stockholder to be underwriting discounts or commissions under the Securities Act. Because a selling stockholderSelling Stockholder may be deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, a selling stockholderSelling Stockholder will be subject to the prospectus delivery requirements of the Securities Act and also may be subject to liabilities under the securitiessecu rities laws, including Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. To our knowledge, there are currently no plans, arrangements or understandings between any selling stockholderSelling Stockholder and any broker-dealer, underwriter or agent regarding the sale of the Common Stock. If required by the applicable securities laws of particular states, the Resale Shares will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, if required by the applicable securities laws of particular states, the Resale Shares may be sold only pursuant to registration or qualification of such Resale Shares in the applicable state or if an exemption from the registration or qualification requirement is available and is complied with. Each selling stockholderSelling Stockholder and any person participating in the distribution of Common Stockthe Resale Shares registered under the registration statement that includes this prospectus will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and applicable SEC rules and regulations, including, among others, Regulation M, which may limit the timing of purchases and sales of any of our Common Stock by any such person. Furthermore, Regulation M may restrict the ability of any person engaged in the distribution of our Common Stock to engage in market-making activities with respect to our Common Stock. We have informed the selling stockholdersSelling Stockholders that the anti-manipulative provisions of Regulation M promulgated under the Exchange Ac tAct may apply to their salessale s in the market. These restrictions may affect the marketability of our Common Stock and the ability of any person or entity to engage in market-making activities with respect to our Common Stock.
To the extent required, this prospectus will be amended or supplemented from time to time to describe a specific plan of distribution or to disclose additional information with respect to any sale or other distribution of the shares.
The selling stockholderSelling Stockholder may also sell its shares in accordance with Rule 144 under the Securities Act, to the extent available, or pursuant to other available exemptions from the registration requirements of the Securities Act, rather than pursuant to this prospectus. We will pay for all costs of the selling stockholders of this registration, including, without limitation, SEC filing fees and expenses of compliance with state securities or “blue sky” laws; except that the selling holders will pay all brokerage commissions, underwriting discounts and selling expenses, if any. We have agreed to indemnify the selling stockholdersSelling Stockholders against particular liabilities, including liabilities under the Securities Act, incurred in connection with the offering of the Resale Shares. We and the selling stockholdersSelling Stockholders may agree to indemnify any underwriter, broker, dealer or agent that participates in transactions involving sales of the Resale Shares against certain liabilities, including liabilities arising under the Securities Act. Once sold under the registration statement, of which this prospectus forms a part, the Common Stock will be freely tradable in the hands of persons other than our affiliates. DESCRIPTION OF SECURITIES Common Stock Common Stock
Authorized and Outstanding
We are authorized to issue up to 600,000,000 shares of Common Stock, par value $0.0001 per share, of which 268,749,970 shares are outstanding as of August 15, 2010.
Voting
Holders of our Common Stock each have one vote per share. Our directors are elected by the vote of a plurality of the Common Stock represented in person or by proxy at such meeting and entitled to vote on the election of directors. A majority of the outstanding shares of Common Stock constitute a quorum. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
Upon our dissolution, our stockholders will be entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of Preferred Stock with preferential liquidation rights, if any, at the time outstanding. Our Common Stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Common Stock.
Preferred Stock
Authorized and Outstanding We are authorized to issue up to 600,000,000 shares of Common Stock, par value $0.0001 per share, of which 294,309,452 shares are outstanding as of November 22, 2010. Voting Holders of our Common Stock each have one vote per share. Our directors are elected by the vote of a plurality of the Common Stock represented in person or by proxy at such meeting and entitled to vote on the election of directors. A majority of the outstanding shares of Common Stock constitute a quorum. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Upon our dissolution, our stockholders will be entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of Preferred Stock with preferential liquidation rights, if any, at the time outstanding. Our Common Stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Common Stock. Preferred Stock Authorized and Outstanding We are authorized to issue up to 20,000,000 shares of Preferred Stock, par value $0.0001 per share. As of the date of this prospectus, we have the following shares of Preferred Stock outstanding. Series D Preferred During the first quarter of fiscal year 2010, our Board of Directors reviewed the financial condition, including the financial obligations and capital requirements of the Company. The Board of Directors also took notice of the determination of the Company’s auditors that our recurring net losses and negative cash flows from operating activities “raise substantial doubt about the Company's ability to continue as a going concern.” The Board of Directors determined that in order for the Company to achieve successful operations, we must generate positive cash flows from operating activities and obtain additional funding to meet its projected capital investment requirements. To deal with this uncertainty, the Board of Directors deemed it necessary to reduce the debt lo adload of the Company, both obligationsobliga tions to third party creditors, and obligations to officers and directors of the Company who held unsecured Company debt. The Board did not separately consider whether the debt owed to the officers and directors of the Company was secured or unsecured. The Board also deemed it necessary to raise additional capital from the issuance of Preferred Stock, while continuing to expand the market for our TrackerPAL™ portfolio of products. As part of this plan to deal with the uncertainty regarding the Company’s ability to continue to pursue its business objectives, and in order to lessen the Company’s cash burden and to raise additional capital, effective December 3, 2009, the Board of Directors acted to amend our Articles of Incorporation to authorize 50,000 shares of Series D Preferred, and establish the designations, rights and preferences for the Series D Preferred. The Board of Directors instructed management to offer the new equity securities to the Company’s debt holders at the rate of one share of Series D Preferred for each $1,000 in debt exchanged. The Board of Directors also authorized the sale of the Series D Preferred for $500 per share to investors willing to pay cash for t hethe securities. All offers were to be made only to accredited investors. In order to give the new investors some assurance that the Company would be able to reserve a sufficient number of shares of Common Stock for conversion of the Series D Preferred and to provide some potential for liquidity to those investors, particularly the debt holders who were giving up their right to repayment of principal and interest, the Company also granted special voting rights and registration rights to the Series D Preferred, as described below. As originally adopted, the Certificate granted to the holders of the Series D Preferred the right to vote on an as-converted basis on matters for which a vote of the Common Stock may be required, as well as limited special voting rights equivalent to 60 percent (60%) of the issued and outstanding shares of Common Stock, notwithstanding the number of shares of Common Stock actually outstanding, solely for purposes of approving an increase in the authorized capital stock of the Company or a reduction in the number of shares of Common Stock outstanding, as described below (the “Special 60% Voting Rights”). The decision and action to designate the Series D Preferred and to commit the Company to the issuance of the Series D Preferred and to the conversion of such stock into Common Stock of the Company were undertaken by the Board of Directors, acting without additional authorization or approval of the shareholders of the Company, in reliance upon the Articles of Incorporation of the Company which specifically reserve to the Board of Directors the authority to designate series of Preferred Stock and the rights and preferences thereof. Under the Certificate, the Company is required to reserve a number of shares of Common Stock of the Company in an amount at least equal to 110 percent (110%) of the number of shares necessary to effect the conversion of the Series D Preferred. At the time that the Board of DirectorsDirect ors took this action there were not a sufficient number of authorized shares of Common Stock available under the Articles of Incorporation of the Company to reserve the full amount of shares of Common Stock issuable in the event all 50,000 shares of Series D Preferred were eventually issued and subsequently converted. The Articles of Incorporation were subsequently amended in July 2010 to increase the number of authorized shares of Common Stock to 600,000,000 shares, to provide a sufficient number of shares to enable us to reserve those shares required under the Certificate. This amendment to our Articles of Incorporation was adopted by the consent of a majority of the outstanding shares of Common Stock, voting as a class, as well as a majority of the outstanding shares of the Series D Preferred, also voting as a class, and of a majority of all voting shares (both Common Stock and Series D Preferred) voting on an as-if converted basis. The Board did not rely on the Special 60% Voting Rig htsRights in seeking approvalapprov al of the amendment. Approval of the holders of the Common Stock of the Company for the designation of the Series D Preferred or the issuance thereof was not obtained by the Board of Directors, prior to the Board of Directors’ authorizing the Series D Preferred as a class and committing the Company to increase the total number of shares of Common Stock that would be necessary for full conversion of the Series D Preferred. At the time, the Board of Directors was of the opinion that pursuant to the terms of the Company’s existing Articles of Incorporation, and its powers to create new classes of Preferred Stock and to designate the rights and preferences of any such new classes (including voting rights), the Bo ardBoard of Directors did not need the prior approval of the holders of the Common Stock as a class to effect an increase of the Common Stock. According to the Certificate, as amended and restated, the holders of the Series D Preferred are entitled to the following preferences and other rights. Rank. The Series D Preferred ranks senior as to liquidation rights to the Company’s Common Stock, and all other classes and series of equity securities of the Company which by their terms do not rank senior to the Series D Preferred (collectively with the Common Stock, “Junior Stock”). The Series D Preferred is subordinate and ranks junior to all indebtedness of the Company. Payment of Dividends. Dividends declared by the Company are payable on the Series D Preferred on a pro rata basis with the Common Stock and all other equity securities of the Company ranking pari passu with the Common Stock as to the payment of dividends, before certain distributions are paid on, or declared and set apart for Junior Stock, other than the Common Stock. In addition, the Company is prohibited from declaring, paying or setting apart for payment any dividend or making any distribution on Junior Stock (other than dividends or distributions payablepay able in shares of the Junior Stock) unless, at the time of such dividend or distribution, the Company shall have paid all unpaid dividends on the outstanding shares of Series D Preferred. In addition, holders of the Series D Preferred are entitled to receive quarterly dividends accrued on March 31, June 30, September 30, and December 31 of each year, cumulative dividends on the Series D Preferred at the rate per share equal to eight percent (8%) per annum, payable in cash or shares of Common Stock at the sole discretion of the Company. If a dividend is paid in shares of Common Stock of the Company, the number of shares to be issued will be 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 paid quarterly, no later than the thirtieth (30th) day following the end of the accrual period. Voting Rights. Except as otherwise required by Utah law and in the Certificate, the Series D Preferred will vote with the Common Stock on an as-converted basis. Each share of Series D Preferred entitles the holder thereof to 6,000 votes. The Common Stock into which the shares of Series D Preferred are convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company. Liquidation Preference. Holders of the Series D Preferred also are entitled to preferences upon liquidation, dissolution or winding up of the Company, voluntary or involuntary, before any payment is made or any assets distributed to holders of any Junior Stock. Conversion. Each holder of Series D Preferred has the right to convert the Series D Preferred into shares of Common Stock of the Company under certain circumstances. Each share of Series D Preferred is convertible into 6,000 shares of Common Stock, subject to adjustment as provided in the Certificate. Optional Redemption. At any time on or after December 1, 2010, the Company has the right, exercisable at its option, to redeem from funds legally available therefore, all or any portion of the then-outstanding and unconverted shares of the Series D Preferred at a price and on the terms contained in the Certificate. Any redemption of less than all of the Series D Preferred shall be pro rata among the holders of the Series D Preferred based on the number of shares of Series D Preferred held by each holder of record at the time of such partial redemption. Registration Rights Although the Designation of Rights and Preferences of the Series D Preferred did not provide for registration rights under the Securities Act, the Company subsequently agreed to grant registration rights to three holderspurchasers of Series D Preferred in connection with their collective investment of $3,300,000.$3,330,000. Pursuant to that agreement, the Company agreed to have a registration statement approved and effective with respect to the common shares underlying the Series D Preferred held by the three shareholders, no later than 90 days from April 13, 2010, the date of the investments. If the registration statement is not effective within 90 days, then until such time as a registration statement is effective with respect to the shares, or such time as the resale restrictions on the underlying shares can be removed, the Company agreed to pay a 16% dividend on the Series D Preferred held by these particular shareholders, instead of the standard 8% dividend rate on the preferred. If after one year and 15 days the resale restrictions on the underlying shares of common held by these holders are not removed, or a registration statement with respect to the shares is not then effective, as an additional penalty, the Company agreed to issue one additional share of Series D Preferred for each original share of Series D Preferred issued.
In connection with the purchase agreements by which all other cash investors of the Series D Preferred holders acquired their shares, the Company granted piggyback registration rights to such holders with respect to the shares of common stockCommon Stock underlying their Series D Preferred. Transfer Agent Our transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company.
Undesignated Preferred Stock The ability to authorize and issue undesignated Preferred Stock may enable our Board of Directors to render more difficult or discourage an attempt to change control of the Company by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal is not in our best interest, the Board of Directors could cause shares of Preferred Stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. INDEMNIFICATION Our articlesArticles of incorporationIncorporation provide that we shall indemnify our officers, directors, agents, incorporators and other persons against liabilities incurred by them that result from their acts that are performed in furtherance of our business to the full extent permitted by the laws of the State of Utah. Our bylaws provide that, to the full extent permitted by law, we shall indemnify any director or officer or former director or officer of our company, or any person who may have served at our request as a director or officer of another corporation in which we own shares, or of which we are a creditor, against expenses actually and reasonably incurred by him or her, in connection with the defense of any action, suit or proceeding, civil or criminal, in which he or she is made a party by r easonreason of being or having been such director or officer, except in relation to matters as to which he or she shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty; and to make such other indemnification as shall be authorized by our shareholders. As a result of the indemnification provisions described above and contained in the Utah Revised Business Corporations Act, subject to certain limitations in the Utah Revised Business Corporation Act, we may be permitted or compelled to provide indemnification and advancement of expenses to our directors, officers, agents, and employees when they are made parties to an investigation or legal action in connection with services performed at our request, including when such persons are alleged to have violated the Securities Act. Insurance purchased with respect to such persons may also cover expenses or other liabilities associated with an allegation of violations of the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons of pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of counsel the matter has been s ettledsettled by controlling precedent, submitsubmi t to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The rights of indemnification described above are not exclusive of any other rights of indemnification to which the persons indemnified may be entitled under any bylaw, agreement, vote of stockholders or directors or otherwise. In addition to the foregoing, we maintain insurance through a commercial carrier against certain liabilities which may be incurred by our directors and officers. The foregoing description is necessarily general and does not describe all details regarding the indemnification of our officers, directors or controlling persons. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material U.S. Federal income tax consequences to U.S. holders and non-U.S. holders (each defined below) regarding the acquisition, ownership and disposition of shares of our Common Stock. For purposes of this discussion, a U.S. holder is a beneficial owner of shares of our Common Stock who is: | · | an individual who is a citizen or resident of the United States; |
| · | a corporation (or other entity taxed as a corporation for U.S. Federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to U.S. Federal income taxation regardless of its source; or |
| · | a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) it has in effect a valid election to be treated as a U.S. person. |
For purposes of this discussion, a non-U.S. holder is a beneficial owner of shares of our Common Stock that is not a U.S. holder. This section is based on current provisions of the Code, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. This summary is not binding on the IRS, and the IRS is not precluded from adopting a contrary position. This section does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each holder of shares of our Common Stock. This section does not address all aspects of U.S. Federal income taxation that may be relevant to any particular investor based on such investor’s individual circumstances. In particular, this section considers only U.S. holders and non-U.S. holders that hold shares of our Common Stock as capital assets and does not address the potential application of the alternative minimum tax or the U.S. Federal income tax consequences to investors that are subject to special treatment, including: | · | taxpayers who have elected mark-to-market accounting; |
| · | tax-exempt organizations; |
| · | regulated investment companies; |
| · | real estate investment trusts; |
| · | financial institutions or “financial services entities;” |
| · | taxpayers who hold shares of our Common Stock as part of a straddle, hedge, conversion transaction or other integrated transaction; |
| · | controlled foreign corporations; |
| · | passive foreign investment companies; |
| · | certain expatriates or former long-term residents of the United States; and |
| · | U.S. holders whose functional currency is not the U.S. dollar. |
The following does not address any aspect of U.S. Federal gift or estate tax laws, or state, local or non-U.S. tax laws. In addition, the section does not consider the tax treatment of entities taxable as partnerships for U.S. Federal income tax purposes or other pass-through entities or persons who hold shares of our Common Stock through such entities. Prospective investors are urged to consult their tax advisors regarding the specific tax consequences to them of the acquisition, ownership or disposition of shares of our Common Stock in light of their particular circumstances.
Tax Consequences of Owning Shares of Our Common Stock U.S. Holders Dividends and Other Distributions on Shares of Common Stock Distributions on shares of our Common Stock will constitute dividends for U.S. Federal income tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. Federal income tax principles. If a distribution exceeds the Company’s current or accumulated earnings and profits, the excess will be treated first as a tax-free return of capital and will reduce (but not below zero) the U.S. holder’s adjusted tax basis in the Common Stock, and any remaining excess will be treated as capital gain from a sale or exchange of the shares of Common Stock, subject to the tax treatment described below in “Disposition of Shares of Our Common Stock.” Dividends received by a corporate U.S. holder generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions, and provided certain holding period requirements are met, dividends received by a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to capital gains for tax years beginning on or before December 31, 2010, after which the rate applicable to dividends is currently scheduled to change to the tax rate generally then applicable to ordinary income. Disposition of Shares of Our Common Stock Upon the sale, exchange, redemption or other disposition of shares of our Common Stock, a U.S. holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale, exchange or other disposition of the shares of our Common Stock and the U.S. holder’s adjusted tax basis in such stock. Generally, such gain or loss will be capital gain or loss. Any such capital gain or loss will be long term capital gain or loss if the U.S. holder’s holding period for the shares exceeds one year, and will otherwise be short-term capital gain or loss. Non-U.S. Holders Dividends and Other Distributions on Shares of our Common Stock In general, any distributions made to a non-U.S. holder of shares of our Common Stock, to the extent paid out of current or accumulated earnings and profits of the Company (as determined under U.S. Federal income tax principles), will constitute dividends for U.S. Federal income tax purposes. Provided such dividends are not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, such dividends generally will be subject to withholding of U.S. Federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Any distribution not constituting a dividend will be treated first as a tax-free return of capital and will reduce (but not below zero) the non-U.S. holder’s adjusted tax basis in its shares of our Common Stock and any remaining excess will be treated as gain realized from the sale or other disposition of the Common Stock, as described under “— Disposition of Common Stock” below. Dividends paid to a non-U.S. holder that are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States generally will not be subject to U.S. withholding tax, provided such non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. Federal income tax at the same graduated individual or corporate rates applicable to U.S. holders. If the non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder who wishes to claim the benefit of an applicable treaty rate for dividends will be required (a) to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if the Company Common Stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable U.S. Treasury regulations.
A non-U.S. holder eligible for a reduced rate of U.S. Federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. Disposition of Common Stock A non-U.S. holder generally will not be subject to U.S. Federal income or withholding tax in respect of gain recognized on a sale, exchange or other disposition of shares of our Common Stock unless: | · | the gain is effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States; |
| · | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or |
| · | the Company is or has been a “United States real property holding corporation” for U.S. Federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held shares of our Common Stock and, in the case where shares of our Common Stock are regularly traded on an established securities market, the non-U.S. holder has owned, directly or indirectly, more than 5% of shares of our Common Stock at any time within the shorter of the five-year period |
| · | preceding a disposition of shares of our Common Stock or such non-U.S. holder’s holding period for the shares of our Common Stock. |
Unless an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable U.S. Federal income tax rates. Any gain described in the first bullet point above of a non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Gain described in the second bullet point above (which may be offset by U.S. source capital losses) will be subject to a flat 30% U.S. Federal income tax. With respect to the third bullet point above, there can be no assurance that shares of our Common Stock will be treated as regularly traded on an established securities market. The Company believes that it will be a “United States real property holding corporation” for U.S. Federal income tax purposes. Character of Income, Gain, and Loss For non-corporate U.S. holders, items of ordinary income and loss are subject to different tax rates than items of capital gain or loss. Ordinary income for non-corporate U.S. holders is generally taxable, for tax years beginning on or before December 31, 2010, at rates of up to 35%. For tax years beginning after December 31, 2010, the maximum ordinary income rate for non-corporate U.S. holders is scheduled to increase to 39.6%. Ordinary losses are generally deductible against all income and gain. Long term capital gains of non-corporate U.S. holders are currently subject to a reduced maximum tax rate of 15% for tax years beginning on or before December 31, 2010. After December 31, 2010, the maximum capital gains rate is scheduled to increase to 20%. The deductibilit ydeductibility of capital losses is subject to limitations.
Information Reporting and Back-up Withholding A U.S. holder may be subject to information reporting requirements with respect to dividends paid on shares of our Common Stock, and on the proceeds from the sale, exchange or disposition of shares of our Common Stock. In addition, a U.S. holder may be subject to back-up withholding (currently at 28%) on dividends paid on common shares, and on the proceeds from the sale, exchange or other disposition of shares of our Common Stock unless the U.S. holder provides certain identifying information, such as a duly executed IRS Form W-9 certifying that he, she, or it is not subject to backup withholding or appropriate W-8, or otherwise establishes an exemption. Back-up withholding is not an additional tax and the amount of any back-up withholding will be allowable as a credit against a U.S. ho lder’sholder’s U.S. Federal incomeinco me tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. In general, a non-U.S. holder will not be subject to information reporting and backup withholding. However, a non-U.S. holder may be required to establish an exemption from information reporting and backup withholding by certifying the non-U.S. holder’s non-U.S. status on Form W-8BEN. Holders are urged to consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them. Surtax on Unearned Income For tax years beginning after Dec. 31, 2012, a 3.8% surtax called the Unearned Income Medicare Contribution, would be placed on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income would be interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income would be reduced by properly allocable deductions to such income. The validity of the shares of our Common Stock offered hereby will be passed upon for us by Durham Jones & Pinegar, P.C., Salt Lake City, Utah. The consolidated financial statements, the related financial statements included in this prospectus for the fiscal years ended September 30, 2009 and 2008 have been audited by Hansen Barnett & Maxwell, P.C., an independent registered public accounting firm, as stated in their report and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov. These filings and other documents are available and may be accessed on our website at www.securealert.com. You may request a copy of these filings at no cost, by writing or calling SecureAlert, Inc., Attention: Secretary, 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this prospectus.
Financial Statements Index to Consolidated Financial Statements
| Page | | | Report of Independent Registered Public Accounting Firm | F-2 | | | Consolidated Balance Sheets as of September 30, 2009 and 2008 | F-3 | | | Consolidated Statements of Operations for the fiscal years ended September 30, 2009 and 2008 | F-5 | | | Consolidated Statements of Stockholders’ Equity (Deficit) for the fiscal years ended September 30, 2008 and 2009 | F-6 | | | Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2009 and 2008 | F-12 | | | Notes to Consolidated Financial Statements | F-14F-15 |
HANSEN, BARNETT & MAXWELL, P.C. | | | A Professional Corporation | | Registered with the Public Company | CERTIFIED PUBLIC ACCOUNTANTS | | Accounting Oversight Board | 5 Triad Center, Suite 750 | | | Salt Lake City, UT 84180-1128 | | | Phone: (801) 532-2200 (801) 532-2200 Fax: (801) 532-7944 | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of SecureAlert, Inc., (Formerly known as RemoteMDx, Inc.)
We have audited the accompanying consolidated balance sheets of SecureAlert, Inc., formerly known as RemoteMDx, Inc., and subsidiaries (collectively, the Company) as of September 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended September 30, 2009. 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.
We conducted our audits 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 misstatement. The companyCompany 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’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examinin g,examining, on a test basis, evidence 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 our audits 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 RemoteMDx,SecureAlert, Inc. as of September 30, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2009 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, the Company has incurred losses 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. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| HANSEN, BARNETT & MAXWELL, P.C. |
Salt Lake City, Utah January 12, 2010
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2009 AND 2008
| | | | | | | | Assets | | 2009 | | | 2008 | | Current assets: | | | | | | | Cash | | $ | 602,321 | | | $ | 2,782,953 | | Deposit held in escrow | | | - | | | | 500,000 | | Accounts receivable, net of allowance for doubtful accounts of $266,000 and $312,000, respectively | | | 1,441,648 | | | | 1,441,853 | | Receivables from related-party | | | - | | | | 55,385 | | Prepaid expenses and other | | | 275,390 | | | | 224,842 | | Inventory, net of reserves of $83,092 and $0, respectively | | | 603,329 | | | | - | | Total current assets | | | 2,922,688 | | | | 5,005,033 | | Property and equipment, net of accumulated depreciation of $2,525,180 and $1,937,710, respectively | | | 1,313,306 | | | | 1,581,558 | | Monitoring equipment, net of accumulated depreciation of $2,944,197 and $3,061,321, respectively | | | 1,316,493 | | | | 1,349,146 | | Goodwill | | | 2,468,081 | | | | 4,811,834 | | Intangible assets, net of amortization of $126,655 and $16,500, respectively | | | 496,346 | | | | 216,500 | | Other assets | | | 76,675 | | | | 46,626 | | Total assets | | $ | 8,593,589 | | | $ | 13,010,697 | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) AS OF SEPTEMBER 30, 2009 AND 2008
| | | | Liabilities and Stockholders’ Equity | | | | | | 2009 | | | 2008 | | Current liabilities: | | | | | | | Bank line of credit | | $ | 252,600 | | | $ | 3,462,285 | | Accounts payable | | | 2,339,786 | | | | 2,059,188 | | Accrued liabilities | | | 3,506,680 | | | | 1,781,267 | | Deferred revenue | | | 56,858 | | | | 21,343 | | Related-party note payable and line of credit | | | 1,576,022 | | | | 792,804 | | SecureAlert Series A Preferred stock redemption obligation | | | 3,148,943 | | | | 3,244,758 | | Derivative liability (Note 11) | | | 1,219,426 | | | | - | | Promissory notes payable, net of debt discount of $41,556 and $0, respectively | | | 2,008,444 | | | | - | | Senior secured note payable, net of debt discount of $529,109 and $0, respectively | | | 2,890,522 | | | | - | | Current portion of Series A 15% debentures, net of debt discount of $1,272,189 and $0, respectively | | | 2,127,811 | | | | - | | Current portion of long-term debt | | | 272,493 | | | | 465,664 | | Total current liabilities | | | 19,399,585 | | | | 11,827,309 | | Series A 15% debentures net of current portion, net of debt discount of $549,531 and $0, respectively | | | 557,219 | | | | - | | Long-term debt, net of current portion, net of debt discount of $525,665 and $0, respectively | | | 1,009,606 | | | | 1,147,382 | | Total liabilities | | | 20,966,410 | | | | 12,974,691 | | | | | | | | | | | Stockholders’ equity (deficit): | | | | | | | | | Preferred stock: | | | | | | | | | Series A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares designated; zero and 19 shares outstanding, respectively (aggregate liquidation preference of $0) | | | - | | | | 1 | | Series B convertible, $0.0001 par value: 2,000,000 shares designated; zero and 10,999 shares outstanding, respectively (aggregate liquidation preference of $0) | | | - | | | | 1 | | Common stock, $0.0001 par value: 250,000,000 shares authorized; 210,365,988 and 155,881,260 shares outstanding, respectively | | | 21,037 | | | | 15,588 | | Additional paid-in capital | | | 194,659,044 | | | | 186,203,084 | | Deferred compensation | | | (1,287,406 | ) | | | (3,498,672 | ) | Accumulated deficit | | | (205,765,496 | ) | | | (182,683,996 | ) | Total stockholders’ equity (deficit) | | | (12,372,821 | ) | | | 36,006 | | Total liabilities and stockholders’ equity | | $ | 8,593,589 | | | $ | 13,010,697 | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| | 2009 | | | 2008 | | 2009 | | | 2008 | | Revenues: | | | | | | | | | | | | Products | | $ | 570,749 | | | $ | 2,577,600 | | $ | 570,749 | | | $ | 2,577,600 | | Monitoring services | | | 12,055,159 | | | | 9,826,077 | | | 12,055,159 | | | | 9,826,077 | | Total revenues | | | 12,625,908 | | | | 12,403,677 | | | 12,625,908 | | | | 12,403,677 | | Cost of revenues: | | | | | | | | | | | | | | | | Products | | | 275,688 | | | | 1,675,212 | | | 275,688 | | | | 1,675,212 | | Monitoring services | | | 9,862,925 | | | | 10,862,830 | | | 9,862,925 | | | | 10,862,830 | | Impairment of monitoring equipment and parts (Note 3) | | | 2,319,530 | | | | 570,948 | | | 2,319,530 | | | | 570,948 | | Total cost of revenues | | | 12,458,143 | | | | 13,108,990 | | | 12,458,143 | | | | 13,108,990 | | Gross (negative) margin | | | 167,765 | | | | (705,313 | ) | | 167,765 | | | | (705,313 | ) | Operating expenses: | | | | | | | | | | | | | | | | Selling, general and administrative (including $3,315,716 and $26,324,358, respectively, of compensation expense paid in stock or stock options / warrants) | | | 16,540,645 | | | | 36,466,678 | | | 16,540,645 | | | | 36,466,678 | | Research and development (including $0 and $1,045,285, respectively, paid in stock or stock options / warrants) | | | 1,777,873 | | | | 4,811,128 | | | 1,777,873 | | | | 4,811,128 | | Impairment of goodwill (Note 4) | | | 2,804,580 | | | | - | | | 2,804,580 | | | | - | | Loss from operations | | | (20,955,333 | ) | | | (41,983,119 | ) | | (20,955,333 | ) | | | (41,983,119 | ) | Other income (expense): | | | | | | | | | | | | | | | | Gain on sale of intellectual property | | | - | | | | 2,400,000 | | | - | | | | 2,400,000 | | Redemption of SecureAlert Series A Preferred | | | 95,816 | | | | (8,372,566 | ) | | Redemption of SecureAlert Monitoring Series A Preferred | | | 95,816 | | | | (8,372,566 | ) | Interest income | | | 18,187 | | | | 35,230 | | | 18,187 | | | | 35,230 | | Interest expense (including $2,695,759 and $865,568, respectively, paid in stock or stock options / warrants) | | | (5,012,803 | ) | | | (1,566,542 | ) | | (5,012,803 | ) | | | (1,566,542 | ) | Derivative valuation gain (Note 11) | | | 1,867,007 | | | | - | | | 1,867,007 | | | | - | | Other income (expense), net | | | 905,626 | | | | 314,059 | | | 905,626 | | | | 314,059 | | Net loss from continuing operations | | | (23,081,500 | ) | | | (49,172,938 | ) | | (23,081,500 | ) | | | (49,172,938 | ) | Discontinued operations | | | - | | | | (414,112 | ) | | - | | | | (414,112 | ) | Net loss | | | (23,081,500 | ) | | | (49,587,050 | ) | | (23,081,500 | ) | | | (49,587,050 | ) | Dividends on Series A Preferred stock | | | (175 | ) | | | (345,356 | ) | | (175 | ) | | | (345,356 | ) | Net loss attributable to common stockholders | | $ | (23,081,675 | ) | | $ | (49,932,406 | ) | $ | (23,081,675 | ) | | $ | (49,932,406 | ) | Net loss per common share from continuing operations, basic and diluted | | $ | (0.13 | ) | | $ | (0.35 | ) | $ | (0.13 | ) | | $ | (0.35 | ) | Net loss per common share from discontinued operations, basic and diluted | | $ | (0.00 | ) | | $ | (0.01 | ) | $ | 0.00 | | | $ | (0.01 | ) | Net loss per common, basic and diluted | | $ | (0.13 | ) | | $ | (0.36 | ) | $ | (0.13 | ) | | $ | (0.36 | ) | Weighted average common shares outstanding, basic and diluted | | | 182,188,000 | | | | 140,092,000 | | | 182,188,000 | | | | 140,092,000 | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009 | | Preferred Stock | | | Preferred Stock | | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2007 | | | 19 | | | $ | 1 | | | | 12,999 | | | $ | 1 | | | | 19 | | | $ | 1 | | | | 12,999 | | | $ | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series B Preferred stock | | | - | | | | - | | | | (2,000 | ) | | | - | | | | - | | | | - | | | | (2,000 | ) | | | - | | Settlement of lawsuit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Related provisions of debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Services | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Cash | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Acquisition of subsidiaries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Exercise of options and warrants | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Related provisions of debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Services | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of financing costs | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of SecureAlert Series A Preferred stock | | | - | | | | - | | | | - | | | | - | | | Issuance of SecureAlert Monitoring Series A Preferred stock | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subscription receivable | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SecureAlert Series A Preferred stock redemption | | | - | | | | - | | | | - | | | | - | | | SecureAlert Monitoring Series A Preferred stock redemption | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009 | | | | | Additional | | | | | | | | | Additional | | | | | | | Common Stock | | | Paid-In | | | Deferred | | | Common Stock | | | Paid-In | | | Deferred | | | | Shares | | | Amount | | | Capital | | | Compensation | | | Shares | | | Amount | | | Capital | | | Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2007 | | | 127,340,085 | | | $ | 12,734 | | | $ | 142,238,576 | | | $ | (7,468,998 | ) | | | 127,340,085 | | | $ | 12,734 | | | $ | 142,238,576 | | | $ | (7,468,998 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series B Preferred stock | | | 15,000 | | | | 2 | | | | (2 | ) | | | - | | | | 15,000 | | | | 2 | | | | (2 | ) | | | - | | Settlement of lawsuit | | | 325,000 | | | | 33 | | | | 571,967 | | | | - | | | | 325,000 | | | | 33 | | | | 571,967 | | | | - | | Debt | | | 360,000 | | | | 36 | | | | 403,164 | | | | (403,200 | ) | | | 360,000 | | | | 36 | | | | 403,164 | | | | (403,200 | ) | Services | | | 9,135,000 | | | | 914 | | | | 15,843,671 | | | | (1,520,000 | ) | | | 9,135,000 | | | | 914 | | | | 15,843,671 | | | | (1,520,000 | ) | Cash | | | 6,177,219 | | | | 618 | | | | 5,187,296 | | | | - | | | | 6,177,219 | | | | 618 | | | | 5,187,296 | | | | - | | Acquisition of subsidiaries | | | 650,000 | | | | 65 | | | | 2,599,435 | | | | - | | | | 650,000 | | | | 65 | | | | 2,599,435 | | | | - | | Exercise of options and warrants | | | 3,618,814 | | | | 361 | | | | 2,509,520 | | | | - | | | | 3,618,814 | | | | 361 | | | | 2,509,520 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt | | | - | | | | - | | | | 1,872,000 | | | | - | | | | - | | | | - | | | | 1,872,000 | | | | - | | Services | | | - | | | | - | | | | 4,398,279 | | | | (134,812 | ) | | | - | | | | - | | | | 4,398,279 | | | | (134,812 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | - | | | | - | | | | 5,162,770 | | | | - | | | | - | | | | - | | | | 5,162,770 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of financing costs | | | - | | | | - | | | | - | | | | 865,568 | | | | - | | | | - | | | | - | | | | 865,568 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of SecureAlert Series A Preferred stock | | | 825,893 | | | | 82 | | | | 825,810 | | | | - | | | Issuance of SecureAlert Monitoring Series A Preferred stock | | | | 825,893 | | | | 82 | | | | 825,810 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | (345,356 | ) | | | - | | | | - | | | | - | | | | (345,356 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subscription receivable | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SecureAlert Series A Preferred stock redemption | | | 7,434,249 | | | | 743 | | | | 8,548,643 | | | | - | | | SecureAlert Monitoring Series A Preferred stock redemption | | | | 7,434,249 | | | | 743 | | | | 8,548,643 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | 1,550,081 | | | | - | | | | - | | | | - | | | | 1,550,081 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | | 155,881,260 | | | $ | 15,588 | | | $ | 186,203,084 | | | $ | (3,498,672 | ) | | | 155,881,260 | | | $ | 15,588 | | | $ | 186,203,084 | | | $ | (3,498,672 | ) |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009 | | Subscription Receivable | | | Accumulated Deficit | | | Total | | | Subscription Receivable | | | Accumulated Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2007 | | $ | (407,500 | ) | | $ | (133,096,946 | ) | | $ | 1,277,868 | | | $ | (407,500 | ) | | $ | (133,096,946 | ) | | $ | 1,277,868 | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series B Preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Settlement of lawsuit | | | - | | | | - | | | | 572,000 | | | | - | | | | - | | | | 572,000 | | Debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Services | | | - | | | | - | | | | 14,324,585 | | | | - | | | | - | | | | 14,324,585 | | Cash | | | - | | | | - | | | | 5,187,914 | | | | - | | | | - | | | | 5,187,914 | | Acquisition of subsidiaries | | | - | | | | - | | | | 2,599,500 | | | | - | | | | - | | | | 2,599,500 | | Exercise of options and warrants | | | - | | | | - | | | | 2,509,881 | | | | - | | | | - | | | | 2,509,881 | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | | | | | | | | Debt | | | - | | | | - | | | | 1,872,000 | | | | - | | | | - | | | | 1,872,000 | | Services | | | - | | | | - | | | | 4,263,467 | | | | - | | | | - | | | | 4,263,467 | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | - | | | | 5,162,770 | | | | - | | | | - | | | | 5,162,770 | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of financing costs | | | - | | | | - | | | | 865,568 | | | | - | | | | - | | | | 865,568 | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of SecureAlert Series A Preferred stock | | | - | | | | - | | | | 825,892 | | | Issuance of SecureAlert Monitoring Series A Preferred stock | | | | - | | | | - | | | | 825,892 | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | (345,356 | ) | | | - | | | | - | | | | (345,356 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Subscription receivable | | | 407,500 | | | | - | | | | 407,500 | | | | 407,500 | | | | - | | | | 407,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | SecureAlert Series A Preferred stock redemption | | | - | | | | - | | | | 8,549,386 | | | SecureAlert Monitoring Series A Preferred stock redemption | | | | - | | | | - | | | | 8,549,386 | | | | | | | | | | | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | 1,550,081 | | | | - | | | | - | | | | 1,550,081 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | (49,587,050 | ) | | | (49,587,050 | ) | | | - | | | | (49,587,050 | ) | | | (49,587,050 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | $ | - | | | $ | (182,683,996 | ) | | $ | 36,006 | | | $ | - | | | $ | (182,683,996 | ) | | $ | 36,006 | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
| | Preferred Stock | | | Preferred Stock | | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2008 | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series A Preferred stock | | | (19 | ) | | | (1 | ) | | | - | | | | - | | | | (19 | ) | | | (1 | ) | | | - | | | | - | | Conversion of Series B Preferred stock | | | - | | | | - | | | | (10,999 | ) | | | (1 | ) | | | - | | | | - | | | | (10,999 | ) | | | (1 | ) | Settlement of lawsuit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | 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 on notes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Forgiveness of debt from related party | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of RemoteMDx Series A Preferred stock for accrued dividends | | | - | | | | - | | | | - | | | | - | | | Issuance of SecureAlert Series A Preferred stock for accrued dividends | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2009 | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
| | | | | | | | Additional | | | | | | | | Common Stock | | | Paid-In | | | Deferred | | | Common Stock | | | Additional Paid-In | | | Deferred | | | | Shares | | | Amount | | | Capital | | | Compensation | | | Shares | | | Amount | | | Capital | | | Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2008 | | | 155,881,260 | | | $ | 15,588 | | | $ | 186,203,084 | | | $ | (3,498,672 | ) | | | 155,881,260 | | | $ | 15,588 | | | $ | 186,203,084 | | | $ | (3,498,672 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series A Preferred stock | | | 9,306 | | | | 1 | | | | - | | | | - | | | | 9,306 | | | | 1 | | | | - | | | | - | | Conversion of Series B Preferred stock | | | 10,999 | | | | 1 | | | | - | | | | - | | | | 10,999 | | | | 1 | | | | - | | | | - | | Settlement of lawsuits | | | 5,400,000 | | | | 540 | | | | 1,029,460 | | | | - | | | | 5,400,000 | | | | 540 | | | | 1,029,460 | | | | - | | Related issuances of debt | | | 25,953,016 | | | | 2,595 | | | | 1,767,955 | | | | (138,000 | ) | | | 25,953,016 | | | | 2,595 | | | | 1,767,955 | | | | (138,000 | ) | Services | | | 2,254,121 | | | | 226 | | | | 928,648 | | | | (200,000 | ) | | | 2,254,121 | | | | 226 | | | | 928,648 | | | | (200,000 | ) | Cash | | | 17,850,000 | | | | 1,785 | | | | 3,248,215 | | | | - | | | | 17,850,000 | | | | 1,785 | | | | 3,248,215 | | | | - | | Acquisition of subsidiaries | | | 2,857,286 | | | | 286 | | | | 656,890 | | | | - | | | | 2,857,286 | | | | 286 | | | | 656,890 | | | | - | | Acquisition extension | | | 150,000 | | | | 15 | | | | 19,485 | | | | - | | | | 150,000 | | | | 15 | | | | 19,485 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Related issuances of debt | | | - | | | | - | | | | 96,844 | | | | - | | | | - | | | | - | | | | 96,844 | | | | - | | Services | | | - | | | | - | | | | 392,506 | | | | (46,667 | ) | | | - | | | | - | | | | 392,506 | | | | (46,667 | ) | 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 on notes | | | - | | | | - | | | | 122,727 | | | | - | | | | - | | | | - | | | | 122,727 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Forgiveness of debt from related party | | | - | | | | - | | | | 79,022 | | | | - | | | | - | | | | - | | | | 79,022 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of RemoteMDx Series A Preferred stock for accrued dividends | | | - | | | | - | | | | (175 | ) | | | - | | | Issuance of SecureAlert Series A Preferred stock for accrued dividends | | | | - | | | | - | | | | (175 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2009 | | | 210,365,988 | | | $ | 21,037 | | | $ | 194,659,044 | | | $ | (1,287,406 | ) | | | 210,365,988 | | | $ | 21,037 | | | $ | 194,659,044 | | | $ | (1,287,406 | ) |
SeeThe accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009 | | Accumulated Deficit | | | Total | | | | | | | | | Balance as of October 1, 2008 | | $ | (182,683,996 | ) | | $ | 36,006 | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | Conversion of Series A Preferred stock | | | - | | | | - | | Conversion of Series B Preferred stock | | | - | | | | - | | Settlement of lawsuits | | | - | | | | 1,030,000 | | Related issuances of debt | | | - | | | | 1,632,550 | | Services | | | - | | | | 728,874 | | Cash | | | - | | | | 3,250,000 | | Acquisition of subsidiaries | | | - | | | | 657,176 | | Acquisition of extension | | | - | | | | 19,500 | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | Related issuances of debt | | | - | | | | 96,844 | | Services | | | - | | | | 345,839 | | Acquisition of subsidiary | | | - | | | | 114,383 | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | 1,930,678 | | | | | | | | | | | Amortization of financing costs | | | - | | | | 665,255 | | | | | | | | | | | Beneficial conversion feature recorded as interest expense on notes | | | - | | | | 122,727 | | | | | | | | | | | Forgiveness of debt from related party | | | - | | | | 79,022 | | | | | | | | | | | Issuance of RemoteMDx Series A Preferred stock for accrued dividends | | | - | | | | (175 | ) | | | | | | | | | | Net loss | | | (23,081,500 | ) | | | (23,081,500 | ) | | | | | | | | | | Balance as of September 30, 2009 | | $ | (205,765,496 | ) | | $ | (12,372,821 | ) |
| | Accumulated Deficit | | | Total | | | | | | | | | Balance as of October 1, 2008 | | $ | (182,683,996 | ) | | $ | 36,006 | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | Conversion of Series A Preferred stock | | | - | | | | - | | Conversion of Series B Preferred stock | | | - | | | | - | | Settlement of lawsuits | | | - | | | | 1,030,000 | | Related issuances of debt | | | - | | | | 1,632,550 | | Services | | | - | | | | 728,874 | | Cash | | | - | | | | 3,250,000 | | Acquisition of subsidiaries | | | - | | | | 657,176 | | Acquisition of extension | | | - | | | | 19,500 | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | Related issuances of debt | | | - | | | | 96,844 | | Services | | | - | | | | 345,839 | | Acquisition of subsidiary | | | - | | | | 114,383 | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | 1,930,678 | | | | | | | | | | | Amortization of financing costs | | | - | | | | 665,255 | | | | | | | | | | | Beneficial conversion feature recorded as interest expense on notes | | | - | | | | 122,727 | | | | | | | | | | | Forgiveness of debt from related party | | | - | | | | 79,022 | | | | | | | | | | | Issuance of SecureAlert Series A Preferred stock for accrued dividends | | | - | | | | (175 | ) | | | | | | | | | | Net loss | | | (23,081,500 | ) | | | (23,081,500 | ) | | | | | | | | | | Balance as of September 30, 2009 | | $ | (205,765,496 | ) | | $ | (12,372,821 | ) |
SeeThe accompanying notes to consolidated financialare an integral part of these statements. SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| | | | | | | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | Cash flows from operating activities: | | | | | | | | | | | | | Net loss | | $ | (23,081,500 | ) | | $ | (49,587,050 | ) | | $ | (23,081,500 | ) | | $ | (49,587,050 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 2,087,949 | | | | 1,736,492 | | | | 2,087,949 | | | | 1,736,492 | | Common stock issued for services | | | 728,876 | | | | 13,620,584 | | | | 728,876 | | | | 13,620,584 | | Common stock issued to settle lawsuit | | | 261,521 | | | | 1,276,000 | | | | 261,521 | | | | 1,276,000 | | Amortization of debt discount | | | 2,030,504 | | | | - | | | | 2,030,504 | | | | - | | Amortization of deferred financing and consulting costs | | | 2,595,933 | | | | 5,968,338 | | | | 2,595,933 | | | | 5,968,338 | | Derivative liability valuation | | | (1,867,007 | ) | | | - | | | | (1,867,007 | ) | | | - | | Registration payment arrangement expense | | | - | | | | 130,000 | | | | - | | | | 130,000 | | Stock options and warrants issued during the period for services | | | 345,838 | | | | 4,263,467 | | | | 345,838 | | | | 4,263,467 | | Redemption of SecureAlert Series A Preferred stock | | | (95,816 | ) | | | 8,205,922 | | | Redemption of SecureAlert Monitoring Series A Preferred stock | | | | (95,816 | ) | | | 8,205,922 | | Impairment of goodwill | | | 2,804,580 | | | | - | | | | 2,804,580 | | | | - | | Common stock issued for acquisition option extension cost | | | 19,500 | | | | - | | | | 19,500 | | | | - | | Increase in related-party line of credit for services | | | 272,281 | | | | 618,433 | | | | 272,281 | | | | 618,433 | | Impairment of monitoring equipment and parts | | | 2,319,530 | | | | 570,948 | | | | 2,319,530 | | | | 570,948 | | Loss from discontinued operations | | | - | | | | 414,112 | | | | - | | | | 414,112 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable, net | | | (23,490 | ) | | | 3,293,050 | | | | (23,490 | ) | | | 3,293,050 | | Interest receivable (payable) | | | - | | | | (9,068 | ) | | | - | | | | (9,068 | ) | Deposit held in escrow | | | 500,000 | | | | (500,000 | ) | | | 500,000 | | | | (500,000 | ) | Prepaid expenses and other assets | | | (25,212 | ) | | | 720,591 | | | | (25,212 | ) | | | 720,591 | | Accounts payable | | | 745,630 | | | | (1,373,491 | ) | | | 745,630 | | | | (1,373,491 | ) | Accrued liabilities | | | 1,824,042 | | | | 999,310 | | | | 1,824,042 | | | | 999,310 | | Deferred revenue | | | 35,515 | | | | (20,382 | ) | | | 35,515 | | | | (20,382 | ) | Net cash used in operating activities | | | (8,521,326 | ) | | | (9,672,744 | ) | | | (8,521,326 | ) | | | (9,672,744 | ) | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (380,647 | ) | | | (334,226 | ) | | | (380,647 | ) | | | (334,226 | ) | Purchase of monitoring equipment and parts | | | (1,312,397 | ) | | | (192,221 | ) | | | (1,312,397 | ) | | | (192,221 | ) | Proceeds from sale of equipment | | | 16,577 | | | | - | | | | 16,577 | | | | - | | Net cash used in investing activities | | | (1,676,467 | ) | | | (526,447 | ) | | | (1,676,467 | ) | | | (526,447 | ) | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Payments on related-party line of credit | | | (739,063 | ) | | | (315,392 | ) | | | (739,063 | ) | | | (315,392 | ) | Net principal proceeds (reductions) in bank line of credit borrowings | | | 388,593 | | | | (396,700 | ) | | | 388,593 | | | | (396,700 | ) | Payments on notes payable | | | (1,115,237 | ) | | | (336,133 | ) | | | (1,115,237 | ) | | | (336,133 | ) | Borrowings on related-party notes payable | | | 680,229 | | | | 975,578 | | | | 680,229 | | | | 975,578 | | Principal payments on notes payable related to acquisitions | | | - | | | | (2,176,821 | ) | | | - | | | | (2,176,821 | ) | Cash acquired through acquisitions | | | - | | | | 163,002 | | | | - | | | | 163,002 | | Proceeds from the issuance of Series A 15% debentures | | | 4,496,750 | | | | - | | | | 4,496,750 | | | | - | | Proceeds from sale of common stock | | | 3,250,000 | | | | 5,058,014 | | | | 3,250,000 | | | | 5,058,014 | | Proceeds from sale of warrants and subsidiary stock | | | - | | | | 2,400,000 | | | | - | | | | 2,400,000 | | Proceeds from issuance of notes payable | | | 1,055,889 | | | | 34,344 | | | | 1,055,889 | | | | 34,344 | | Proceeds from exercise of options and warrants | | | - | | | | 2,772,381 | | | | - | | | | 2,772,381 | | Net cash provided by financing activities | | | 8,017,161 | | | | 8,178,273 | | | | 8,017,161 | | | | 8,178,273 | | Net decrease in cash | | | (2,180,632 | ) | | | (2,020,918 | ) | | | (2,180,632 | ) | | | (2,020,918 | ) | Cash, beginning of year | | | 2,782,953 | | | | 4,803,871 | | | | 2,782,953 | | | | 4,803,871 | | Cash, end of year | | $ | 602,321 | | | $ | 2,782,953 | | | $ | 602,321 | | | $ | 2,782,953 | |
See
The accompanying notes to consolidated financialare an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| | | 2009 | | | | 2008 | | | | 2009 | | | 2008 | | | | | | | | | | | | | | | | | | Cash paid for interest | | | $ 1,963,200 | | | $ | 700,974 | | | $ | 1,963,200 | | $ | 700,974 | | | | | | | | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of 9,306 and zero common shares, respectively, in exchange for 19 and zero shares of Series A Preferred stock, respectively | | | $ 1 | | | $ | - | | | $ | 1 | | $ | - | | | | | | | | | | | | | | | | | | Issuance of 10,999 and 2,000 common shares, respectively, in exchange for 10,999 and 15,000 shares of Series B Preferred stock, respectively | | | 1 | | | | 2 | | | | 1 | | | 2 | | | | | | | | | | | | | | | | | | Issuance of 2,000,000 and 360,000 common shares, respectively for deferred consulting services and financing services | | | 384,667 | | | | 403,200 | | | | 384,667 | | | 403,200 | | | | | | | | | | | | | | | | | | Preferred Series A and C stock dividends | | | 175 | | | | 423 | | | | 175 | | | 423 | | | | | | | | | | | | | | | | | | SecureAlert Series A Preferred stock dividends accrued | | | - | | | | 480,537 | | | SecureAlert Monitoring Series A Preferred stock dividends accrued | | | | - | | | 480,537 | | | | | | | | | | | | | | | | | | Forgiveness of debt from related-party debt | | | 79,022 | | | | - | | | | 79,022 | | | - | | | | | | | | | | | | | | | | | | Shares issued prepaid services | | | - | | | | 1,520,000 | | | | - | | | 1,520,000 | | | | | | | | | | | | | | | | | | Fair value of assets acquired in purchase of Court Programs through the issuance of common stock | | | - | | | | 1,316,338 | | | | - | | | 1,316,338 | | | | | | | | | | | | | | | | | | Fair value of liabilities assumed in purchase of Court Programs through the issuance of common stock | | | - | | | | 468,837 | | | | - | | | 468,837 | | | | | | | | | | | | | | | | | | Issuance of common stock in acquisition of Court Programs, Inc | | | - | | | | 847,500 | | | | - | | | 847,500 | | | | | | | | | | | | | | | | | | Settlement of SecureAlert Series A Preferred stock | | | - | | | | 3,590,000 | | | | - | | | 3,590,000 | | | | | | | | | | | | | | | | | | Deconsolidation of ActiveCare | | | - | | | | 607,869 | | | | - | | | 607,869 | | | | | | | | | | | | | | | | | | Fair value of assets acquired in purchase of Midwest Monitoring through the issuance of common stock | | | - | | | | 2,974,666 | | | | - | | | 2,974,666 | | | | | | | | | | | | | | | | | | Fair value of liabilities assumed in purchase of Midwest Monitoring through the issuance of common stock | | | - | | | | 1,222,666 | | | | - | | | 1,222,666 | | | | | | | | | | | | | | | | | | Issuance of common stock in acquisition of Midwest Monitoring | | | - | | | | 1,752,000 | | | | - | | | 1,752,000 | | | | | | | | | | | | | | | | | | Issuance of common stock and stock options to acquire the assets and liabilities of Bishop Rock Software | | | 856,522 | | | | - | | | | 856,522 | | | - | | | | | | | | | | | | | | | | | | Stock issued in connection with debt (as discount) | | | 1,739,393 | | | | - | | | | 1,739,393 | | | - | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded | | | 122,727 | | | | - | | | | 122,727 | | | - | | | | | | | | | | | | | | | | | | Debt issued to settle line of credit | | | 3,549,631 | | | | - | | | | 3,549,631 | | | - | | | | | | | | | | | | Common stock cancelled | | | 175 | | | | - | | | | | | | | | | | | | Acquisition of monitoring equipment through issuance of note payable | | | 2,887,987 | | | | - | | | | | | | | | | | | | Stock issued to settle related-party note payable and accrued interest | | | 218,479 | | | | - | | | | | | | | | | | | | Issuance of common stock to settle accounts payables | | | 550,000 | | | | - | | | | | | | | | | | | | Acquisition of property and equipment through issuance of note payable | | | 38,991 | | | | - | | | | | | | | | | | | | Reclassification of monitoring equipment to inventory from recovery of parts | | | 1,450,803 | | | | - | | |
See
The accompanying notes to consolidated financialare an integral part of these statements.
Common stock cancelled | | 175 | | | 1 | | | | | | | | | Acquisition of monitoring equipment through issuance of note payable | | 2,887,987 | | | - | | | | | | | | | Stock issued to settle related-party note payable and accrued interest | | 218,479 | | | - | | | | | | | | | Issuance of common stock to settle accounts payables | | 550,000 | | | - | | | | | | | | | Acquisition of property and equipment through issuance of note payable | | 38,991 | | | - | | | | | | | | | Reclassification of monitoring equipment to inventory from recovery of parts | | 1,450,803 | | | - | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Organization and Nature of Operations |
General SecureAlert, Inc., formerly known as RemoteMDx, Inc., and subsidiaries (collectively, the “Company”) markets, monitors and leases TrackerPAL™ devices. The TrackerPAL™ is used to monitor convicted offenders that are on probation or parole in the criminal justice system. The TrackerPAL™ device utilizes GPS and cellular technologies in conjunction with a monitoring center that is staffed 365 days a year. The Company believes that its technologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. The TrackerPAL™ is targeted to meet the needs of this market domestically as well as internationally. Going Concern The Company has incurred recurring net losses and negative cash flows from operating activities for the fiscal years ended September 30, 2009 and 2008. In addition, the Company has accumulated deficits of $205,765,496 and $182,683,996 as of September 30, 2009 and 2008, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In order for the Company to continue as a going concern, it must generate positive cash flows from operating activities and obtain 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 stock and expanding its market for its TrackerPAL™ 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 operations.
To lessen the Company’s cash burden and to raise additional capital, subsequent to September 30, 2009, the Company entered into agreements to issue 15,986 shares of Series D Convertible Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock. (2) | Discontinued Operations |
During the fiscal year ended September 30, 2008, the Company divested its majority ownership interest of the diagnostic stain business conducted by a former subsidiary ActiveCare, Inc., formerly known as Volu-Sol Reagents Corporation (“ActiveCare”). The Company completed the divestiture by distributing its remaining interest (approximately 17% of the common stock) in ActiveCare during the fiscal year ended September 30, 2009. This transaction was treated as a pro-rata nonreciprocal transfer to owners as required by the nonmonetary transactions topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC). This resulted in $1,550,081 recorded as additional paid in capital to the Company.
The Company’s consolidated financial statements have been reclassified to segregate operating results of the discontinued operations for all periods presented. Prior to reclassification, the discontinued operations were reported in the stain operating segment. The summary of net sales and operating results from discontinued operations for the fiscal years ended September 30, 2009 and 2008, respectively, are as follows:
| | 2009 | | | 2008 | | Net sales | | $ | - | | | $ | 608,024 | | Loss from discontinued operations | | $ | - | | | $ | (414,112 | ) |
(3) | Summary of Significant Accounting Policies |
Principles of Consolidation The accompanying consolidated financial statements include the accounts of SecureAlert, Inc., formerly known as RemoteMDx, Inc. and its subsidiaries, SecureAlert Monitoring Inc., formerly known as SecureAlert, Inc., Midwest Monitoring & Surveillance, Inc., Bishop Rock Software, Inc., Court Programs, Inc., Court Programs of Florida, Inc., and Court Programs of Northern Florida, Inc. (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation. As discussed in Note 2, the Company completely divested its ownership of ActiveCare during the year ended September 30, 2009.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Statements The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, accrued liabilities, and other debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company’s debt obligations approximate fair value as the interest rates approximate market interest rates.
Concentration of Credit Risk
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.
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.
Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts receivable.
No customer represented more than 10% of the Company’s total revenues for the fiscal year ended September 30, 2009. One non-repeat customer represented 16% of the Company’s total revenues for the fiscal year ended September 30, 2008.
No customer represented more than 10% of the Company’s total accounts receivable for the fiscal year ended September 30, 2009. One customer accounted for $360,257 (25%) of the Company’s total accounts receivable for the fiscal year ended September 30, 2008.
Cash Equivalents
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company had $15,670 and $0 of cash deposits in excess of federally insured limits as of September 30, 2009 and 2008, respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves are 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. InterestIntere st income is not recorded on trade receivables that are p astpast due, unless that interest is collected.
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.
Inventory consists of products that are available for sale and raw materials used in the manufacturing of TrackerPAL™ devices. Completed TrackerPAL™ devices are reflected in Monitoring Equipment. As of September 30, 2009 and 2008, respectively, inventory consisted of the following:
| | 2009 | | | 2008 | | Raw materials | | $ | 686,421 | | | $ | - | | Reserve for damaged or obsolete inventory | | | (83,092 | ) | | | - | | Total inventory, net of reserves | | $ | 603,329 | | | $ | - | |
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 lives of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized. When property and equipment are disposed of, any gains or losses are included in the results of operations.
Property and equipment consisted of the following as of September 30, 2009 and 2008, respectively:
| | 2009 | | | 2008 | | Equipment, software, tooling, and other fixed assets | | $ | 2,742,537 | | | $ | 2,472,076 | | Automobiles | | | 305,658 | | | | 287,736 | | Building and land | | | 377,555 | | | | 377,555 | | Leasehold improvements | | | 127,912 | | | | 102,190 | | Furniture and fixtures | | | 284,824 | | | | 279,711 | | Total property and equipment | | | 3,838,486 | | | | 3,519,268 | | Accumulated depreciation | | | (2,525,180 | ) | | | (1,937,710 | ) | Property and equipment, net of accumulated depreciation | | $ | 1,313,306 | | | $ | 1,581,558 | |
Depreciation expense for the fiscal years ended September 30, 2009 and 2008 was $677,016 and $638,138, respectively.
Monitoring Equipment
Monitoring equipment as of September 30, 2009 and 2008 is as follows:
| | 2009 | | | 2008 | | Monitoring equipment | | $ | 4,260,690 | | | $ | 4,410,467 | | Less accumulated depreciation | | | (2,944,197 | ) | | | (3,061,321 | ) | Monitoring Equipment, net | | $ | 1,316,493 | | | $ | 1,349,146 | |
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.
Amortization expense for the fiscal years ended September 30, 2009 and 2008 was $1,300,783 and $1,082,648, respectively. These expenses were classified as a cost of revenues.
Assets 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, 2009 and 2008, the Company disposed of lease monitoring equipment and parts of $2,319,530 and $570,948, respectively.
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 vs. fair market value 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 fair market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair market value that is independent of other groups of assets. As of September 30, 2009, the Company impaired goodwill from Midwest Monitoring & Surveillance, Inc. by $2,343,753 and from Bishop Rock Software by $460,827, Inc. for a total impairment expense of $2,804,580.
Revenue Recognition
The Company’s revenue has historically been from two sources: (i) monitoring services; (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 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.
Monitoring Device Product Sales Although not the focus of the Company’s business model, the Company sells its monitoring devices in certain situations. In addition, the Company sells home security and Personal Emergency Response Systems (“PERS”) units. 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, 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 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.
Multiple Element Arrangements The majority of the Company’s revenue transactions do not have multiple elements. On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services). For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have standalone value to the customer; (ii) there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services; and (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 cus tomer.customer. In accordance with FASB ASC subtopic addressing multiple deliverables, if the fair value of the undelivered element exists, but the fair value does not exist for one 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 criteria are met.
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 are 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 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.
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 2009 and 2008 were for the development of SecureAlert’s TrackerPAL™ device and associated services. For the fiscal years ended September 30, 2009 and 2008, research and development expenses were $1,777,873 and $4,811,128, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2009, and 2008, was $76,793 and $209,389, respectively.
Stock-Based Compensation
For the fiscal years ended September 30, 2009 and 2008, the Company calculated compensation expense of $67,406 and $214,251, respectively related to the vesting of stock options granted in prior years.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company granted 1,517,714 and 1,725,000 stock options to employees during the fiscal years ended September 30, 2009 and 2008 valued $274,650 and $359,946, respectively. In addition, 390,000 stock options issued to employees in prior years vested during the fiscal year ended September 30, 2008. The weighted average fair value of stock options at the date of grant during the fiscal year ended September 30, 2009 and 2008 was $0.18 and $1.34, respectively. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatilityvo latility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.
The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2009 and 2008, respectively:
| | Fiscal years Ended September 30, | | | | 2009 | | | 2008 | | | | | | | | | Expected cash dividend yield | | | - | | | | - | | Expected stock price volatility | | | 121 | % | | | 136 | % | Risk-free interest rate | | | 1.16 | % | | | 3.12 | % | Expected life of options | | 3.7 years | | | 5 years | |
A summary of stock option activity for the fiscal years ended September 30, 2008 and 2009 is presented below:
| | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Outstanding as of September 30, 2007 | | | 3,295,000 | | | $ | 0.64 | | | | | | Granted | | | 1,725,000 | | | $ | 1.54 | | | | | | Exercised | | | (1,375,000 | ) | | $ | 0.63 | | | | | | Forfeited | | | (45,000 | ) | | $ | 0.86 | | | | | | Expired | | | - | | | | - | | | | | | Outstanding as of September 30, 2008 | | | 3,600,000 | | | $ | 1.08 | | 3.34 years | | $ | 1,062,000 | | Exercisable as of September 30, 2008 | | | 421,667 | | | $ | 1.35 | | 3.30 years | | $ | 37,000 | |
| | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Outstanding as of September 30, 2008 | | | 3,600,000 | | | $ | 1.08 | | | | | | Granted | | | 1,517,714 | | | $ | 0.21 | | | | | | Exercised | | | - | | | $ | - | | | | | | Forfeited | | | - | | | $ | - | | | | | | Expired | | | (408,500 | ) | | $ | 1.45 | | | | | | Outstanding as of September 30, 2009 | | | 4,709,214 | | | $ | 0.76 | | 2.05 years | | $ | 12,854 | | Exercisable as of September 30, 2009 | | | 1,719,880 | | | $ | 0.32 | | 2.97 years | | $ | 12,854 | |
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.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, and shares issuable upon conversion of preferred stock. As of September 30, 2009 and 2008, there were 75,789,348 and 21,846,412 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.
Recent Accounting Pronouncements
Effective for December 2008, new accounting guidance was added relating to business combinations. The objective of this Topic is to enhance the information that an entity provides in our financial reports about a business combination and its effects. The Topic mandates: (i) how the acquirer recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree; (ii) what information to disclose in our financial reports and; (iii) recognition and measurement criteria for goodwill acquired. This Topic is effective for any acquisitions made on or after December 15, 2008. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.
In May 2009, the FASB issued guidance which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Topic sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in our financial statements, (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Topic should be applied to the accounting and disc losuredisclosure of subsequent events. This Topic does not apply to subsequent events or transactions that are within the scope of other applicable accounting standards that provide different guidance on the accounting treatment for subsequent events or transactions. This Topic was effective for interim and annual periods ending after June 15, 2009, which was September 30, 2009 for us. The adoption of this Topic did not have a material impact on our financial statements and disclosures.
In June 2009, the FASB issued guidance which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Topic, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This Topic identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP and arranged these sources of GAAP in a hierarchy for us ersusers to apply accordingly.accordi ngly. This Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Topic did not have a material impact on our disclosure of the financial statements.
In June 2009, the FASB issued additional guidance which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in our financial statements about a transfer of financial assets; the effects of a transfer on our financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This additional guidance must be applied to transfers occurring on or after the effective date. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.
In September 2009, the FASB added implementation guidance on accounting for uncertainty in income taxes. For entities that are currently applying the standards for accounting for uncertainty in income taxes, the guidance and disclosure amendments are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Update did not have a material impact on our financial statements and disclosures.
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) 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) 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 beginningbegi nning of the year of adoption. We are currently assessing the future impact of this new accounting update to our financial statements.
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 are currentl ycurrently assessing the futurefutu re impact of this new accounting update to our financial statements.
In April 2008, the FASB issued an amendment for determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under authoritative accounting guidance for goodwill and other intangible assets. This guidance is intended to improve the consistency between the useful life of an intangible asset determined under the guidance for goodwill and other intangible assets and the period of expected cash flows used to measure the fair value of the asset under ASC 805 “Business Combinations” and other principles under GAAP. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods withinwit hin those fiscal years. Early adoption is prohibited. This guidance will be effective for us in fiscal year 2010. The adoption of this guidance is not expected to significantly impact our results of operations and financial position.
In September 2006, the FASB issued enhanced guidance for using fair value to measure assets and liabilities. This guidance also provides for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. ASC 820 applies whenever other guidance requires or permit assets or liabilities to be measured at fair value. ASC 820 does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and delays the effective date of ASC 820 by one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial stat ementsstatements on a nonrecurringnonrecur ring basis. In October 2008, the FASB issued additional guidance for determining the fair value of a financial asset when the market for that asset is not active to clarify the application of the provisions of the guidance for fair value measurements in an inactive market and how an entity would determine fair value in an inactive market. This additional guidance is effective immediately. We adopted ASC 820 for financial assets and financial liabilities at the beginning of fiscal year 2009. The adoption of this guidance for financial assets and financial liabilities did not impact our results of operations and financial position. The guidance is effective for nonfinancial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008, which is our fiscal year 2010. The adoption of this guidance for nonfinancial assets and nonfinancial liabilities is not expected to significantly impact our results of operations and financial position.
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 September 2009, the FASB issued guidance updates and provided amendments to its Fair Value Measurements and Disclosure requirements which permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments, such as the nature of any restriction on the ability to redeem an investment on the measurement date. This guidance is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The adoption of this guidance is not expected to signifi cantlysignificantly impact our resultsre sults 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 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. This guidance is effective for arrangements entered into on (not outstanding) or after the beginning of the first reporting period that begins on or after June 15, 2009. Certain transition disclosures are also required. Early application is not permitted. The adoption of this guidance is not expected to significantly impact our results of operations a ndand financial position.
(4) | Goodwill and Other Intangible Assets |
As of September 30, 2009, the Company had recorded goodwill and intangible assets related to the acquisition of controlling interest of Midwest, Court Programs, and Bishop Rock Software as follows:
| | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Total | | | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Total | | Goodwill | | $ | 1,259,995 | | | $ | 1,208,086 | | | $ | - | | | $ | 2,468,081 | | | $ | 1,259,995 | | | $ | 1,208,086 | | | $ | - | | | $ | 2,468,081 | | Other Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | 229,000 | | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | 380,001 | | | | - | | | | - | | | | 380,001 | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | 6,000 | | | | - | | | | 6,000 | | | | - | | | | 6,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | 8,000 | | | | 2,000 | | | | 6,000 | | | | - | | | | 8,000 | | Total Other Intangible Assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 623,001 | | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 623,001 | | Accumulated other intangible asset amortization | | | (16,500 | ) | | | 19,800 | ) | | | (90,355 | ) | | | (126,655 | ) | | | (16,500 | ) | | | (19,800 | ) | | | (90,355 | ) | | | (126,655 | ) | Total goodwill and other intangible assets, net of amortization | | $ | 1,365,495 | | | $ | 1,299,286 | | | $ | 299,646 | | | $ | 2,964,427 | | | $ | 1,365,495 | | | $ | 1,299,286 | | | $ | 299,646 | | | $ | 2,964,427 | |
Midwest Monitoring & Surveillance Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, of 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.
The total consideration of $4,400,427 less the tangible assets acquired of $674,679 resulted in an excess over net book value of $3,725,748. The Company recorded impairment of $2,343,753 for the fiscal year ended September 30, 2009, resulting in a net goodwill of $1,259,995, as noted in the table above.
The Company recorded $9,000 of amortization expense for Midwest intangible assets during the fiscal year ended September 30, 2009 resulting in a total accumulated amortization of $16,500 and net intangible assets of $105,500.
During March 2009, the parties extended the option period for the purchase of the remaining 49% ownership of Midwest to April 15, 2010. The Company agreed to give the following consideration to Midwest minority owners to extend this option:
| 1) | 150,000 shares of RemoteMDx common stock valued at $0.13 per share for a total of $19,500. |
| 2) | $75,000 in cash upon execution of the agreement. |
| 3) | $105,000 in cash paid in ten equal payments of $10,500 beginning April 15, 2009 through January 15, 2010. |
The expense totaling $199,500 was reported as an acquisition option extension cost under other income (expense) for the fiscal year ended September 30, 2009.
Court Programs Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, of 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 total consideration for the purchase of Court Programs was $1,527,743 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 liabilitiesliabilitie s assumed of $334,919. The total consideration of $1,527,743 less the tangible assets acquired of $208,658 resulted in an excess over net book value of $1,319,086. The excess over net book value was allocated as noted in the table above.
The Company recorded $10,800 of amortization expense on intangible assets for Court Programs during the fiscal year ended September 30, 2009 resulting in a total accumulated amortization of $19,800 and net intangible assets of $91,200.
Effective April, 1, 2009, the Company and Court Programs agreed to release Court Programs from an obligation to repay expenses paid on its behalf by the Company in the amount of $147,566 as consideration to extend the option period for the purchase of the remaining 49% ownership of Court Programs to April 15, 2010. The expense of $147,566 was reported as an acquisition option extension cost under other income (expense) for the fiscal year ended September 30, 2009.
Bishop Rock Software Effective January 14, 2009, the Company purchased a 100% ownership interest, including a voting interest, of 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 valued at $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, resulting i nin no more remaining goodwill.
The Company recorded $90,355 of amortization expense on intangible assets for Bishop Rock Software during the fiscal year ended September 30, 2009 resulting in a total accumulated amortization of $90,355 and net intangible assets of $299,646.
Supplemental Pro Forma Results of Operations The following tables present the pro forma results of operations for the fiscal years ended September 30, 2009 and 2008, as though the Midwest, Court Programs, and Bishop Rock Software acquisitions had been completed as of the beginning of each period presented: | | Fiscal years Ended September 30, | | | Fiscal years Ended September 30, | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | Revenues: | | | | | | | | | | | | | Products | | $ | 570,749 | | | $ | 2,593,925 | | | $ | 570,749 | | | $ | 2,593,925 | | Monitoring services | | | 12,055,841 | | | | 11,322,201 | | | | 12,055,841 | | | | 11,322,201 | | Total revenues | | | 12,626,590 | | | | 13,916,126 | | | | 12,626,590 | | | | 13,916,126 | | Cost of revenues: | | | | | | | | | | | | | | | | | Products | | | (275,688 | ) | | | (1,675,212 | ) | | | (275,688 | ) | | | (1,675,212 | ) | Monitoring services | | | (9,862,925 | ) | | | (12,261,139 | ) | | | (9,862,925 | ) | | | (12,261,139 | ) | Impairment of monitoring equipment and parts | | | (2,319,530 | ) | | | (570,948 | ) | | | (2,319,530 | ) | | | (570,948 | ) | Total cost of revenues | | | (12,458,143 | ) | | | (14,507,299 | ) | | | (12,458,143 | ) | | | (14,507,299 | ) | Gross margin (deficit) | | | 168,447 | | | | (591,173 | ) | | | 168,447 | | | | (591,173 | ) | Operating expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative | | | (16,701,374 | ) | | | (36,777,665 | ) | | | (16,701,374 | ) | | | (36,777,665 | ) | Research and development | | | (1,777,873 | ) | | | (4,811,128 | ) | | | (1,777,873 | ) | | | (4,811,128 | ) | Impairment of goodwill | | | (2,804,580 | ) | | | - | | | | (2,804,580 | ) | | | - | | Loss from operations | | | (21,115,380 | ) | | | (42,179,966 | ) | | | (21,115,380 | ) | | | (42,179,966 | ) | Other income (expense): | | | | | | | | | | | | | | | | | Gain on sale of intellectual property | | | - | | | | 2,400,000 | | | | - | | | | 2,400,000 | | Redemption of SecureAlert Series A Preferred stock | | | - | | | | (8,372,566 | ) | | Redemption of Monitoring SecureAlert Series A Preferred stock | | | | - | | | | (8,372,566 | ) | Interest income | | | 18,187 | | | | 35,230 | | | | 18,187 | | | | 35,230 | | Interest expense | | | (5,012,803 | ) | | | (1,588,073 | ) | | | (5,012,803 | ) | | | (1,588,073 | ) | Derivative valuation gain | | | 1,867,007 | | | | - | | | | 1,867,007 | | | | - | | Change from estimate to actual on Series A | | | 95,816 | | | | - | | | | 95,816 | | | | - | | Other income (loss) | | | 905,626 | | | | 314,059 | | | | 905,626 | | | | 314,059 | | Net loss from continuing operations | | | (23,241,547 | ) | | | (49,391,316 | ) | | | (23,241,547 | ) | | | (49,391,316 | ) | Discontinued operations | | | - | | | | (414,112 | ) | | | - | | | | (414,112 | ) | Net loss | | | (23,241,547 | ) | | | (49,805,428 | ) | | | (23,241,547 | ) | | | (49,805,428 | ) | Dividends on Series A and C Preferred stock | | | (175 | ) | | | (345,356 | ) | | | (175 | ) | | | (345,356 | ) | Net loss attributable to common stockholders | | $ | (23,241,722 | ) | | $ | (50,150,784 | ) | | $ | (23,241,722 | ) | | $ | (50,150,784 | ) | Net loss per common share – basic and diluted | | $ | (0.13 | ) | | $ | (0.36 | ) | | $ | (0.13 | ) | | $ | (0.36 | ) | Weighted average common shares outstanding – basic and diluted | | | 182,188,000 | | | | 140,092,000 | | | | 182,188,000 | | | | 140,092,000 | |
During the fiscal year ended September 30, 2008, the Company paid off a $4,000,000 line of credit and established a line of credit for $3,600,000 with the same bank. As of September 30, 2008, the outstanding balance of the line of credit was $3,462,285 and it 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™ 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 9)
Additionally, 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 3.28% and the line of credit matures on September 22, 2010. The line of credit is secured by certificates of deposit pledged by the Company’s Chief Executive Officer, Mr. David Derrick. Interest on the line of credit is due monthly. As of September 30, 2009, the Company owed $252,600. Subsequent to September 30, 2009, the Company borrowed the remaining $747,400 available under the line of credit.
Accrued expenses consisted of the following as of September 30, 2009:
Accrued foreclosure liability (see Note 7) | | $ | 775,000 | | Accrued payroll, taxes and employee benefits | | | 561,898 | | Accrued officer compensation | | | 492,280 | | Accrued consulting | | | 436,054 | | Accrued interest | | | 382,424 | | Accrued board of directors fees | | | 300,000 | | Accrued warranty and manufacturing costs | | | 246,622 | | Accrued legal and settlement costs | | | 80,208 | | Accrued research and development costs | | | 45,000 | | Accrued acquisition extension costs | | | 42,000 | | Accrued outside services | | | 38,132 | | Accrued indigent fees | | | 34,130 | | Accrued cellular costs | | | 27,144 | | Accrued commissions and other costs | | | 45,788 | | Total accrued expenses | | $ | 3,506,680 | |
Subsequent to September 30, 2009, the Company entered into agreements to exchange approximately 2,099 shares of Series D Preferred stock for the conversion of $1,857,280 of existing accrued expenses shown above.
(7) | Related Party Transactions |
The Company has entered into certain transactions with related parties. These transactions consist mainly of financing transactions and consulting arrangements.
Related-Party Line of Credit
As of September 30, 2009, the Company owed $76,022 under a line-of-credit agreement with ADP Management, an entity owned and controlled by Mr. Derrick, the Company’s Chief Executive Officer. Outstanding amounts on the line of credit accrue interest at 11% per annum and are due upon demand. 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.
As of September 30, 2008, the Company owed $542,804 to ADP Management under a line-of-credit agreement. During the year ended September 30, 2008, the line of credit increased $1,318,433 due to a monthly management fee owed to ADP Management, including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP Management that are reimbursable by the Company of $618,433, and $700,000 in cash. The Company made cash repayments during the year of $975,641.
Related-Party Notes Payable
In 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 Comp anyCompany owed $1,500,000 plus $12,197 in accrued interest to Mr. Derrick. Subsequent to September 30, 2009, the Company and Mr. Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D Preferred stock.
In September 2008, the Company borrowed $250,000 from Randy Olshen, the former President of SecureAlert. The unsecured note payable accrued interest at 11%. As of September 30, 2009, this note was paid in full.
Foreclosure Liability
In July 2009, the Company entered into a promissory note with an unrelated entity in the amount of $1,000,000 payable on December 31, 2010. The note bears interest at a rate of 15% 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. As of September 30, 20 09,2009, the Company accruedaccr ued $775,000 as a “foreclosure liability” to record the Company’s obligation to repay the 5,000,000 shares of common stock to ADP Management. Subsequent to September 30, 2009, the Company agreed to issue 833 shares of Series D Preferred stock to ADP Management as payment this liability.
Related-Party Series A 15% Debenture
On May 1, 2009, the Company issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an employee 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 common stock at an exercise price of $0.25 per share valued at $43,926. As of September 30, 2009, the outstanding balance owed on the debenture was $250,000 plus $9,452 in accrued interest. Subsequent to September 30, 2009, the Company agreed to issue 250 shares of Series D Preferred stock in exchange for the debenture of $250,000. 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 $40,000 per month and the Company agreed to reimburse the expenses incurred by ADP Management (including the salaries of certain of our officers) in the course of performing services under the consulting arrangement. Effective April 1, 2008, ADP Management reduced the consulting fee from $40,000 to $20,000 per month to reflect the resignation of Mr. Dalton as the Company’s President.
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.
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. The Company recorded $240,000 and $60,000 of expense associated with the issuance of these shares during the fiscal years ended September 30, 2009 and September 30, 2008, respectively. As of September 30, 2009, the remaining deferred compensation was $1,220,000.
(8) | Convertible Promissory Note |
On January 15, 2009, the Company entered into an unsecured convertible promissory note for $2,700,000 in order to purchase TrackerPAL™ units. The note, at the lender’s option, may convert into shares of the Company’s common stock at a conversion price of $0.22 per share. The note bears interest at 8% per annum and matures on January 15, 2010. Interest is due monthly and the principal is due at maturity. The fair market value 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, 2009, the outstanding balance due was $2,050,000 with a remaining debt dis countdiscount balance of $41,556.$41 ,556. Subsequent to September 30, 2009, the holders of the convertible promissory note of $2,050,000 agreed to convert the note and the total outstanding accrued interest of $98,414 into 2,149 shares of Series D Preferred stock.
(9) | Senior Secured Convertible Notes |
During the 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 is 15% per annum and the notes mature on March 13, 2010. Interest is due monthly and the principal is due at maturity. These notes may convert into shares of the Company’s common stock at a conversion price 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, or into shares of the SecureAlert’s common stock at the fair market value of the stock at the conversion date. The Company determined that the embedded conversion features of the notes were su bjectsubject to derivative accounting treatment (see Note 11). 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 will be expensed over the life of these notes. As of September 30, 2009, the outstanding balance of the notes was $3,419,631 with a remaining debt discount balance of $529,109. Subsequent to September 30, 2009, the holders of $2,270,000 of this debt agreed to convert the debt into 2,270 shares of Series D Preferred stock and the remaining debt discount of $529,109 was expensed.
(10) | Series A 15% Debentures |
During the fiscal year ended September 30, 2009, the Company received $4,400,000 in cash from the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company. As of September 30, 2009, the total outstanding balance of the debentures was $4,506,750. The terms of these debentures are as follows: 1) 15% interest per annum. Interest is due quarterly and principal is due at maturity, 2) 18-month maturity, 3) for every $1 invested into the debenture the holder received 1 share of the Company’s common stock, and 4) 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 a tat a reduced conversionconversi on 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 notes were subject to derivative accounting treatment (see Note 11).
This resulted in a debt discount valued at $3,130,423. Additionally, with the issuance of these notes, 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. This discount will be 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, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt discoun tdiscount resulting in a totaltot al $3,130,423 in a debt discount to be amortized over the life of the debentures. During the fiscal year ended September 30, 2009, the Company amortized $1,308,703 of this debt discount and recorded it as interest expense. As of September 30, 2009, the debt discount balance was $1,821,720.
Subsequent to September 30, 2009, the holders of $4,609,648 of debentures and accrued interest agreed to convert this debt into a total of 4,614 shares of Series D Preferred stock and the remaining debt discount of $1,821,720 was expensed.
The Company does not hold or issue derivative instruments for trading purposes. However, the Company has convertible notes that contain embedded derivative features that require separate valuation from the convertible notes payable. The Company recognizes these derivatives as liabilities in its balance sheet, measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings (losses) in the period of change. As of September 30, 2009, the derivative instruments had a fair value of $1,219,426 resulting in a derivative valuation gain of $1,867,007 for the period. The Company did not have any derivatives during the fiscal year ended September 30, 2008.
Debt obligations as of September 30, 2009 and 2008 consisted of the following:
| | September 30, | | | | 2009 | | | 2008 | | SecureAlert Monitoring, Inc. | | | | | | | Unsecured note payable to a former subsidiary bearing interest at 5%. This note was paid in full during the fiscal year ended September 30, 2009. | | $ | - | | | $ | 598,793 | | | | | | | | | | | Unsecured notes payable to former SecureAlert stockholders, with interest at 5%, payable in installments of $80,000 per month paid in full as of September 30, 2009. | | | - | | | | 169,676 | | | | | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on June 9, 2011. | | | 12,228 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 12%. The note matures on February 1, 2010. | | | 8,728 | | | | - | | | | | | | | | | | SecureAlert, Inc. | | | | | | | | | Unsecured promissory note with an entity bearing an interest rate of 15%. The note matures on December 31, 2010. Interest is paid quarterly and the principal due at maturity. Debt discount at year end was $525,665. | | | 474,335 | | | | - | | | | | | | | | | | Court Programs, Inc. | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 6.04% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 225,000 | | | | 229,100 | | | | | | | | | | | Unsecured revolving lines of credit with two banks, with interest rates between 6.60% and 13.49%. | | | 16,500 | | | | 48,499 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 30,751 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | 1,492 | | | | 16,028 | | | | | | | | | | | Capital leases with an effective interest rate 14.89% that matures in January 2011. | | | 14,898 | | | | - | |
| | September 30, | | | | 2009 | | | 2008 | | SecureAlert, Inc. | | | | | | | Unsecured note payable to a former subsidiary bearing interest at 5%. This note was paid in full during the fiscal year ended September 30, 2009. | | $ | - | | | $ | 598,793 | | | | | | | | | | | Unsecured notes payable to former SecureAlert stockholders, with interest at 5%, payable in installments of $80,000 per month paid in full as of September 30, 2009. | | | - | | | | 169,676 | | | | | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on June 9, 2011. | | | 12,228 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 12%. The note matures on February 1, 2010. | | | 8,728 | | | | - | | | | | | | | | | | RemoteMDx, Inc. | | | | | | | | | Unsecured promissory note with an entity bearing an interest rate of 15%. The note matures on December 31, 2010. Interest is paid quarterly and the principal due at maturity. Debt discount at year end was $525,665. | | | 474,335 | | | | - | | | | | | | | | | | Court Programs, Inc. | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 6.04% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 225,000 | | | | 229,100 | | | | | | | | | | | Unsecured revolving lines of credit with two banks, with interest rates between 6.60% and 13.49%. | | | 16,500 | | | | 48,499 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 30,751 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | 1,492 | | | | 16,028 | | | | | | | | | | | Capital leases with an effective interest rate 14.89% that matures in January 2011. | | | 14,898 | | | | - | | | | | | | | | | | Midwest Monitoring & Surveillance, Inc. | | | | | | | | | Unsecured revolving line of credit with a bank, with an interest rate of 6.60% | | | 39,224 | | | | - | | | | | | | | | | | Notes payable to a financial institution bearing interest at 6.37%. Notes mature in July 2011 and July 2016. The notes are secured by property. | | | 185,274 | | | | 247,675 | | | | | | | | | | | 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. | | | 57,344 | | | | 199,747 | |
Automobile loans with several financial institutions secured by the vehicles. Interest rates range between 6.9% and 8.5%, due between January 2010 and October 2011. | | | 42,463 | | | | 43,570 | | | | | | | | | | | Note payable to a stockholder of Midwest. The note bears interest at 5% maturing in February 2013. | | | 47,704 | | | | 59,958 | | | | | | | | | | | Capital leases with effective interest rates that range between 12.9% and 14.7%. Leases mature between June 2014 and September 2014. | | | 126,158 | | | | - | | | | | | | | | | | Total debt obligations | | | 1,282,099 | | | | 1,613,046 | | Less current portion | | | (272,493 | ) | | | (465,664 | ) | Long-term debt, net of current portion | | $ | 1,009,606 | | | $ | 1,147,382 | |
| | | | | | | | | Midwest Monitoring & Surveillance, Inc. | | | | | | | | | Unsecured revolving line of credit with a bank, with an interest rate of 6.60% | | | 39,224 | | | | - | | | | | | | | | | | Notes payable to a financial institution bearing interest at 6.37%. Notes mature in July 2011 and July 2016. The notes are secured by property. | | | 185,274 | | | | 247,675 | | | | | | | | | | | 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. | | | 57,344 | | | | 199,747 | |
Automobile loans with several financial institutions secured by the vehicles. Interest rates range between 6.9% and 8.5%, due between January 2010 and October 2011. | | | 42,463 | | | | 43,570 | | | | | | | | | | | Note payable to a stockholder of Midwest. The note bears interest at 5% maturing in February 2013. | | | 47,704 | | | | 59,958 | | | | | | | | | | | Capital leases with effective interest rates that range between 12.9% and 14.7%. Leases mature between June 2014 and September 2014. | | | 126,158 | | | | - | | | | | | | | | | | Total debt obligations | | | 1,282,099 | | | | 1,613,046 | | Less current portion | | | (272,493 | ) | | | (465,664 | ) | Long-term debt, net of current portion | | $ | 1,009,606 | | | $ | 1,147,382 | |
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 stockholder 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 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, 2009, all 19 outstanding shares of Series A Preferred Stock converted into 9,306 shares of the Company’s common stock. There were no conversions during the year ended September 30, 2008.
Dividends The 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 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 years ended September 30, 2009 and 2008, the Company recorded $175 and $423 in dividends on Series A Preferred stock, respectively.
Series B Convertible Preferred Stock The 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 $3.00 per share of common. The Company has issued shares of common stock or securities convertible into common stock for consideration per share less than $3.00 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 years ended September 30, 2009 and 2008, 10,999 and 2,000 shares of Series B Preferred stock converted into 10,999 and 15,000 shares of common stock, respectively. As of September 30, 2009, there were no shares of Series B Preferred stock outstanding.
Series D Convertible Preferred Stock In November 2009, the Company designated 50,000 shares of preferred stock as Series D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred stock”). Subsequent to the fiscal year ended September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in consideration for the conversion of $15,723,204 of debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.
Dividends The Series D Preferred stock is entitled to dividends at the rate equal to eight 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 thirty days following the end of the accrual period.
Convertibility Each share of Series D Preferred stock may be converted into 6,000 shares of common stock commencing after ninety days from the date of issue.
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, 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 the date of this report, there w erewere 25,186 shares of Series D Preferred stock 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. 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, 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.
(14) | SecureAlert Preferred Stock |
SecureAlert, Inc. Series A Preferred Shares During the fiscal year ended September 30, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. to establish 3,590,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred stock (“SecureAlert Monitoring Series A Preferred stock”).
Dividends The holders of shares of SecureAlert Monitoring Series A Preferred stock were entitled to receive quarterly dividends out of any of SecureAlert’sSecureAlert Monitoring’s assets legally available therefore, prior and in preference to any declaration or payment of any dividend on the common stock of SecureAlert Monitoring, at the rate of $1.54 per day times the number of SecureAlert’sSecureAlert Monitoring’s parolee contracts calculated in days during the quarter. For example, if there were an average of 10,000 parolee contracts outstanding during the quarter, the total dividend would be $1,386,000 ($1.54 x 90 days x 10,000 contracts) or $0.386 per share of SecureAlert Monitoring Series A Preferred stock. In no case will a dividend be paid if the gross revenue per contract per day to SecureAlert averagesMonitoring aver ages less than $4.50. Dividends wil lwill be paid in cash to the holders of record of shares of SecureAlert Monitoring Series A Preferred stock as they appear on the books and records of SecureAlert Monitoring on such record dates not less than ten days nor more than sixty days preceding the payment dates thereof, as may be fixed by the Board of Directors of the Company.
During the fiscal years ended September 30, 2009 and 2008, the Company recorded $0 and $344,933 in dividends on SecureAlert Monitoring Series A Preferred stock.
Convertibility As a group, all SecureAlert Monitoring 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 SecureAlert, Inc.
On March 24, 2008, SecureAlert redeemed all outstanding shares of SecureAlert Monitoring Series A in exchange for 7,434,249 shares of RemoteMDxSecureAlert common stock for a value of $8,549,386. The former SecureAlert Monitoring Series A stockholders are entitled to receive quarterly contingency payments through March 23, 2011 based on a rate of $1.54 per day times the number of SecureAlert’sSecureAlert Monitoring’s parolee contracts calculated in days during the quarter. This can be paid in either cash or common stock at the Company’s option. The Company will make quarterly adjustments as necessary to reflect the difference between the estimated and actual contingency payments to the former SecureAlert Monitoring Series A stockholders. During the fiscal year ended September 30, 2008, RemoteMDxSecureAle rt issued 825,893 shares of common stock as consideration for dividends due to the former SecureAlert Monitoring Series A stockholders, and recorded a net expense of $8,372,566 from the initial redemption and subsequent quarterly adjustments. As of September 30, 2009, the Company estimated and accrued $3,148,943 for future and past contingency payments due to former SecureAlert Monitoring Series A stockholders. Subsequent to September 30, 2009, former holders of SecureAlert Monitoring Series A Preferred stock agreed to convert an aggregate of $2,261,142 of the future and past contingency payments otherwise payable with respect to the redemption of the SecureAlert Monitoring Series A Preferred stock for 2,263 shares of Series D Preferred stock.
Authorized Shares
The Company is authorized to issue up to 250,000,000 shares of common stock.
Common Stock Issuances
During the fiscal year ended September 30, 2009, the Company issued 54,484,728 shares of common stock. Of these shares, 9,306 shares were issued upon conversion of 19 shares of Series A Preferred stock; 10,999 shares were issued upon conversion 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; 2,254,121 shares were issued for services rendered to the Company valued at $728,874; 3,007,286 shares were issued to purchase Bishop Rock and to extend an option to purchase the remaining percentage of ownership of Midwest; and 17,850,000 shares were issued for net cash proceeds of $3,250,000.
During the fiscal year ended September 30, 2008, the Company issued 28,541,175 shares of common stock. Of these shares, 15,000 shares were issued upon conversion of 2,000 shares of Series B Preferred stock; 325,000 shares were issued upon settlement of a lawsuit; 360,000 shares were issued for debt; 9,135,000 shares were issued for services in the amount of $14,324,585; 6,177,219 shares were issued for cash proceeds of $5,187,914; 650,000 shares were issued in connection with the acquisition of Midwest and Court Programs; 825,893 shares were issued for SecureAlert Series A Preferred stock dividends; 7,434,249 shares were issued to redeem SecureAlert Series A Preferred stock; and 3,618,814 shares were issued from the exercise of options and warrants.
As of September 30, 2009, the Company was authorized to issue 250,000,000 shares of common stock and 210,365,988 were outstanding.
Subsequent to the fiscal year 2009, the holders of a majority of the issued and outstanding voting securities of the Company consented in writing to an increase of the authorized shares from 250,000,000 to 600,000,000. The Company intends to file Amended Articles of Incorporation for the Company to the effect the increase in the number of authorized shares as soon as reasonably practical.
Stock Incentive Plan
During the fiscal year ended September 30, 2006, the stockholders approved the 2006 Equity Incentive Award Plan (the “2006 Plan”). The 2006 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 10,000,000 shares are authorized for issuance pursuant to awards granted under the 2006 Plan. During the fiscal year ended September 30, 2009, the Company granted 4,931,214 options under this plan as described bel ow. below. | | | Number of Options and Warrants | | | | Exercise Price Per Share | | | | | | | | | | | Outstanding as of September 30, 2007 | | | 18,887,896 | | | $ | 0.54 to 3.00 | | Granted | | | 6,752,869 | | | 0.59 to 4.05 | | Expired or cancelled | | | (296,500 | ) | | 0.60 to 3.00 | | Exercised | | | (3,618,814 | ) | | 0.54 to 1.73 | | | | | | | | | | | Outstanding as of September 30, 2008 | | | 21,725,451 | | | 0.56 to 4.05 | | Granted | | | 4,931,214 | | | 0.09 to 0.30 | | Expired or cancelled | | | (1,408,500 | ) | | 0.60 to 2.15 | | Exercised | | | - | | | | - | | | | | | | | | | | Outstanding as of September 30, 2009 | | | 25,248,165 | | | $ | 0.09 to 4.05 | |
The following table summarizes information about stock options and warrants outstanding as of September 30, 2009: | | | Options and Warrants | | | Options and Warrants | | | | | Outstanding | | | Exercisable | | | | | | | | Weighted | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | | | | | Remaining | | | Weighted | | | | | | Weighted | | Range of | | | | | | Contractual | | | Average | | | | | | Average | | Exercise | | | Number | | | Life | | | Exercise | | | Number | | | Exercise | | Prices | | | Outstanding | | | (Years) | | | Price | | | Exercisable | | | Price | | $0.00 - $0.60 | | | | 10,566,849 | | | 2.36 | | | $ | 0.37 | | | | 8,886,849 | | | $ | 0.33 | | 0.61 – 1.60 | | | | 5,849,400 | | | 3.29 | | | | 1.28 | | | | 3,944,400 | | | | 1.24 | | 1.61 – 4.05 | | | | 8,831,916 | | | 0.67 | | | | 2.03 | | | | 8,827,582 | | | | 2.03 | |
| Options and Warrants | | | | Options and Warrants | | Outstanding | | | | Exercisable | | | | | | | | | | Weighted | | | | | | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | | | | | | | | | | Remaining | | | | Weighted | | | | | | | Weighted | | Range of | | | | | | | | Contractual | | | | Average | | | | | | | Average | | Exercise | | | | Number | | | | Life | | | | Exercise | | | | Number | | | Exercise | | Prices | | | | Outstanding | | | | (Years) | | | | Price | | | | Exercisable | | | Price | $ | 0.00 - $0.60 | | | | 10,566,849 | | | | 2.36 | | | $ | 0.37 | | | | 8,886,849 | | | $ | 0.33 | | 0.61 – 1.60 | | | | 5,849,400 | | | | 3.29 | | | | 1.28 | | | | 3,944,400 | | | | 1.24 | | 1.61 – 4.05 | | | | 8,831,916 | | | | 0.67 | | | | 2.03 | | | | 8,827,582 | | | | 2.03 |
As of September 30, 2009, 21,658,831 of the 25,248,165 outstanding options and warrants were vested.
During the fiscal year ended September 30, 2009, the Company issued 4,931,214 options and warrants to purchase common 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 during the year vested 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.
During the fiscal year ended September 30, 2008, the Company issued 6,752,869 common stock options and warrants as follows: 1,670,000 in connection with the sale of common stock, 1,725,000 to employees (275,000 have vested and 1,450,000 are unvested), 1,169,869 to consultants, and 2,188,000 to the Board of Directors. The exercise prices range from $0.59 to $4.05 per share. The exercise price for the options granted during the fiscal year ended September 30, 2008 were based upon the quoted market price of the Company’s shares on the date of grant.
(17) | Deferred Compensation |
As of September 30, 2008, deferred compensation in connection with common stock and warrants issued in prior years reflected $3,498,672 of expenses to be recorded in future periods. Of these expenses of $3,498,672, $2,211,266 was recorded as deferred compensation expense during the fiscal year ended September 30, 2009. Additionally, the Company recorded deferred compensation expense of $384,667 related to common stock and warrants issued and fully expensed throughout the fiscal year, resulting in a total of $2,595,933 of deferred compensation expense recorded during the fiscal year ended September 30, 2009.
The issuance of common stock and warrants during the fiscal year ended September 30, 2009 valued at $384,667 is outlined as follows:
| · | 1,000,000 shares of common stock issued to an entity for services valued at $200,000 or $0.20 per share. |
| · | 900,000 shares of common stock issued to three individuals for paying down the Company’s line of credit valued at $108,000, or $0.12 per share. |
| · | 100,000 shares of common stock issued to an officer of the Company in connection with debt (Note 7: Related-Party Notes Payable) valued at $30,000, or $0.30 per share. |
| · | 213,500 unregistered warrants to an individual for rendering services to the Company valued at $46,667. |
As of September 30, 2009, deferred compensation to be expensed in future periods was $1,287,406.
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, 2009 and 2008, the Company incurred net losses of $22,761,102 and $49,339,637, respectively, for income tax purposes. 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, 2009, the Company had net carryforwards available to offset future taxable income of approximately $158,807,000 which will begin to expire in 2017. 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, limitations are imposed on the utilization of 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 occurred as the net operating losses are utilize d.utilized.
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.
The deferred income tax assets (liabilities) were comprised of the following as orof September 30: | | | 2009 | | | | 2008 | | Net loss carryforwards | | $ | 53,994,000 | | | $ | 45,367,000 | | Accruals and reserves | | | 101,000 | | | | (99,000 | ) | Contributions | | | 1,000 | | | | 3,000 | | Valuation allowance | | | (54,096,000 | ) | | | (45,271,000 | ) | | | $ | - | | | $ | - | |
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the fiscal years ended September 30, 2009 and 2008 are as follows:
| | 2009 | | | 2008 | | Federal income tax benefit at statutory rate | | $ | 7,739,000 | | | $ | 16,755,000 | | State income tax benefit, net of federal income tax effect | | | 1,138,000 | | | | 2,464,000 | | Change in estimated tax rate and gain (loss) on non-deductible expenses | | | (52,000 | ) | | | (91,000 | ) | Change in valuation allowance | | | (8,825,000 | ) | | | (19,128,000 | ) | Benefit for income taxes | | $ | - | | | $ | - | |
The deferred income tax assets (liabilities) and the federal and state income tax benefits reflects an adjustment in calculating the valuation allowance using a tax rate of 15% used in fiscal year ended 2008 to 34% in fiscal year ended 2009.
(19) | Commitment and Contingencies |
Legal Matters
Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent infringement suit was filed against the Company and other defendants in the United States District Court for the Eastern District of Texas on March 19, 2008. Plaintiffs have alleged that the defendants infringe United States Patent No. RE39,909 ('909 Patent), Tracking System for Locational Tracking of Monitored Persons. On May 14, 2008, the Company answered the complaint, denying Plaintiffs’ allegations and asserting various affirmative defenses. The Company also asserted a counterclaim for declaratory judgment that the Company has not infringed the '909 Patent and that the patent is invalid. On February 17, 2009 the United States Patent and Trademark Office ("USPTO") granted a request for reexamination of the '909 Patent. The USPTO is now in the process of reexamining the claims of the '909 Patent. Briefs have been submitted on the issue of claim construction, and the case is currently in discovery. The Markman hearing is set for May of 2011, and trial is set for late 2011. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC): The Company filed a patent infringement suit against STOP in the United States District Court for the Central District of California on May 2, 2008. The Company has asserted that STOP infringes United States Patent No. 7,330,122 for a remote tracking and communication device and method for processing data from the device ("'122 patent"), in which the Company holds all rights and interests. STOP moved to dismiss the original complaint and also filed an answer and counterclaim. The motion to dismiss was granted with leave to amend. The Company filed an amended complaint on August 5, 2008. The amended complaint seeks damages fo rfor infringement accordingaccor ding to proof, treble damages, injunctive relief enjoining the infringement, and costs and attorney's fees. STOP's counterclaim is for declaratory relief, seeking a declaration that STOP has not infringed the '122 patent and that the '122 patent is invalid. The Company filed an answer to the counterclaim. STOP subsequently filed a motion for summary judgment of non-infringement, which was denied. STOP’s subsequent motion for reconsideration was also denied. The parties are currently working on claim construction and discovery issues. The Markman hearing is currently set for March of 2010. No trial date has yet been set. The Company intends to vigorously prosecute its claims and defend against the counterclaim.
Frederico and Erica Castellanos, v. Volu-Sol, Inc. On August 15, 2008, plaintiffs Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the State of California, Los Angeles County. The complaint names twenty-fourtwenty four defendants and one hundred unnamed Doe Defendants. The complaint asserts claims for negligence, strict liability - failure to warn, strict liability - design defect, fraudulent concealment, breach of implied warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to certain chemicals during the course of his employment. One of the original named defendants was identified as Logos Scientific,Scien tific, Inc. On September 4, 2008, Plaintiffs a mendedamended their complaint to substitute "Volu-Sol, Inc. as successor in interest to Logos Scientific, Inc." for the previously unnamed Doe 1. Volu-Sol, Inc. was the original name of RemoteMDx, Inc. The Company intends to vigorously defend itself against Castellanos’ claims. 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.
Informal Inquiry. In March 2008, the Company was advised by letter from the U.S. Securities and Exchange Commission (“SEC”), Salt Lake District Office, that it has begun an informal inquiry regarding the Company. The inquiry, among other items, relates to the Company’s revenue recognition policy and documents, relationship with stockholders, and business. The SEC has advised the Company in its correspondence that this informal inquiry should not be construed as an indication that any violation of law has occurred, nor should it be considered a reflection upon any person, entity, or security. The Company voluntarily disclosed this inquiry in its Quarterly Report on Form 10- Q10-Q for the fiscal quarterqua rter ended March 31, 2008. There were no material developments in this matter during the fiscal year ended September 30, 2009.
Lease Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2009:
Fiscal Year | | Total | | | SecureAlert | | | Midwest Monitoring | | | Court Programs | | | | | | | | | | | | | | | 2010 | | $ | 418,151 | | | $ | 266,691 | | | $ | 35,555 | | | $ | 115,905 | | 2011 | | | 361,588 | | | | 274,095 | | | | 27,771 | | | | 59,722 | | 2012 | | | 336,588 | | | | 278,991 | | | | 22,473 | | | | 35,124 | | 2013 | | | 285,749 | | | | 269,922 | | | | 8,075 | | | | 7,752 | | 2014 | | | 61,018 | | | | 60,564 | | | | 454 | | | | - | | Thereafter | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | Total | | $ | 1,463,094 | | | $ | 1,150,263 | | | $ | 94,328 | | | $ | 218,503 | |
The total contractual obligations of $1,463,094 consist of the following: $1,324,432 from facilities operating leases and $138,662 from equipment leases. During the fiscal years ended September 30, 2009 and 2008, the Company paid approximately $487,000 and $536,000, in lease payment obligations, respectively.
Indemnification Agreements In November 2001, the Company agreed to indemnify officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.
Cellular Access Agreement During the fiscal year ended September 30, 2009, the Company entered into several agreements with cellular organizations to provide communication services. The cost to the Company during the fiscal years ended September 30, 2009 and 2008 was approximately $2,422,541 and $2,940,000, respectively. These amounts are included in cost of sales.
Subsequent to September 30, 2009, the following events occurred: | 1) | On October 30, 2009, the Company issued 1,400,000 shares of common stock to several former holders of SecureAlert Monitoring Series A Preferred to settle a dispute and an outstanding liability in connection with contingency payments due to the holders. |
| 2) | On November 2, 2009, the Company’s Board of Directors designated 50,000 shares Series D Preferred stock. The shares accrue dividends at a rate of 8% per annum and may be paid in cash or additional shares of Series D Preferred stock. See note 13. Subsequent to September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock. |
Subsequent events have been evaluated through January 12, 2010, the date these financial statements were issued. No events, other than the events described above, required disclosure.
Financial Statements
Financial Statements
Index to Consolidated Financial Statements
| Page | | | Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009 (Unaudited) | F-36F-38 | | | Condensed Consolidated Statements of Operations for the Three and Nine Months ndedended June 30, 2010 and 2009 (Unaudited) | F-38F-40 | | | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (Unaudited) | F-39F-41 | | | Notes to Condensed Consolidated Financial Statements (Unaudited) | F-41F-43 |
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | | June 30, 2010 | | | September 30, 2009 | | Assets | | | | | | | Current assets: | | | | | | | Cash | | $ | 1,879,955 | | | $ | 602,321 | | Accounts receivable, net of allowance for doubtful accounts of $299,100 and $266,000, respectively | | | 1,451,165 | | | | 1,441,648 | | Inventory, net of reserve of $124,725 and $83,092, respectively | | | 351,072 | | | | 603,329 | | Prepaid expenses and other | | | 386,551 | | | | 275,390 | | Total current assets | | | 4,068,743 | | | | 2,922,688 | | Property and equipment, net of accumulated depreciation of $2,208,208 and $2,525,180, respectively | | | 1,343,915 | | | | 1,313,306 | | Monitoring equipment, net of accumulated depreciation of $3,200,324 and $2,944,197, respectively | | | 2,231,961 | | | | 1,316,493 | | Goodwill | | | 4,178,456 | | | | 2,468,081 | | Intangible assets, net of amortization of $234,672 and $126,655, respectively | | | 438,329 | | | | 496,346 | | Other assets | | | 82,618 | | | | 76,675 | | Total assets | | $ | 12,344,022 | | | $ | 8,593,589 | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS – Continued (Unaudited)
| | June 30, 2010 | | | September 30, 2009 | | Liabilities and Stockholders’ Equity (Deficit) | | | | | | | Current liabilities: | | | | | | | Bank line of credit | | $ | 1,000,000 | | | $ | 252,600 | | Accounts payable | | | 2,431,785 | | | | 2,339,786 | | Accrued liabilities | | | 1,497,126 | | | | 3,506,680 | | Dividends payable | | | 579,892 | | | | - | | Deferred revenue | | | 30,941 | | | | 56,858 | | Settlement liability | | | 975,000 | | | | - | | SecureAlert Monitoring Series A Preferred stock redemption obligation | | | 148,995 | | | | 3,148,943 | | Current portion of related-party line of credit and notes | | | 200,000 | | | | 1,576,022 | | 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 | | | 150,000 | | | | 2,890,522 | | Current portion of Series A 15% debentures, net of debt discount of $0 and $1,272,189, respectively | | | - | | | | 2,127,811 | | Derivative liability | | | - | | | | 1,219,426 | | Current portion of long-term debt | | | 886,424 | | | | 272,493 | | Total current liabilities | | | 7,900,163 | | | | 19,399,585 | | Series A 15% debentures, net of debt discount of $0 and $549,531, respectively, net of current portion | | | - | | | | 557,219 | | Long-term related party line of credit and notes, net of current portion | | | 55,245 | | | | - | | Long-term debt, net of current portion, net of debt discount of $0 and $525,665, respectively | | | 519,284 | | | | 1,009,606 | | Total liabilities | | | 8,474,692 | | | | 20,966,410 | | | | | | | | | | | Stockholders’ equity (deficit): | | | | | | | | | SecureAlert, Inc. stockholders’ equity (deficit): | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 50,000 shares designated; 37,851 and zero shares outstanding, respectively (aggregate liquidation preference of $28,857,253) | | | 4 | | | | - | | Common stock, $0.0001 par value: 600,000,000 shares authorized; 238,748,663 and 210,365,988 shares outstanding, respectively | | | 23,875 | | | | 21,037 | | Additional paid-in capital | | | 221,235,284 | | | | 194,659,044 | | Subscription receivable | | | (50,000 | ) | | | - | | Deferred compensation | | | (1,092,943 | ) | | | (1,287,406 | ) | Accumulated deficit | | | (216,075,643 | ) | | | (205,765,496 | ) | Total SecureAlert, Inc. stockholders’ equity (deficit) | | | 4,040,577 | | | | (12,372,821 | ) | Non-controlling interest | | | (171,247 | ) | | | - | | Total equity (deficit) | | | 3,869,330 | | | | (12,372,821 | ) | Total liabilities and stockholders’ equity (deficit) | | $ | 12,344,022 | | | $ | 8,593,589 | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | Three months ended June 30, | | | Nine months ended June 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | Revenues: | | | | | | | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | | $ | 225,380 | | | $ | 493,595 | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | | | 9,056,757 | | | | 8,985,386 | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | | | 9,282,137 | | | | 9,478,981 | | Cost of revenues: | | | | | | | | | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | | | 27,140 | | | | 246,310 | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | | | 5,348,448 | | | | 8,049,230 | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | | | 5,375,588 | | | | 8,295,540 | | Gross profit | | | 1,363,765 | | | | 788,143 | | | | 3,906,549 | | | | 1,183,441 | | Operating expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative (including $120,174, $281,604, $1,068,352 and $2,355,600, respectively, of compensation expense paid in stock or stock options / warrants) | | | 2,703,819 | | | | 3,178,333 | | | | 8,931,801 | | | | 11,078,059 | | Settlement expense | | | - | | | | 23,046 | | | | 1,150,000 | | | | 23,046 | | Research and development | | | 490,258 | | | | 431,201 | | | | 1,161,539 | | | | 1,277,102 | | Impairment of goodwill | | | - | | | | - | | | | 204,735 | | | | - | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | | | (7,541,526 | ) | | | (11,194,766 | ) | Other income (expense): | | | | | | | | | | | | | | | | | Currency exchange rate loss | | | (672 | ) | | | - | | | | (8,756 | ) | | | - | | Loss on disposal of equipment | | | - | | | | - | | | | (8,713 | ) | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | | | (21,263 | ) | | | 20,449 | | Interest income | | | 86 | | | | 8,215 | | | | 13,227 | | | | 11,658 | | Interest expense (including $88,247, $1,099,707, $3,006,297, $1,929,306, respectively, of interest expense paid in stock) | | | (229,582 | ) | | | (1,255,103 | ) | | | (3,840,232 | ) | | | (2,790,006 | ) | Acquisition option extension cost | | | - | | | | (147,566 | ) | | | - | | | | (347,066 | ) | Derivative valuation gain (loss) | | | - | | | | (1,014,045 | ) | | | 200,534 | | | | (1,014,045 | ) | Other income, net | | | 1,811 | | | | 196,568 | | | | 121,855 | | | | 1,276,319 | | Net loss | | | (2,054,238 | ) | | | (5,032,308 | ) | | | (11,084,874 | ) | | | (14,037,457 | ) | Net loss attributable to non-controlling interest | | | 12,645 | | | | - | | | | 121,741 | | | | - | | Net loss attributable to SecureAlert, Inc. | | | (2,041,593 | ) | | | (5,032,308 | ) | | | (10,963,133 | ) | | | (14,037,457 | ) | Dividends on Series A and D Preferred stock | | | (579,892 | ) | | | - | | | | (939,371 | ) | | | (175 | ) | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485 | ) | | $ | (5,032,308 | ) | | $ | (11,902,504 | ) | | $ | (14,037,632 | ) | Net loss per common share, basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | (0.08 | ) | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | | | | 215,230,000 | | | | 173,137,000 | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | Nine Months Ended June 30, | | | Nine Months Ended June 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | Cash flows from operating activities: | | | | | | | | | | | | | Net loss | | $ | (11,084,874 | ) | | $ | (14,037,457 | ) | | $ | (11,084,874 | ) | | $ | (14,037,457 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 1,061,652 | | | | 1,676,541 | | | | 1,061,652 | | | | 1,676,541 | | Common stock issued for services | | | 27,500 | | | | 668,874 | | | | 27,500 | | | | 668,874 | | Amortization of deferred financing and consulting costs | | | 541,860 | | | | 1,497,936 | | | | 541,860 | | | | 1,497,936 | | Non-cash compensation related to re-pricing of stock options | | | 498,992 | | | | 345,838 | | | | 498,992 | | | | 345,838 | | Common stock issued for acquisition option extension cost | | | - | | | | 19,500 | | | | - | | | | 19,500 | | Amortization of debt discount | | | 2,918,050 | | | | 1,067,037 | | | | 2,918,050 | | | | 1,067,037 | | Settlement expense | | | 1,150,000 | | | | - | | | | 1,150,000 | | | | - | | Non-cash interest expense related to a beneficial conversion feature | | | 62,737 | | | | - | | | | 62,737 | | | | - | | Common stock issued in connection with debt | | | 25,510 | | | | - | | | | 25,510 | | | | - | | Common stock issued to settle lawsuit | | | - | | | | 292,207 | | | | - | | | | 292,207 | | Redemption of SecureAlert Monitoring Series A Preferred stock | | | 21,263 | | | | (20,448 | ) | | | 21,263 | | | | (20,448 | ) | Increase in related-party line of credit for services | | | 117,193 | | | | 218,684 | | | | 117,193 | | | | 218,684 | | Impairment of goodwill | | | 204,735 | | | | - | | | | 204,735 | | | | - | | Derivative liability valuation (gain) loss | | | (200,534 | ) | | | 1,014,045 | | | | (200,534 | ) | | | 1,014,045 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable, net | | | (9,517 | ) | | | 269,388 | | | | (9,517 | ) | | | 269,388 | | Deposit released from escrow | | | - | | | | 500,000 | | | | - | | | | 500,000 | | Inventories | | | 252,257 | | | | (177,253 | ) | | | 252,257 | | | | (177,253 | ) | Prepaid expenses and other assets | | | (81,004 | ) | | | (139,184 | ) | | | (81,004 | ) | | | (139,184 | ) | Receivables | | | (99 | ) | | | 55,385 | | | | (99 | ) | | | 55,385 | | Accounts payable | | | 91,999 | | | | 14,929 | | | | 91,999 | | | | 14,929 | | Accrued liabilities | | | (56,376 | ) | | | 10,202 | | | | (56,376 | ) | | | 10,202 | | Deferred revenue | | | (25,917 | ) | | | 18,572 | | | | (25,917 | ) | | | 18,572 | | Net cash used in operating activities | | | (4,484,573 | ) | | | (6,705,204 | ) | | | (4,484,573 | ) | | | (6,705,204 | ) | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (241,491 | ) | | | (240,984 | ) | | | (241,491 | ) | | | (240,984 | ) | Purchase of monitoring equipment | | | (1,588,093 | ) | | | (1,047,043 | ) | | | (1,588,093 | ) | | | (1,047,043 | ) | Purchase of securities | | | - | | | | (200,000 | ) | | | - | | | | (200,000 | ) | Disposal of property and equipment | | | 24,221 | | | | - | | | | 24,221 | | | | - | | Disposal of monitoring equipment | | | 60,016 | | | | 33,519 | | | | 60,016 | | | | 33,519 | | Net cash used in investing activities | | | (1,745,347 | ) | | | (1,454,508 | ) | | | (1,745,347 | ) | | | (1,454,508 | ) | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Net payments on related-party line of credit | | | (137,970 | ) | | | (713,868 | ) | | | (137,970 | ) | | | (713,868 | ) | Proceeds from related-party note payable | | | 500,000 | | | | 1,500,000 | | | | 500,000 | | | | 1,500,000 | | Payment on related-party notes payable | | | (500,000 | ) | | | (603,280 | ) | | | (500,000 | ) | | | (603,280 | ) | Principal payments on notes payable | | | (595,393 | ) | | | (453,766 | ) | | | (595,393 | ) | | | (453,766 | ) | Proceeds from notes payable | | | 3,217 | | | | 55,744 | | | | 3,217 | | | | 55,744 | | Net borrowings on bank line of credit | | | 747,400 | | | | 87,346 | | | | 747,400 | | | | 87,346 | | Principal payments on notes payable related to acquisitions | | | (100,000 | ) | | | - | | | | (100,000 | ) | | | - | | Proceeds from Series A 15% debenture, net of commissions | | | - | | | | 3,846,750 | | | | - | | | | 3,846,750 | | Payments on Series A 15% debenture | | | (25,000 | ) | | | - | | | | (25,000 | ) | | | - | | Proceeds from issuance of common stock, net of commissions | | | - | | | | 3,250,000 | | | | - | | | | 3,250,000 | | Net proceeds from issuance of Series D Convertible Preferred stock | | | 7,615,300 | | | | - | | | | 7,615,300 | | | | - | | Net cash provided by financing activities | | | 7,507,554 | | | | 6,968,926 | | | | 7,507,554 | | | | 6,968,926 | | Net increase (decrease) in cash | | | 1,277,634 | | | | (1,190,786 | ) | | | 1,277,634 | | | | (1,190,786 | ) | Cash, beginning of period | | | 602,321 | | | | 2,782,953 | | | | 602,321 | | | | 2,782,953 | | Cash, end of period | | $ | 1,879,955 | | | $ | 1,592,167 | | | $ | 1,879,955 | | | $ | 1,592,167 | |
The accompanying notes are an integral part of these statements.
ECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) | | Nine Months Ended June 30, | | | | 2010 | | | 2009 | | | | | | | | | Cash paid for interest | | $ | 1,088,120 | | | $ | 1,121,715 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of shares of common stock in exchange for shares of Series B Preferred stock | | $ | - | | | $ | 2 | | Issuance of shares of common stock and warrants in exchange for deferred consultingservices and financing costs | | | - | | | | 384,667 | | Accrual of Series A Preferred stock dividends | | | - | | | | 175 | | Issuance of shares of common stock for subscription receivable | | | - | | | | 250,000 | | Issuance of shares of common stock for accounts payable | | | - | | | | 550,000 | | Discount from issuance of convertible debt | | | - | | | | 4,114,052 | | Cancellation of common stock issued | | | - | | | | 175 | | Acquisition of monitoring equipment through issuance of debt | | | - | | | | 2,770,000 | | Stock and options issued in connection with acquisition of Bishop Rock Software, Inc. | | | - | | | | 856,522 | | Issuance of common stock to settle notes payable and accrued interest | | | - | | | | 187,793 | | Line of credit paid through the issuance of Senior convertible notes | | | - | | | | 3,549,630 | | Acquisition of property and equipment through issuance of debt | | | - | | | | 38,991 | | Issuance of 5,160,858, and 0 shares of common stock for payment of SecureAlert Monitoring, Inc. Series A Preferred stock contingency payments | | | 609,772 | | | | - | | Note payable issued to acquire monitoring equipment and property and equipment | | | 190,487 | | | | - | | Issuance of 3,150,000 and 0 stock options, respectively, for deferred consulting | | | 347,397 | | | | - | | Issuance of shares of Series D Convertible Preferred stock for conversion of debt, accrued liabilities and interest | | | 16,884,874 | | | | - | | Issuance of dividends payable on Series D Convertible Preferred stock | | | 939,371 | | | | - | | Note payable issued to acquire remaining shares of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 1,049,631 | | | | - | | Liabilities forgiven as part of acquisition of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 330,262 | | | | - | | 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. | | | 335,086 | | | | - | | Conversion effect on derivative liability | | | 1,018,892 | | | | - | |
Issuance of 150,000 shares of common stock to purchase an additional 2.145% ownership of Midwest Monitoring & Surveillance, Inc. | | | 18,000 | | | | - | | Issuance of 19,896,000 of common stock from the conversion of 3,316 shares of Series D Preferred stock | | | 1,990 | | | | - | | Issuance of 2,925,817 shares of common stock in connection with Series D Preferred stock dividends | | | 359,479 | | | | - | | Accrued liabilities issued for Midwest Monitoring & Surveillance ownership | | | 144,000 | | | | - | | Subscription receivable issued for Series D Preferred stock | | | 50,000 | | | | - | | Patent acquired through accrued liability | | | 50,000 | | | | - | |
| | | Nine Months Ended June 30, | | | | | 2010 | | | | 2009 | | Cash paid for interest | | $ | 1,088,120 | | | $ | 1,121,715 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of shares of common stock in exchange for shares of Series B Preferred stock | | $ | - | | | $ | 2 | | Issuance of shares of common stock and warrants in exchange for deferred consulting services and financing costs | | | - | | | | 384,667 | | Accrual of Series A Preferred stock dividends | | | - | | | | 175 | | Issuance of shares of common stock for subscription receivable | | | - | | | | 250,000 | | Issuance of shares of common stock for accounts payable | | | - | | | | 550,000 | | Discount from issuance of convertible debt | | | - | | | | 4,114,052 | | Cancellation of common stock issued | | | - | | | | 175 | | Acquisition of monitoring equipment through issuance of debt | | | - | | | | 2,770,000 | | Stock and options issued in connection with acquisition of Bishop Rock Software, Inc. | | | - | | | | 856,522 | | Issuance of common stock to settle notes payable and accrued interest | | | - | | | | 187,793 | | Line of credit paid through the issuance of Senior convertible notes | | | - | | | | 3,549,630 | | Acquisition of property and equipment through issuance of debt | | | - | | | | 38,991 | | Issuance of 5,160,858, and 0 shares of common stock for payment of SecureAlert Monitoring, Inc. Series A Preferred stock contingency payments | | | 609,772 | | | | - | | Note payable issued to acquire monitoring equipment and property and equipment | | | 190,487 | | | | - | | Issuance of 3,150,000 and 0 stock options, respectively, for deferred consulting | | | 347,397 | | | | - | | Issuance of shares of Series D Convertible Preferred stock for conversion of debt, accrued liabilities and interest | | | 16,884,874 | | | | - | | Issuance of dividends payable on Series D Convertible Preferred stock | | | 939,371 | | | | - | | Note payable issued to acquire remaining shares of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 1,049,631 | | | | - | | Liabilities forgiven as part of acquisition of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 330,262 | | | | - | | 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. | | | 335,086 | | | | - | | Conversion effect on derivative liability | | | 1,018,892 | | | | - | | Issuance of 150,000 shares of common stock to purchase an additional 2.145% ownership of Midwest Monitoring & Surveillance, Inc. | | | 18,000 | | | | - | | Issuance of 19,896,000 of common stock from the conversion of 3,316 shares of Series D Preferred stock | | | 1,990 | | | | - | | Issuance of 2,925,817 shares of common stock in connection with Series D Preferred stock dividends | | | 359,479 | | | | - | | Accrued liabilities issued for Midwest Monitoring & Surveillance ownership | | | 144,000 | | | | - | | Subscription receivable issued for Series D Preferred stock | | | 50,000 | | | | - | | Patent acquired through accrued liability | | | 50,000 | | | | - | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The unaudited interim condensed consolidated financial information of SecureAlert, Inc. (formerly RemoteMDx, Inc.) and subsidiaries (collectively, the “Company” or “SecureAlert”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 fin ancialfinancial position as of June 30, 2010, and results of its operations for the three and nine months ended June 30, 2010 and 2009. 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, 2009. The results of operations for the three and nine months ended June 30, 2010 may not be indicative of the results for the fiscal year ending September 30, 2010.
The Company has incurred recurring net losses and negative cash flows from operating activities. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In order for the Company to achieve successful operations, the Company must generate positive cash flows from operating activities and obtain 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 stock and expanding its market for its TrackerPAL™ 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 operations.
(3) 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.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the FASB issued additional guidance which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in the Company’s financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency abou tabout transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This additional guidance must be applied to transfers occurring on or after the effective date. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.
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, wit hwith early adoptionadoptio n permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This guidance has not yet been adopted and the Company does not expect a significant impact to its results of operations and financial position.
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 asa s of April 1, 2010 which did not significantly impact its results of operations and financial position as of June 30, 2010.
In April 2008, the FASB issued an amendment for determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under authoritative accounting guidance for goodwill and other intangible assets. This guidance is intended to improve the consistency between the useful life of an intangible asset determined under the guidance for goodwill and other intangible assets and the period of expected cash flows used to measure the fair value of the asset under ASC 805 “Business Combinations” and other principles under GAAP. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and inte riminterim periods withinwit hin those fiscal years. The Company adopted this guidance as of October 1, 2009 which did not significantly impact its results of operations and financial position as of June 30, 2010.
In September 2006, the FASB issued enhanced guidance for using fair value to measure assets and liabilities. This guidance also provides for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. This new guidance applies whenever other guidance requires or permits assets or liabilities to be measured at fair value. This does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued additional guidance to exclude previous guidance on “Accounting for Leases” and delays the effective date of the this new guidance by one year for nonfinancial assets and nonfinancial liabilities that are recognized or disc loseddisclosed at fair valuev alue in the financial statements on a nonrecurring basis. In October 2008, the FASB issued additional guidance for determining the fair value of a financial asset when the market for that asset is not active to clarify the application of the provisions of the guidance for fair value measurements in an inactive market and how an entity would determine fair value in an inactive market. This additional guidance is effective immediately. The Company adopted this for financial assets and financial liabilities at the beginning of fiscal year 2009. The adoption of this guidance for financial assets and financial liabilities did not impact our results of operations and financial position. The guidance is effective for nonfinancial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this guidance for nonfinancial assets and nonfinancial liabilities did not significantly impact the Company’s results of operations and financial p osition.position.
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 September 2009, the FASB issued guidance updates and provided amendments to its Fair Value Measurements and Disclosure requirements which permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments, such as the nature of any restriction on the ability to redeem an investment on the measurement date. This guidance is effective for interim and annual periods ending after December 15, 2009. Early application was permitted in financial statements for earlier interim and annual periods that have not been issued. 0;The Company adopted this guidance for the nine months ended June 30, 2010 which did not 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 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. The Company adopted this guidance for the nine months ended June 30, 2010 which did not significantly impact the Company’s results of operations and financial position.
In February 2010, the FASB issued an accounting standard that amended certain recognition and disclosure requirement related to subsequent events. The accounting standard requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that a SEC filer disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial position or results of operations. The Company evaluated subsequent events through the date the accompanying condensed consolidated financial statements were issued.
(5) 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. The Company uses an equity verses a fair market value 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 fair 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 thatth at is independent of other groups of assets. During the nine months ended June 30, 2010 and 2009, the Company impaired goodwill from the purchase of Court Programs, Inc. by $204,735 and $0, respectively.
(6) REVENUE RECOGNITION
The Company’s revenue has historically been from two sources: (i) monitoring services; (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 up to 7 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 deferredd eferred revenue.
Monitoring Device Product Sales Although not the focus of the Company’s business model, the Company sells its monitoring devices in certain situations. In addition, the Company sells home security and Personal Emergency Response Systems (“PERS”) units. 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, 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™ 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 servic esservices for customerscustomer s that have previously purchased devices at the end of each month that monitoring services have been provided.
Multiple Element Arrangements The majority of the Company’s revenue transactions do not have multiple elements. On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services). For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have stand alone value to the customer; (ii) there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services; and (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 custome r. Incustomer. I n accordance with FASB ASC subtopic addressing multiple deliverables, if the fair value of the undelivered element exists, but the fair value does not exist for one 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 criteria are met.
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 are 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 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.
(7) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") is computed by dividing net loss attributable 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 then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common stock equivalents consist of shares issuable upon the exercise of common stock options and warrants, shares issuable upon conversion of debt, and shares issuable upon the conversion of preferred stock. As of June 30, 2010 and 2009, there were 274,113,290 and 76,128,791 outstanding common stock 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 June 30, 2010, consisted of 227,106,000 shares of common stock from the potential conversion of 37,851 shares of outstanding Series D Convertible Preferred Stock, 3,329,125 shares of common stock from the potential conversion of $417,855 of debt and accruedaccrue d interest, and 19,678,165 shares underlying options and warra nts.warrants. Of the 19,678,165 shares underlying options and warrants, 18,455,498 shares underlie options and warrants which have vested and 1,222,667 shares underlie options and warrants which have not yet vested. The remaining common stock equivalents consist of 4,000 Series D Preferred stock options that when converted would result in the issuance of 24,000,000 shares of the Company’s common stock.
(8) STOCK-BASED COMPENSATION
For the nine months ended June 30, 2010 and 2009, the Company calculated compensation expense of $67,406 and $67,406 respectively related to the vesting of stock options granted in prior years.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company granted no stock options to employees during the nine months ended June 30, 2010 and 1,517,714 during the nine months ended June 30, 2009, valued at $274,650. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.
A summary of stock option activity for the nine months ended June 30, 2010 is presented below: | | Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | Outstanding as of September 30, 2009 | | 4,709,214 | | $ | 0.76 | | | | | | | Granted | | - | | $ | - | | | | | | | Exercised | | - | | $ | - | | | | | | | Forfeited | | - | | $ | - | | | | | | | Expired / Cancelled | | (1,570,000) | | $ | 0.60 | | | | | | | Outstanding as of June 30, 2010 | | 3,139,214 | | $ | 0.27 | | 2.49 years | | $ | 17,353 | | Exercisable as of June 30, 2010 | | 3,016,547 | | $ | 0.25 | | 2.55 years | | $ | 17,353 | |
(9) 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.
Inventory consists of products that are available for sale and raw materials used in the manufacturing of TrackerPAL™ devices. Completed TrackerPAL™ devices are reflected in Monitoring Equipment. As of June 30, 2010 and September 30, 2009, respectively, inventory consisted of the following:
| | June 30, 2010 | | | September 30, 2009 | | Raw materials | | $ | 475,797 | | | $ | 686,421 | | Reserve for damaged or obsolete inventory | | | (124,725 | ) | | | (83,092 | ) | Total inventory, net of reserves | | $ | 351,072 | | | $ | 603,329 | |
(10) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2010 and September 30, 2009, were as follows: | | June 30, 2010 | | | September 30, 2009 | | Equipment, software and tooling | | $ | 2,453,221 | | | $ | 2,742,537 | | Automobiles | | | 308,611 | | | | 305,658 | | Building and land | | | 377,555 | | | | 377,555 | | Leasehold improvements | | | 127,912 | | | | 127,912 | | Furniture and fixtures | | | 284,824 | | | | 284,824 | | Property and equipment, before accumulated depreciation | | | 3,552,123 | | | | 3,838,486 | | Accumulated depreciation | | | (2,208,208 | ) | | | (2,525,180 | ) | | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | 1,343,915 | | | $ | 1,313,306 | |
Depreciation expense for the nine months ended June 30, 2010 and 2009 was $311,150 and $527,917, respectively.
Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the nine months ended June 30, 2010 and 2009, the Company disposed of property and equipment with a net book value of $24,221 and $0, respectively.
(11) MONITORING EQUIPMENT
Monitoring equipment as of June 30, 2010 and September 30, 2009, was as follows:
| June 30, 2010 | | | September 30, 2009 | Monitoring equipment | | $ | 5,432,285 | | | $ | 4,260,690 | | Less: accumulated depreciation | | | (3,200,324 | ) | | | (2,944,197 | ) | Total | | $ | 2,231,961 | | | $ | 1,316,493 | |
The Company leases monitoring equipment to agencies under operating lease arrangements. The monitoring equipment is depreciated using the straight-line method over an estimated useful life of 3 years.
Depreciation expense for the nine months ended June 30, 2010 and 2009 was $642,609 and $1,106,380, respectively. These expenses were classified as a cost of revenues.
Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the nine months ended June 30, 2010 and 2009, the Company disposed of monitoring equipment and parts with a net book value of $60,016 and $33,519, respectively.
(12) GOODWILL AND OTHER INTANGIBLE ASSETS
As of June 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 and patent purchases as follows:
| | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | Total | | Goodwill | | $ | 1,421,995 | | | $ | 2,756,461 | | | $ | - | | | $ | - | | | $ | 4,178,456 | | Other intangible assets | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | - | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | - | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | - | | | | 6,000 | | Patent license agreement | | | - | | | | - | | | | - | | | | 50,000 | | | | 50,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | - | | | | 8,000 | | Total other intangible assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 50,000 | | | | 673,001 | | Accumulated amortization | | | (22,667 | ) | | | (26,150 | ) | | | (185,855 | ) | | | - | | | | (234,672 | ) | Other intangible assets, net of accumulated amortization | | | 99,333 | | | | 84,850 | | | | 204,146 | | | | 50,000 | | | | 438,329 | | Total goodwill and other intangible assets, net of amortization | | $ | 1,521,328 | | | $ | 2,841,311 | | | $ | 204,146 | | | $ | 50,000 | | | $ | 4,616,785 | |
| | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | Total | | Goodwill | | $ | 1,421,995 | | | $ | 2,756,461 | | | $ | - | | | $ | - | | | $ | 4,178,456 | | Other intangible assets | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | - | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | - | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | - | | | | 6,000 | | Patent license agreement | | | - | | | | - | | | | - | | | | 50,000 | | | | 50,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | - | | | | 8,000 | | Total other intangible assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 50,000 | | | | 673,001 | | Accumulated amortization | | | (22,667 | ) | | | (26,150 | ) | | | (185,855 | ) | | | - | | | | (234,672 | ) | Other intangible assets, net of accumulated amortization | | | 99,333 | | | | 84,850 | | | | 204,146 | | | | 50,000 | | | | 438,329 | | Total goodwill and other intangible assets, net of amortization | | $ | 1,521,328 | | | $ | 2,841,311 | | | $ | 204,146 | | | $ | 50,000 | | | $ | 4,616,785 | |
Midwest Monitoring & Surveillance Effective 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.
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 Midwes t’s commonMidwest’s commo n 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 goodwill of $1,421,995 and $122,000 of other intangible assets, as noted in the table above.
The Company recorded $6,167 of amortization expense for Midwest intangible assets during the nine months ended June 30, 2010 resulting in a total accumulated amortization of $22,667 and net intangible assets of $99,333.
Court Programs Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, in Court Programs, Inc., a Mississippi corporation, Court Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of Florida, Inc., a Florida corporation (collectively, “Court Programs”). 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. 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 approximatelyapproxim ately $4.00 per share), transaction costs of $45,324, and long - -termlong-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,$200,000, a note payable for $849,631 which was subsequently exchanged into 621 shares of the Company’s Series D Preferred stock (see Note 16), $330,262 of debt forgiveness, and $335,086 of assumption of non-controlling interest. In connection with the acquisition, the Company paid 229 shares of Series D Preferred stock and $30,000 in cash to an entity to facilitate the acquisition.
The total consideration of $3,342,722 less the tangible assets acquired of $270,526 resulted in an excess over net book value of $3,072,196. The Company recorded $204,735 of impairment of goodwill resulting in a net goodwill of $2,756,461 and $111,000 of other intangible assets, as noted in the table above. The Company recorded $6,350 of amortization expense on intangible assets for Court Programs during the nine months ended June 30, 2010 resulting in a total accumulated amortization of $26,150 and net intangible assets of $84,850.
Bishop Rock Software Effective 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, resulting in no more r emaining goodwill.remaining goodwi ll.
The Company recorded $95,500 of amortization expense on intangible assets for Bishop Rock Software during the nine months ended June 30, 2010, resulting in a total accumulated amortization of $185,855 and net intangible assets of $204,146.
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 shall 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 pay $50,000 as consideration for the use of this patent. Of the $50,000, $25,000 was paid during the three months ended June 30, 2010 and the balance is due by January 29, 2011. Since the Company has not yet begun utilizing this patent and is in the process of determining its useful life, no amortization was recorded in connection with the license for the nine months ended June 30, 2010.
Supplemental Pro Forma Results of Operations The following tables present the pro forma results of operations for the three and nine months ended June 30, 2010 and 2009, as though the Bishop Rock Software acquisition and the remaining ownership of Court Programs had been completed as of the beginning of each period presented:
| | Three months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | Cost of revenues: | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | Gross profit | | | 1,363,765 | | | | 788,143 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $120,174 and $281,604, respectively, of compensation expense paid in stock or stock options / warrants) | | | 2,703,819 | | | | 3,178,333 | | Settlement expense | | | - | | | | 23,046 | | Research and development | | | 490,258 | | | | 431,201 | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (672) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | Interest income | | | 86 | | | | 8,215 | | Interest expense (including $88,247 and $1,099,707, respectively, of interest expense paid in stock) | | | (229,582) | | | | (1,255,103) | | Acquisition option extension cost | | | - | | | | (147,566) | | Derivative valuation loss | | | - | | | | (1,014,045) | | Other income (expense), net | | | 1,811 | | | | 196,568 | | Net loss | | | (2,054,238) | | | | (5,032,308) | | Net loss attributable to non-controlling interest | | | 12,645 | | | | - | | Net loss attributable to SecureAlert, Inc. | | | (2,041,593) | | | | (5,032,308) | | Dividends on Series A and D Preferred stock | | | (579,892) | | | | - | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485) | | | $ | (5,032,308) | | Net loss per common share, basic and diluted | | $ | (0.01) | | | $ | (0.03) | | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | |
| | Nine months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 225,380 | | | $ | 493,595 | | Monitoring services | | | 9,056,757 | | | | 8,986,068 | | Total revenues | | | 9,282,137 | | | | 9,479,663 | | Cost of revenues: | | | | | | | | | Products | | | 27,140 | | | | 246,310 | | Monitoring services | | | 5,348,448 | | | | 8,049,230 | | Total cost of revenues | | | 5,375,588 | | | | 8,295,540 | | Gross profit | | | 3,906,549 | | | | 1,184,123 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $1,068,352 and $2,355,600, respectively, of compensation expense paid in stock or stock options / warrants) | | | 8,931,801 | | | | 11,238,788 | | Settlement expense | | | 1,150,000 | | | | 23,046 | | Research and development | | | 1,161,539 | | | | 1,277,102 | | Impairment of goodwill | | | 204,735 | | | | - | | Loss from operations | | | (7,541,526 | ) | | | (11,354,813) | | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (8,756) | | | | - | | Loss on disposal of equipment | | | (8,713) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | (21,263) | | | | 20,449 | | Interest income | | | 13,227 | | | | 11,658 | | Interest expense (including $3,006,297 and $1,929,306, respectively, of interest expense paid in stock) | | | (3,840,232) | | | | (2,790,006) | | Acquisition option extension cost | | | - | | | | (347,066) | | Derivative valuation gain (loss) | | | 200,534 | | | | (1,014,045) | | Other income (expense), net | | | 121,855 | | | | 1,276,319 | | Net loss | | | (11,084,874) | | | | (14,197,504) | | Net loss attributable to non-controlling interest | | | 121,741 | | | | - | | Net loss attributable to SecureAlert, Inc. | | $ | (10,963,133) | | | $ | (14,197,504) | | Dividends on Series A and D Preferred stock | | | (939,371) | | | | (175) | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (11,902,504) | | | $ | (14,197,679) | | Net loss per common share, basic and diluted | | $ | (0.06) | | | $ | (0.08) | | Weighted average common shares outstanding, basic and diluted | | | 215,230,000 | | | | 173,137,000 | |
| | Three months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | Cost of revenues: | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | Gross profit | | | 1,363,765 | | | | 788,143 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $120,174 and $281,604, respectively, of compensation expense paid in stock or stock options / warrants) | | | 2,703,819 | | | | 3,178,333 | | Settlement expense | | | - | | | | 23,046 | | Research and development | | | 490,258 | | | | 431,201 | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (672) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | Interest income | | | 86 | | | | 8,215 | | Interest expense (including $88,247 and $1,099,707, respectively, of interest expense paid in stock) | | | (229,582) | | | | (1,255,103) | | Acquisition option extension cost | | | - | | | | (147,566) | | Derivative valuation loss | | | - | | | | (1,014,045) | | Other income (expense), net | | | 1,811 | | | | 196,568 | | Net loss | | | (2,054,238) | | | | (5,032,308) | | Net loss attributable to non-controlling interest | | | 12,645 | | | | - | | Net loss attributable to SecureAlert, Inc. | | | (2,041,593) | | | | (5,032,308) | | Dividends on Series A and D Preferred stock | | | (579,892) | | | | - | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485) | | | $ | (5,032,308) | | Net loss per common share, basic and diluted | | $ | (0.01) | | | $ | (0.03) | | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | |
| | Nine months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 225,380 | | | $ | 493,595 | | Monitoring services | | | 9,056,757 | | | | 8,986,068 | | Total revenues | | | 9,282,137 | | | | 9,479,663 | | Cost of revenues: | | | | | | | | | Products | | | 27,140 | | | | 246,310 | | Monitoring services | | | 5,348,448 | | | | 8,049,230 | | Total cost of revenues | | | 5,375,588 | | | | 8,295,540 | | Gross profit | | | 3,906,549 | | | | 1,184,123 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $1,068,352 and $2,355,600, respectively, of compensation expense paid in stock or stock options / warrants) | | | 8,931,801 | | | | 11,238,788 | | Settlement expense | | | 1,150,000 | | | | 23,046 | | Research and development | | | 1,161,539 | | | | 1,277,102 | | Impairment of goodwill | | | 204,735 | | | | - | | Loss from operations | | | (7,541,526 | ) | | | (11,354,813) | | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (8,756) | | | | - | | Loss on disposal of equipment | | | (8,713) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | (21,263) | | | | 20,449 | | Interest income | | | 13,227 | | | | 11,658 | | Interest expense (including $3,006,297 and $1,929,306, respectively, of interest expense paid in stock) | | | (3,840,232) | | | | (2,790,006) | | Acquisition option extension cost | | | - | | | | (347,066) | | Derivative valuation gain (loss) | | | 200,534 | | | | (1,014,045) | | Other income (expense), net | | | 121,855 | | | | 1,276,319 | | Net loss | | | (11,084,874) | | | | (14,197,504) | | Net loss attributable to non-controlling interest | | | 121,741 | | | | - | | Net loss attributable to SecureAlert, Inc. | | $ | (10,963,133) | | | $ | (14,197,504) | | Dividends on Series A and D Preferred stock | | | (939,371) | | | | (175) | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (11,902,504) | | | $ | (14,197,679) | | Net loss per common share, basic and diluted | | $ | (0.06) | | | $ | (0.08) | | Weighted average common shares outstanding, basic and diluted | | | 215,230,000 | | | | 173,137,000 | |
(13) BANK LINE OF CREDIT
As of September 30, 2009, the Company owed $252,600 against an available line of credit of $1,000,000 bearing interest at a rate of 3.28% and maturing on September 22, 2010. The line of credit is secured by certificates of deposit pledged by the Company’s Chief Executive Officer, Mr. Derrick. Interest on the line of credit is due monthly with the principal due at maturity. During the nine months ended, the Company borrowed $1,747,400 and made payments of $1,000,000 resulting in an outstanding balance of $1,000,000 as of June 30, 2010.
(14) ACCRUED EXPENSES
Accrued expenses consisted of the following as of June 30, 2010 and September 30, 2009:
| | June 30, 2010 | | | September 30, 2009 | | Accrued payroll, taxes and employee benefits | | $ | 649,745 | | | $ | 561,898 | | Accrued related-party origination fees | | | 192,725 | | | | - | | Accrued warranty and manufacturing costs | | | 156,622 | | | | 246,622 | | Accrued commissions and other costs | | | 154,128 | | | | 45,788 | | Accrued interest | | | 128,238 | | | | 382,424 | | Accrued acquisition extension costs | | | 72,000 | | | | 42,000 | | Accrued indigent fees | | | 47,686 | | | | 34,130 | | Accrued board of directors fees | | | 25,000 | | | | 300,000 | | Accrued legal and settlement costs | | | 21,307 | | | | 80,208 | | Accrued consulting | | | 18,000 | | | | 436,054 | | Accrued research and development costs | | | 14,132 | | | | 45,000 | | Accrued outside services | | | 11,458 | | | | 38,132 | | Accrued cellular costs | | | 6,085 | | | | 27,144 | | Accrued foreclosure liability | | | - | | | | 775,000 | | Accrued officer compensation | | | - | | | | 492,280 | | Total accrued expenses | | $ | 1,497,126 | | | $ | 3,506,680 | |
(15) (15) | CONVERTIBLE PROMISSORY NOTE |
On January 15, 2009, the Company entered into an unsecured convertible promissory note for $2,700,000 in order to purchase TrackerPAL™ units. The note, at the lender’s option, may convert into shares of the Company’s common stock at a conversion price of $0.22 per share. The note bears interest at 8% per annum and matures on January 15, 2010. Interest is due monthly and the principal is due at maturity. The fair market value of the common stock was $0.23$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 was expensed over the life of the note. As of June 30, 2010 and September 30, 2009, the outstanding balance due was $0 and $2,050,000 with a remainingremain ing debt discount 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. (16) (16) | 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 is 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 NoteNo te 18). This resulted in a debt discount valued at $853,166. A dditionally,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. 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 12). The promissory note requires monthly principal payments of $50,000 plus interest at a rate of 12% per annum maturing on July 13, 2011 (see Note 20). During the nine months ended June 30, 2010 the Company and the Senior Secured Convertible Note holder of $150,000 mutually agreed to extend the maturity dated ate from March 13, 2010 to May 31, 2010. As of June 30, 2010 a ndand September 30, 2009, the outstanding balance of the Senior Secured Convertible Notes was $150,000 and $3,419,631 with a remaining debt discount balance of $0 and $529,109, respectively. Subsequent to June 30, 2010 the Company paid off the outstanding balance of $150,000 and accrued interest of $20,891 for total cash payments of $170,891.
(17) (17) | SERIES A 15% DEBENTURES |
During the fiscal year ended September 30, 2009, the Company received $4,400,000 in cash from the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company. As of June 30, 2010 and September 30, 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 conver sionconversion rate of $0.20$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 18). 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. This 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, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt discount res ultingresulting in a totaltot al $3,130,423 in a debt discount to be amortized over the life of the debentures. During the nine months ended June 30, 2010, the Company amortized $1,821,720 of this debt discount and recorded it as interest expense. On January 13, 2010 the holders of debentures of $4,718,197 in principal and accrued interest converted this debt into a total of 4,723 shares of Series D Preferred stock. As of June 30, 2010 and September 30, 2009, the debt discount balance was $0 and $1,821,720, respectively.
(18) DERIVATIVES
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 nine months ended June 30, 2010. The Company recognized these derivatives as liabilities on its balance sheet, and measured them at their estimated fair value, and recognized changes in their estimated fair value in earnings (losses) in the period of change. As of June 30, 2010 and September 30, 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 nine months ended June 30, 2010.
The Company did not have any derivatives as of June 30, 2009. (19) DEBT OBLIGATIONS
Debt obligations as of June 30, 2010 and September 30, 2009, consisted of the following: | | June 30, 2010 | | | September 30, 2009 | | SecureAlert Monitoring, Inc. | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on June 9, 2011. | | $ | 7,803 | | | $ | 12,228 | | | | | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on December 31, 2011. | | | 14,241 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 12%. The note matured on February 1, 2010. | | | - | | | | 8,728 | | | | | | | | | | | Note payable for computer equipment with an interest rate of 10%. The note is secured by computer equipment. The note matures on December 18, 2012. | | | 16,806 | | | | - | | | | | | | | | | | Note payable for computer equipment with an interest rate of 12.364%. The note is secured by computer equipment. The note matures on June 28, 2013. | | | 85,342 | | | | - | | SecureAlert, Inc. | | | | | | | | | Unsecured promissory note with an entity bearing an interest rate of 15%. The note matures on December 31, 2010. Interest was paid quarterly and the principal due at maturity. Note was converted to Series D Preferred Stock on January 13, 2010 (see Note 21). | | | - | | | | 474,335 | | | | | | | | | | | Secured promissory note with an individual with an interest rate of 12%. The note matures on July 13, 2011. | | | 649,631 | | | | - | |
Court Programs, Inc. | | | | | | | Unsecured revolving line of credit with a bank with an interest rate of 9.24%. | | | 12,500 | | | | 16,500 | | | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 4% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 221,260 | | | | 225,000 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 26,397 | | | | 30,751 | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | - | | | | 1,492 | | | | | | | | | | | Capital lease with an effective interest rate 14.89% that matures in January 2011. | | | 6,878 | | | | 14,898 | | | | | | | | | | | Capital lease with an interest rate of 14.12% that matures on November 15, 2012. | | | 24,820 | | | | - | |
Court Programs, Inc. | | | | | | | Unsecured revolving line of credit with a bank with an interest rate of 9.24%. | | | 12,500 | | | | 16,500 | | | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 4% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 221,260 | | | | 225,000 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 26,397 | | | | 30,751 | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | - | | | | 1,492 | | | | | | | | | | | Capital lease with an effective interest rate 14.89% that matures in January 2011. | | | 6,878 | | | | 14,898 | | | | | | | | | | | Capital lease with an interest rate of 14.12% that matures on November 15, 2012. | | | 24,820 | | | | - | |
Midwest | | | | | | | | | | | | | | | Unsecured revolving line of credit with a bank, with an interest rate of 9.25%. | | | 39,522 | | | | 39,224 | | | | 39,522 | | | | 39,224 | | | | | | | | | | | | | | | | | | | Notes payable to a financial institution bearing interest at 6.37%. Notes mature in July 2011 and July 2016. The notes are secured by property. | | | 133,865 | | | | 185,274 | | | | 133,865 | | | | 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. | | | 9,010 | | | | 57,344 | | | | 9,010 | | | | 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 October 2011. | | | 48,741 | | | | 42,463 | | | | 48,741 | | | | 42,463 | | | | | | | | | | | | | | | | | | | Note payable to a stockholder of Midwest. The note bears interest at 5% maturing in February 2013. | | | - | | | | 47,704 | | | | - | | | | 47,704 | | | | | | | | | | | | Capital leases with effective interest rates that range between 12.9% and 14.7%. Leases mature between June 2014 and September 2014. | | | 108,892 | | | | 126,158 | | | | 108,892 | | | | 126,158 | | Total debt obligations | | $ | 1,405,708 | | | $ | 1,282,099 | | | $ | 1,405,708 | | | $ | 1,282,099 | | Less current portion | | | (886,424 | ) | | | (272,493 | ) | | | (886,424 | ) | | | (272,493 | ) | Long-term debt, net of current portion | | $ | 519,284 | | | $ | 1,009,606 | | | $ | 519,284 | | | $ | 1,009,606 | |
(20) (20) | RELATED-PARTY TRANSACTIONS | |
The Company has entered into certain transactions with related parties. These transactions consist mainly of financing transactions and consulting arrangements.
Related-Party Line of Credit
As of June 30, 2010 and September 30, 2009, the Company owed $55,245 and $76,022, respectively, under a line-of-credit agreement with ADP Management (“ADP”), an entity owned and controlled by Mr. Derrick, the Company’s Chief Executive Officer. Outstanding amounts on the line of credit accrue interest at 16% per annum and were due upon demand. During the nine months ended June 30, 2010, the Company made payments on the line-of-credit which consisted of net cash payments of $137,970 offset, in part, by $117,193 of expenses owed to ADP that are reimbursable by the Company.
Related-Party Notes Payable
Note #1 As of June 30, 2010 and September 30, 2009, the Company owed $0 and $1,500,000 in principal plus $0 and $12,197, respectively, in accrued interest to Mr. Derrick on an unsecured note payable. Total proceeds from the note were $1,500,000, which accrued interest at 15% and was due on February 26, 2010. On January 13, 2010, Mr. Derrick converted the note into 1,500 shares of Series D Preferred stock.
Note #2 Effective March 1, 2010, the Company purchased the remaining 49% ownership of Court Programs. The Company paid $100,000 in cash and entered into an unsecured note payable of $200,000 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 June 30, 2010 and September 30, 2009, the Company owed $200,000 and $0 in principal plus $5,908 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 #3 The 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 $5,000, a 1% origination fee, whichever is greater, maturing on April 15, 2010. On April 1, 2010, the Company paid off the promissory note for $505,000 in outstanding principal and accrued interest resulting in an effective interest rate of 21.5% per annum.
Note #4 On 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) 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 June 30, 2010, the Company accrued $192,725 in origination fees in connection with the agreement.
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 three months ended June 30, 2010, the Company recorded $62,736 as interest expense to account for a beneficial conversion feature in connection with the agreement.
Related-Party Series A 15% Debenture
On May 1, 2009, the Company issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an officer of the Company for $250,000 in cash. In addition to the rights and 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 June 30, 2010 and September 30, 2009, the Company owed $0 and $250,000 in principal plus $1,334 and $9,452 in accrued interest, respectively.
Consulting Arrangement
During the fiscal year ended September 30, 2008, the Compensation Committee approved a consulting agreement between ADP and the Company whereby the agreement compensates Mr. Derrick for serving as the Company’s Chief Executive Officer and Chairman of the Board of Directors. After considering Mr. Derrick’s status as one of the Company’s founders; his experience and length of service; his experience in the industries in which he operates; educational and work background; and reviews of sample salaries at companies of comparable size and industry, the Compensation Committee and Mr. Derrick agreed to a salary of $240,000 per year. During the fiscal year ended September 30, 2008, the Company and Mr. Derrick agreed to prepay his salary in non-cash instruments by issuing 1,000,000 shares of restrictedrest ricted common stock valued at $1.52 per share (as valued on July 2, 2008, the date of issuance). The Company recorded $180,000 of expense associated with the issuance of these shares during each of the nine months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, the remaining deferred compensation of $1,040,000 will be amortized over future periods.
(21) PREFERRED STOCK
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's board of directors has the authority to amend the Company's Articles of Incorporation, without further stockholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series D Convertible Preferred Stock In November 2009, the Company designated 50,000 shares of preferred stock as Series D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred stock”). During the nine months ended June 30, 2010, the Company issued a total of 17,174 shares of Series D Preferred stock in consideration for the conversion of $16,910,753 of debt, accrued liabilities and interest and issued 23,993 shares under securities purchase agreements for $11,996,500 in cash, of which $50,000 has not yet been received and has been recorded as a subscription receivable. In connection with the raise of capital, the Company paid $4,331,200 of fees and reimbursable expenses resulting in net proceeds of $7,615,300 to the Company. As of June 30, 2010, there were 37,851 Series D Preferred shares ou tstanding.outstanding.
Dividends The Series D Preferred stock is entitled to dividends at a rate equal to eight 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 thirty days following the end of the accrual period. On April 29, 2010 the Company issued 2,925,817 shares of the Com pany’s commonCompany’s co mmon stock to pay $359,479 of accrued dividends. Subsequent to June 30, 2010, the Company issued 4,693,307 shares of common stock to pay $578,048 of accrued dividends for the third fiscal quarter.
Convertibility Each share of Series D Preferred stock may be converted into 6,000 shares of common stock commencing after ninety days from the date of issue. During the nine months ended June 30, 2010, 3,316 shares of Series D Preferred stock were converted into 19,896,000 shares of common stock. Subsequent to June 30, 2010, 3,218 shares of Series D Preferred stock were converted into 19,308,000 shares of common stock.
As of June 30, 2010, 132 of the 37,851 shares of Series D Preferred stock outstanding were able to be converted into common stock due to the terms outlined in the Certificate of Designation of Series D Convertible Preferred Stock and certain forbearance agreements obtained by the Company whereby the holders agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company. The amendment was filed on June 30, 2010 and became effective on July 3, 2010.
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, 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 the date of this report, there were 3 4,63334,633 shares of Series D Preferred stock 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. Additionally, the holders are entitled to a liquidation preference equal to their original investment amount. There are presently no plans to seek approval on either of these issues.
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, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.
Series D Preferred Stock Warrants During the nine months ended June 30, 2010, the Company issued and vested warrants to purchase a total of 4,000 Series D Preferred stock at an exercise price of $500.00 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 warrants were issued in connection with a financial advisory service agreement to restructure debt and raise additional capital.
As of June 30, 2010, the holders of the 4,000 warrants agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company, which was July 3, 2010.
SecureAlert Monitoring, Inc. (formerly SecureAlert, Inc.) Series A Preferred Shares During the fiscal year ended September 30, 2007, and pursuant to board of directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. (“SMI”) to designate 3,590,000 shares of preferred stock as Series A Convertible Redeemable Non-Voting Preferred stock (“SMI Series A Preferred stock”).
On March 24, 2008, SMI redeemed all outstanding shares of SMI Series A Preferred stock 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 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 nine months ended June 30, 2010, certain former holders of SMI Series A Preferred stock agreed to convert an aggregate of $2,490,142 of the future and past contingency payments otherwise payable with respect to the redemption of the SMI Series A Preferred stock in exchange for 2,492 shares of Series D Preferred stock. As of June 30, 2010 and September 30, 2009, the Company accrued $148,995 and $3,148,943, respectively, for future and past contingency payments due to former SMI Series A stockholders.
During the nine months ended June 30, 2010 and 2009, the Company recorded an expense (income) of $21,263 and ($20,449), respectively, to reflect the change between the estimated and actual contingency payments. During the nine months ended June 30, 2010, the Company issued 5,160,858 shares of common stock to satisfy $609,772 in contingency payments on SMI Series A Preferred stock and issued 229 shares of Series D Preferred stock to convert future contingency payments for two individuals, valued at $229,000. (22) COMMON STOCK
On June 30, 2010, the Company filed an amendment to its Articles of Incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Amendment increases the number of shares of common stock the Company is authorized to issue from 250,000,000 to 600,000,000 shares. Under applicable Utah law, the Amendment was effective July 3, 2010. This increase of authorized shares has been reflected in the condensed consolidated balance sheets as of June 30, 2010 and September 30, 2009.
During the nine months ended June 30, 2010, the Company issued 28,382,675 shares of common stock as follows:
| · | 5,160,858 shares of common stock, valued at $609,772, to former SMI Series A Preferred stockholders as payment for past contingency payments in connection with the redemption of the stockholders’ SMI Series A Preferred stock. |
| · | 250,000 shares of common stock, valued at $27,500 for services rendered. |
| · | 19,896,000 shares of common stock for the conversion of Series D Convertible Preferred stock |
| · | 2,925,817 shares of common stock, valued at $359,479, for Series D Convertible Preferred stock dividends |
| · | 150,000 shares of common stock, valued at $18,000, to acquire the additional ownership of Court Programs, Inc. (see Note 12) |
Common Stock Options and Warrants As of June 30, 2010, 18,455,498 of the 19,678,165 outstanding options and warrants were vested with a weighted average exercise price of $0.34 per share.
During the nine months ended June 30, 2010, the Company issued and vested warrants to purchase 2,000,000 shares of common stock at an exercise price of $0.15 per share in connection with a third party consulting service agreement.
During the nine months ended June 30, 2010, the Company granted to each previously serving non-executive member of the board of directors warrants to purchase 250,000 shares of common stock at an exercise price of $0.13 per share for past and future services from October 1, 2009 to December 31, 2010, totaling 750,000 warrants. Additionally, the Company granted to each new non-executive member of the board of directors warrants to purchase 200,000 shares of common stock at an exercise price of $0.13 per share for future services from January 1, 2010 to December 31, 2010, totaling 400,000 warrants. Of the 1,150,000 warrants issued, 650,000 vested during the nine months ended June 30, 2010. The Company recorded $68,825 of expense associated with these warrants during the nine months ended June 30, 2010 resulting in a balance of $52,943 to be expensed over the remaining life of the warrants.
As of June 30, 2010, only 5,892,430 of the 19,678,165 options and warrants outstanding were able to convert into common stock due to certain forbearance agreements obtained by the Company whereby the holders agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company. The amendment was filed on June 30, 2010 and did not become effective until July 3, 2010.
(23) COMMITMENTS AND CONTINGENCIES
Legal Matters During the nine months ended June 30, 2010, the Company settled two lawsuits, Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and RemoteMDx, Inc. and RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC). Under the terms of the settlement agreement, these cases were dismissed and the Company agreed to pay STOP over three years $1,150,000, of which $975,000 is outstanding as of June 30, 2010. The settlement agreement also included cross-li censing provisionscross-licensing provisi ons pursuant to which the Company licensed STOP to utilize certain of its patents and STOP licensed the Company to use certain of its patents that were the subject matter of these two lawsuits.
Aculis, Inc. filed a Complaint against the Company in the Fourth District Court in and for Utah County, Utah, on June 7, 2010, alleging breach of contract, unjust enrichment, and a claim for $208,889 in unpaid products and services, incremental to the $4,840,891 the Company has already paid to Aculis. The Company 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 to the Motion to Dismiss on August 5, 2010. The Company's reply memorandum is due to be filed on August 16, 2010. The Company intends to vigorously defend its interests and to pursue appropriate counterclaims against Aculis.
Indemnification Agreements In November 2001, the Company agreed to indemnify officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.
Cellular Access Agreement During the fiscal year ended September 30, 2009, the Company entered into several agreements with cellular organizations to provide communication services. The cost to the Company under these agreements during the nine months ended June 30, 2010 and 2009, was approximately $980,450 and $1,935,524, respectively. These amounts are included in cost of sales.
Subsequent to June 30, 2010, the following events occurred:
| 1) | 19,308,000 shares of common stock were issued upon the conversion of 3,218 shares of Series D Preferred stock. |
| 2) | 4,693,307 shares of common stock were issued for Series D Preferred stock dividends for the third fiscal quarter ended June 30, 2010. |
| 3) | The Company paid off a Senior Secured Convertible Note of $150,000 and accrued interest of $20,891 for cash payments of $170,891. |
| 4) | On June 30, 2010, the Company filed an amendment to its Articles of Incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Amendment increases the number of shares of common stock the Company is authorized to issue from 250,000,000 to 600,000,000 shares. Under applicable Utah law, the Amendment was effective July 3, 2010. |
(25) CHANGES IN EQUITY (DEFICIT) A summary of the composition of Equity (Deficit) of the Company at June 30, 2010 and 2009, and the changes during the nine months ended is presented in the following table:
| | Total SecureAlert, Inc. stockholders' equity (deficit) | | | Noncontrolling interest | | | Total equity (deficit) | | | Total SecureAlert, Inc. stockholders' equity (deficit) | | | Noncontrolling interest | | | Total equity (deficit) | | Balance at September 30, 2009 | | $ | (11,988,229 | ) | | $ | (384,592 | ) | | $ | (12,372,821 | ) | | $ | (11,988,229 | ) | | $ | (384,592 | ) | | $ | (12,372,821 | ) | Issuance of common stock | | | 1,014,751 | | | | - | | | | 1,014,751 | | | | 1,014,751 | | | | - | | | | 1,014,751 | | Issuance of common stock options | | | 498,992 | | | | - | | | | 498,992 | | | | 498,992 | | | | - | | | | 498,992 | | Amortization of deferred compensation | | | 541,860 | | | | - | | | | 541,860 | | | | 541,860 | | | | - | | | | 541,860 | | Series D preferred stock dividends | | | (939,371 | ) | | | - | | | | (939,371 | ) | | | (939,371 | ) | | | - | | | | (939,371 | ) | Issuance of series D preferred stock | | | 25,817,795 | | | | - | | | | 25,817,795 | | | | 25,817,795 | | | | - | | | | 25,817,795 | | Beneficial conversion feature | | | 62,736 | | | | - | | | | 62,736 | | | | 62,736 | | | | - | | | | 62,736 | | Acquisition of subsidiary | | | (4,824 | ) | | | 335,086 | | | | 330,262 | | | | (4,824 | ) | | | 335,086 | | | | 330,262 | | Net loss | | | (10,963,133 | ) | | | (121,741 | ) | | | (11,084,874 | ) | | | (10,963,133 | ) | | | (121,741 | ) | | | (11,084,874 | ) | Balance at June 30, 2010 | | $ | 4,040,577 | | | $ | (171,247 | ) | | $ | 3,869,330 | | | $ | 4,040,577 | | | $ | (171,247 | ) | | $ | 3,869,330 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total SecureAlert, Inc. stockholders' equity (deficit) | | | Noncontrolling interest | | | Total equity (deficit) | | | Balance at September 30, 2008 | | $ | 362,584 | | | $ | (326,578 | ) | | $ | 36,006 | | | Issuance of common stock | | | 4,559,877 | | | | - | | | | 4,559,877 | | | Issuance of common stock options | | | 719,464 | | | | - | | | | 719,464 | | | Amortization of deferred compensation | | | 1,497,936 | | | | - | | | | 1,497,936 | | | Beneficial conversion feature | | | 1,756,990 | | | | - | | | | 1,756,990 | | | Series A preferred dividend | | | (175 | ) | | | - | | | | (175 | ) | | Net loss | | | (13,925,108 | ) | | | (112,349 | ) | | | (14,037,457 | ) | | Balance at June 30, 2009 | | $ | (5,028,432 | ) | | $ | (438,927 | ) | | $ | (5,467,359 | ) | |
| | Total SecureAlert, Inc. stockholders' equity (deficit) | | | Noncontrolling interest | | | Total equity (deficit) | | Balance at September 30, 2008 | | $ | 362,584 | | | $ | (326,578 | ) | | $ | 36,006 | | Issuance of common stock | | | 4,559,877 | | | | - | | | | 4,559,877 | | Issuance of common stock options | | | 719,464 | | | | - | | | | 719,464 | | Amortization of deferred compensation | | | 1,497,936 | | | | - | | | | 1,497,936 | | Beneficial conversion feature | | | 1,756,990 | | | | - | | | | 1,756,990 | | Series A preferred dividend | | | (175 | ) | | | - | | | | (175 | ) | Net loss | | | (13,925,108 | ) | | | (112,349 | ) | | | (14,037,457 | ) | Balance at June 30, 2009 | | $ | (5,028,432 | ) | | $ | (438,927 | ) | | $ | (5,467,359 | ) |
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution Estimated expenses payable by us in connection with the offering described in this registration statement are as follows: SEC registration fee | | $ | 1,331 | | Accounting fees and expenses | | | 10,000 | | Legal fees and expenses | | | 25,000 | | Printing expenses | | | 5,000 | | Transfer agent fees and expenses | | | 1,000 | | Miscellaneous fees and expenses | | | 1,000 | | | | | | | Total | | $ | 43,331 | |
SEC registration fee | | $ | 336 | | Accounting fees and expenses* | | | 15,000 | | Legal fees and expenses* | | | 40,000 | | Printing expenses* | | | 5,000 | | Transfer agent fees and expenses* | | | 1,000 | | Miscellaneous fees and expenses* | | | 1,000 | | Total* | | $ | 62,336 | | _____________ | | | | | *Estimated | | | | |
Item 14. Indemnification of Directors and Officers We are a Utah corporation. Section 16-10a-902 of the Utah Revised Business Corporation Act (the "Revised Act") provides that a corporation may indemnify any individual who was, is, or is threatened to be made a named defendant or respondent (a "Party") in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (a "Proceeding"), because he or she is or was a director of the corporation or, while a director of the corporation, is or was serving at its request as a director, officer, partner, trustee, employee, fiduciary or agent of another corporation or other person or of an employee benefit plan (an "Indemnifiable Director"), against any obligation incurred with respect to a Proceeding, including any judgment, set tlement,settl ement, penalty, fine or reasonable expenses (including attorneys' fees), incurred in the Proceeding, if his or her conduct was in good faith, he or she reasonably believed that his or her conduct was in, or not opposed to, the best interests of the corporation, and, in the case of any criminal Proceeding, had no reasonable cause to believe such conduct was unlawful; provided, however, that pursuant to Subsections 902(4)-(5): (i) indemnification under Section 902 in connection with a Proceeding by or in the right of the corporation is limited to payment of reasonable expenses (including attorneys' fees) incurred in connection with the Proceeding and (ii) the corporation may not indemnify an Indemnifiable Director in connection with a Proceeding by or in the right of the corporation in which the Indemnifiable Director was adjudged liable to the corporation, or in connection with any other Proceeding charging that the Indemnifiable Director derived an improper personal benefit, whether or not i nvolvinginv olving action in his or her official capacity, in which Proceeding he or she was adjudged liable on the basis that he or she derived an improper personal benefit. Section 16-10a-903 of the Revised Act provides that, unless limited by its articles of incorporation, a corporation shall indemnify an Indemnifiable Director who was successful, on the merits or otherwise, in the defense of any Proceeding, or in the defense of any claim, issue or matter in the Proceeding, to which he or she was a Party because he or she is or was an Indemnifiable Director of the corporation, against reasonable expenses (including attorneys' fees) incurred in connection with the Proceeding or claim with respect to which he or she has been successful. In addition to the indemnification provided by Sections 902 and 903, Section 16-10a-905 of the Revised Act provides that, unless otherwise limited by a corporation's articles of incorporation, an Indemnifiable Director may apply for indemnification to the court conducting the Proceeding or to another court of competent jurisdiction. Section 16-10a-904 of the Revised Act provides that a corporation may pay for or reimburse the reasonable expenses (including attorneys' fees) incurred by an Indemnifiable Director who is a Party to a Proceeding in advance of the final disposition of the Proceeding upon the satisfaction of certain conditions. Section 16-10a-907 of the Revised Act provides that, unless a corporation's articles of incorporation provide otherwise, (i) an officer of the corporation is entitled to mandatory indemnification under Section 903 and is entitled to apply for court-ordered indemnification under Section 905, in each case to the same extent as an Indemnifiable Director, (ii) the corporation may indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as an Indemnifiable Director, and (iii) a corporation may also indemnify and advance expenses to an officer, employee, fiduciary or agent who is not an Indemnifiable Director to a greater extent than the right of indemnification granted to an Indemnifiable Director, if not inconsistent with public policy , and if provided for by its articles of incorporation, bylaws, general or specific action of its board of directors or contract. Section 16-10a-908 of the Revised Act provides that a corporation may purchase and maintain liability insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the corporation or who, while serving as a director, officer, employee, fiduciary, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of another foreign or domestic corporation or other person, or of an employee benefit plan, against liability asserted against or incurred by the individual in that capacity or arising from his or her status as such, whether or not the corporation would have the power to indemnify him or her against the same liability under Section Section 0;902, 903, or 907 of the Revised Act. Section 16-10a-909 of the Revised Act provides that a provision treating a corporation's indemnification of or advance for expenses to, Indemnifiable Directors that is contained in its articles of incorporation or bylaws, in a resolution of its stockholders or board of directors or in a contract, except an insurance policy, or otherwise, is valid only if and to the extent the provision is not inconsistent with Sections 901 through 909 of the Revised Act. If the articles of incorporation limit indemnification or advancement of expenses, indemnification and advancement of expenses are valid only to the extent not inconsistent with the articles. Our articles of incorporation provide that we shall indemnify any person who is or was a director, officer, employee or agent of our company, or who was serving at our request as a director, officer, employee of agent of another entity, trust or plan to the fullest extent permitted by the Revised Act. Our bylaws also include mandatory indemnification provisions with respect of our officers and directors and discretionary indemnification provisions with respect to employees and agents, each subject to limitations generally reflecting the limitations on indemnification set forth in the Revised Act. Our bylaws provide that we may purchase and maintain insurance on behalf of any person who is or was one of our directors, officers, employees or agents, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her or incurred by him or her in such capacity or arising out of his or her status in such capacity, whether or not we would have the power to indemnify him or her against such liability under the indemnification provisions of the bylaws or the laws of the State of Utah, as the same are amended or modified. We maintain insurance from commercial carriers against certain liabilities that may be incurred by our directors andan d officers. Indemnification may be granted pursuant to any other agreement, bylaw or vote of stockholders or directors. The foregoing description is necessarily general and does not describe all details regarding the indemnification of our officers, directors or controlling persons.
Item 15. Recent Sales of Unregistered Securities Since October 1, 2007, we issued the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”). Fiscal Year 2008 Shares Issued Pursuant to Acquisitions 650,000 shares valued at $2,599,500 were issued in December 2007 pursuant to acquisitions. The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506. There were no non-accredited investors involved in this transaction. Shares Issued in Connection with Line of Credit Agreement 360,000 shares were issued in March 2008 to certain entities that provided letters of credit in connection with our line of credit with Citizen National Bank. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. Shares Issued to Employees, Consultants and Vendors for Products and Services 6,710,000 shares valued at $10,552,300 were approved for issuance to certain of our employees and officers for services rendered during fiscal year 2008. Additionally, 1,000,000 shares of restricted Common Stock valued at $1,520,000, or $1.52 per share, were issued to an officer for deferred compensation. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of these shares were officers or employees at the time of the issuance and each was an accredited investor. 400,000 shares valued at $704,000 were issued in May 2008 to an independent consultant for consulting services. These consulting services consisted of aiding in the settlement of a vendor dispute. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. 1,025,000 shares valued at $3,068,285 were issued during fiscal year 2008 to seven unaffiliated entities for product design services. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Shares Issued in Settlement 325,000 shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group (“Onyx”) to settle amounts owed due to a public relations contract. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities. Onyx is an accredited investor. No general solicitation or general advertising was made or done in connection with the issuance of the shares. Shares Issued Upon the Conversion of Preferred Stock 15,000 shares of Common Stock were issued upon conversion of our Series B Preferred Stock in October 2007. Each share of Series B Preferred Stock was convertible at any time into shares of Common Stock. The number of shares of Common Stock into which each share of Series B Preferred Stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred Stock, namely $3.00, by the conversion price. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of the shares were accredited investors and were already security holders. The common shares were issued pursuantpursua nt to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities. Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the Preferred Stock. Shares Issued Upon the Conversion of SecureAlert Monitoring Series A Preferred Stock 7,434,249 shares of Common Stock were issued upon redemption of SecureAlert Monitoring Series A Preferred Stock in March 2008. In addition, 825,893 shares of Common Stock were issued for SecureAlert Monitoring Series A Preferred Stock dividends. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The shares of Common Stock were issued to individuals who were already security holders and were issued pursuant to the terms of the rights and preferences of the preferred class of securities being converted. These shares were issued pursuant to a privately negotiated transaction. There was no public offering of securities, and no general solicitation or general advertising was made or done in connection with the issuances. No cash consideration was paid in connection with the conversion of the Preferred Stock. Shares Issued on Revalue Rights 100,000 shares of Common Stock were issued as a penalty to Borinquen Container Corp. (“Borinquen”) for our failure to register shares Borinquen purchased in a private placement. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Borinquen represented that it was an accredited investor; in addition, Borinquen already owned shares of our Common Stock at the time of this transaction. Shares Issued in Private Placements In March and September 2008, 6,077,219 shares were issued to Futuristic, Advance Technology Investors, LLC, and Borinquen for gross proceeds of $5,057,914 in cash in a private placement of Common Stock. The initial issuance of the shares of Common Stock, together with certain warrants, werewas effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Each investor signed a purchase agreement in which the investor made representations that included being an accredited investor and purchasing for the investor’s own account and not with a view to distribute the shares. There was no public offering of securities. No general solicitation or general advertising was made or done in connectionconnect ion with the issuanc e,issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates. Shares Issued Upon Exercise of Warrants 3,618,814 shares were issued upon the exercise of options and warrants between October 2007 and September 2008. The exercise prices ranged from $0.54 to $1.73 per share. The warrants had been granted in connection with services rendered. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Fiscal Year 2009 Shares Issued Pursuant to Acquisitions 2,857,286 shares valued at $657,176 were issued in January 2009 pursuant to an acquisition of Bishop Rock Software. The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506. There were no non-accredited investors involved in this issuance. 150,000 shares valued at $19,500 were issued in March 2009 pursuant to an agreement to extend an option to purchase the remaining 49% ownership of Midwest Monitoring. Shares Issued in Connection with Debt 100,000 shares were issued in November 2008 to a related-party for entering into a promissory note with us. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. 4,506,750 shares were issued during the fiscal year ended September 30, 2009 to 13 entities in connection with the issuance of Series A 15% debentures for cash proceeds of $4,496,750. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. 3,549,630 shares were issued in March 2009 to six entities in connection with the issuance of Senior Secured Convertible notes. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. 8,000,000 shares were issued in July 2009 for additional consideration to enter into a promissory note and to resolve prior investments. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. 9,796,636 shares were issued in January 2009 for additional consideration to enter into a debenture and to resolve prior investments. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares. Shares Issued to Employees, Directors, and Consultants 737,500 shares valued at $169,625 were issued to our employees and officers as consideration for services rendered to us during fiscal year 2009. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. 400,000 shares valued at $120,000 were issued in March and August 2009 to directors from the conversion of fees for services provided to us. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. 2,875,000 shares valued at $639,250 were issued throughout the fiscal year to four unaffiliated entities for legal and consulting services. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Shares Issued to Settle Lawsuits and Obligations 1,200,000 shares valued at $240,000 were issued in February 2009 to Strategic Growth International (“SGI”) to settle amounts owed due to a public relations contract. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities. SGI is an accredited investor. No general solicitation or general advertising was made or done in connection with the issuance of the shares. 2,000,000 shares valued at $240,000 were issued in March 2009 to Thomas Natale, Edward Boling, and Boling Enterprises, LP (“Boling”) to settle amounts owed due to an unresolved disputed debt. Natale and Boling were former officers of SecureAlert. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities. Boling is an accredited investor. No general solicitation or general advertising was made or done in connection with the issuance of the shares.share s. 2,200,000 shares valued at $550,000 were issued in May 2009 to Fulbright and Jaworski, LLP (“Fulbright”) to settle amounts owed for legal services. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities. Fulbright is an accredited investor. No general solicitation or general advertising was made or done in connection with the issuance of the shares. Shares Issued Upon the Conversion of Preferred Stock 10,999 shares of Common Stock were issued upon conversion of our Series B Preferred Stock in February 2009. Each share of Series B Preferred Stock was convertible at any time into shares of Common Stock. The number of shares of Common Stock into which each share of Series B Preferred Stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred Stock, namely $3.00, by the conversion price. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of the common shares were accredited investors and were already security holders of the Company. The commoncom mon shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities. Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the Preferred Stock. 9,306 shares of Common Stock were issued upon conversion of 19 shares of our Series A Preferred Stock in February 2009. Each share of Series A Preferred Stock was convertible at any time into shares of Common Stock. One share of Series A Preferred Stock was convertible into 370 shares of Common Stock. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of the common shares were accredited investors and were already security holders of the Company. The common shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities .securities. Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the Preferred Stock. Shares Issued in Private Placements In December 2008, March 2009, and May 2009, 17,850,000 shares were issued to Solomon Tennenhaus, Kofler Ventures, and euromicron AG investors for $3,250,000 in cash in a private placement of Common Stock. The initial issuance of the shares of Common Stock, together with certain warrants, werewas effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Each investor signed a purchase agreement in which the investor made representations to us that included being an accredited investor, and purchasing for the investor’s own account and not with a view to distribute the shares. There was no public offering of securities. No general solicitation or general advertising was made or done in connection wi thwith the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates. During the fiscal year ended September 30, 2009, we also cancelled 1,758,379 shares of Common Stock previously issued in prior years. Nine MonthsYear Ended JuneSeptember 30, 2010
Common Stock During the nine monthsyear ended JuneSeptember 30, 2010, we issued 5,160,8585,434,143 shares of Common Stock, valued at $609,772,$642,566, 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. The CompanyWe also issued 250,000 shares of Common Stock for services rendered to the Company valued at $27,500. The shares of Common Stock were issued in connection with a private transaction pursuant to an agreement dated February 4, 2010.
Additionally, the Companywe entered into an agreement with four minority owners of Midwest Monitoring and Surveillance (“Midwest Monitoring”) to extend the option period for the purchase of the remaining minority ownership interest of Midwest Monitoring. As consideration for the extension of the option period for an additional 12 months, the Companywe paid a fee (to be credited against the purchase price for the remaining shares of Midwest Monitoring) 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 Monitoring. In addition, we 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, w ewe received sharesshare s of Midwest Monitoring’s Common Stock, increasing our total ownership interest in Midwest Monitoring from 51% to 53.145%. These shares of Common Stock were issued to the Midwest Monitoring minority owners in private transactions. In April 2010, the Board of Directors approved the issuance of 2,925,817 shares of Common Stock to pay $359,479 of accrued Series D Preferred dividends. The shares were issued to pay the accrued and unpaid 8% dividends on the Series D Preferred as of March 31, 2010. In July 2010, the Board of Directors approved the issuance of 4,693,307 shares of Common Stock to pay $579,892 of accrued Series D Preferred dividends. The shares were issued to pay the accrued and unpaid 8% dividends on the Series D Preferred as of June 30, 2010. During the nine monthsyear ended JuneSeptember 30, 2010, we issued 19,896,00057,204,000 shares of Common Stock upon conversion of 3,3169,534 shares of Series D Preferred. During the year ended September 30, 2010, ADP Management returned and cancelled 1,000,000 shares of Common Stock previously issued to prepay Mr. Derrick’s base salary. Series D Preferred Additionally, duringDuring the nine monthsyear ended JuneSeptember 30, 2010, we issued 41,16744,941 shares of Series D Preferred. We issued the Series D Preferred in exchange for an aggregate of $16,910,753 of outstanding debt obligations of the Company and net cash proceeds of $7,615,300.$9,638,851. The shares of Series D Preferred were issued in private placement transactions, without registration of the offer and sale of the securities. We issued the shares of Series D Preferred to a total of 6263 accredited investors and debt holders in these private transactions.
In each of the transactions listed above, the shares of Common Stock and Preferred Stock were issued without registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations promulgated thereunder. Item 16. Exhibit Index
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 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001). | | | | | 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 10-QSB for the six months ended March 31, 2002). | | | | | 3(i)(5) | Certificate of Amendment to the Designation of Rights and Preferences Related to Series A 10% Cumulative Convertible Preferred Stock (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 (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 (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | | | | | 3(i)(9) | Articles of Amendment to the Designation of Right and Preferences of Series A Convertible Redeemable Non-Voting Preferred Stock (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 (previously filed as Exhibit on Form 10-Q for the three months ended March 31, 2010, filed in May 2010) | | | | | 3(i)(11) | Articles of Amendment to the Articles of Incorporation of RemoteMDx, Inc. to increase the total authorized shares of common stock to 250,000,000, filed on March 5, 2009 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2010, filed in August 2010). | | | | | 3(i)(12) | Articles of Amendment to the Articles of Incorporation to Change Name from RemoteMDx, Inc. to SecureAlert, Inc., dated February 1, 2010 (previously filed as Exhibit on Form 10-Q for the three months ended December 31, 2009, filed in February 2010). | | | | | 3(i)(13) | Articles of Amendment to the Articles of Incorporation to Change Name from SecureAlert, Inc. to SecureAlert Monitoring, Inc., dated February 1, 2010 (previously filed as Exhibit on Form 10-Q for the three months ended December 31, 2009, filed in February 2010). |
| | 3(i)3.(i)(14) | Articles of Correction to the Certificate of Designation of Series D Convertible Preferred Stock, filed with the State of Utah on May 4, 2010, effective December 3, 2009 (previously filed as Exhibit on Form 10-Q for the three months ended March 31, 2010, filed in May 2010). | | | | 3(i) | 3.(i)(15) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc. to increase the total authorized shares of common stock to 600,000,000, filed on June 30, 2010 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2010, filed in August 2010). | | | | | 3(ii) | Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997). |
| | | | 4.01 | 2006 Equity Incentive Award Plan (previously filed in August 2006 the Form 10-QSB for the nine months ended June 30, 2006). | | | | | 5.01 | Opinion regarding legality, filed herewith. | | | | | 10.01 | Loan Agreement (as amended) dated June 2001 between ADP Management and the Company (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001). | | | | | 10.02 | Loan Agreement (as amended and extended) dated March 5, 2002 between ADP Management and the Company, effective December 31, 2001 (filed as an exhibit to our quarterly report on Form 10-QSB for the three months ended December 31, 2001). | | | | | 10.03 | Stock Purchase Agreement between the Company and Midwest Monitoring & Surveillance, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). | | | | | 10.04 | Stock Purchase Agreement between the Company and Court Programs, Inc., Court Programs of Florida Inc., and Court Programs of Northern Florida, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). | | | | | 10.05 | Distribution and License Agreement between euromicron AG, a German corporation, and the Company, dated May 28, 2009 (previously filed as an Exhibit on Form 10-Q for the nine months ended June 30, 2009, filed in August 2009). | | | | | 10.06 | Settlement Agreement between Satellite Tracking of People, L.L.C. and the Company, dated January 29, 2010. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2009, filed in February 2010). | | | | | 10.07 | Agreement between the Company and Sapinda Group, Ltd., dated November 25, 2009 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2009, filed in February 2010). | | | | | 10.08 | Amended Stock Purchase Agreement between Court Programs and the Company, effective March 31, 2010 (previously filed as Exhibit to Current Report on Form 8-K/A, filed by the Company on May 14, 2010). | | | | | 10.09 | Second Extension of Purchase Agreement among SecureAlert, Inc., Midwest Monitoring & Surveillance, Inc., Gary Shelton, Gary Bengtson, Larry Gardner and Sue Gardner, dated effective April 1, 2010 (previously filed as Exhibit to Current Report on Form 8-K, filed by the Company on May 7, 2010). | | | | | 21.01 | Subsidiaries of the Company, filed herewith. | | | | | 23.01 | Consent of Durham, Jones & Pinegar, P.C. (incorporated by reference to Exhibit 5.01 included herewith). | | | | | 23.02 | Consent of Hansen, Barnett & Maxwell, P.C., filed herewith. |
Item 17. Undertakings (A) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offeringofferi ng price set forth in the “Calculation of Registration Fee” table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) For the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will , as to the purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (B) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securitiessecur ities being registered, , the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statementRegistration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Salt Lake City, State of Utah, on September 9,December 3, 2010. | | | | | | | | | SECUREALERT, INC. | | | | | | | | | | | | By: | | /s/ David G. Derrick | | | | | Name: | | David G. Derrick | | | | | Title: | | Chief Executive Officer | | |
POWER OF ATTORNEY
Each person whose signature appears below appoints John L. Hastings, III and Chad D. Olsen, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for him/her and in his name, place and stead, in any and all capacities to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement, any related Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933 and any or all pre- or post-effective amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to b e done in and about the premises, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent, or any substitute or substitutes for him, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statementRegistration Statement has been signed by the following persons in the capacities and on the dates indicated. | | | | | Signature | | Title | | Date | | | | | | /s/ David G. Derrick David G. Derrick | | Chief Executive Officer (Principal Executive Officer) and Director | | September 9,December 3, 2010 | | | | | | /s/ Chad D. Olsen Chad D. Olsen | | Chief Financial Officer, Controller and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer) | | September 9,December 3, 2010 | | | | | | /s/ John L. Hastings, III III* John L. Hastings, III | | President, Chief Operating Officer, and Director | | September 9,December 3, 2010 | | | | | | /s/ Larry G. SchafranSchafran* Larry G. Schafran | | Director | | September 9,December 3, 2010 | | | | | | /s/ Edgar BernardiBernardi* Edgar Bernardi | | Director | | September 9,December 3, 2010 | | | | | | /s/ Robert E. ChildersChilders* Robert E. Childers | | Director | | September 9,December 3, 2010 | | | | | | /s/ David P. HanlonHanlon* David P. Hanlon | | Director | | September 9,December 3, 2010 | /s/ Rene KlinkhammerKlinkhammer* Rene Klinkhammer | | Director | | September 9,December 3, 2010
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*By: /s/ David G. Derrick | As Attorney-in-Fact |
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