Shares Offered by Selling Stockholders | | 47,100,000On April 1, 2014, we closed on a Share Purchase Agreement executed on March 12, 2014 (the “Purchase Agreement”) to acquire all of the issued and outstanding shares of GPS Global (the “Transaction”). The sole owner of GPS Global was Eli Sabag, an individual residing in Israel and the Selling Shareholder under this prospectus. The purchase price for the shares of GPS Global was an amount up to $7,811,404 payable in cash of $311,404 and shares of our Common Stock valued at $7,500,000. The Purchase Agreement requires us to file with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, or the Securities Act, the registration statement that includes this prospectus for the purpose of registering the resale of the Shares that were issued at the time of the closing of the Transaction, including certain shares of Common Stock that are to be held in escrow by Zions First National Bank of Salt Lake City, Utah (“Escrow Agent”) to be released to Selling Shareholder on conditions contained in the escrow agreement entered into by the parties (the “Escrow Agreement”). See “The Transaction” for a summary of the terms and conditions of our acquisition of GPS Global.Securities Offered This offering involves a total of 236,469 shares of our Common Stock (the “Shares”) issued under the Purchase Agreement, including 152,291 shares held in escrow by the Escrow Agent which may be delivered to Selling Shareholder on or about October 1, 2014, as provided in the Purchase Agreement and subject to conditions contained in the Purchase Agreement and in the Escrow Agreement, as follows: Common Stock (the “Resale Shares”)offered by the Selling Shareholder: | 236,469 Shares | | | | Selling Stockholders | | The Selling Stockholders were or are current holders of a total of 7,850 shares of our Series D Preferred and were granted registration rights in connection with their acquisition of the Series D Preferred. To fulfill our obligations under the registration rights granted to these Selling Stockholders, we have filed a Registration Statement pursuant to which the Resale Shares are being registered. See “SELLING STOCKHOLDERS” identified elsewhere in this prospectus on page 44.
| | | | Common Stock Outstanding as of November 22, 2010outstanding prior to the offering: | | 294,309,452 shares9,833,407 Shares | | | | | Common Stock outstanding after the offering: | 10,069,876 Shares | | | | Use of Proceeds | proceeds: | We will not receive noany proceeds from the sale of the Resale Shares by the Selling Stockholders.Shareholder in this offering. See “Use of Proceeds.” | | | | OTCBB Trading Symbol: Common Stock | | SCRA.OB | | | | Risk Factorsfactors: | | InvestingAn investment in our Common Stockthe Shares involves a high degree of risk. YouSee “Risk Factors” for a discussion of factors you should readconsider carefully and consider the information set forth under the heading “RISK FACTORS” beginning on page 3 of this prospectus and all other information in this prospectus before investing in our Common Stock.making an investment decision. | | | | OTC Markets (OTCQB) symbol: | SCRA |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSRISK FACTORS
This prospectus contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. The use of any statements containing the words “anticipate,” “intend,” “believe,” “estimate,” “project,” “expect,��� “plan,” “should” or similar expressions are intendedBefore you make a decision to identify such statements. Forward-looking statements included in this prospectus relate to, among other things, expected future production, expenses and cash flows in 2010, the nature, timing and results of capital expenditure projects, amounts of future capital expenditures, our future debt levels and liquidity. Although we believe that the expectations reflected in such forward-looking statements are reasona ble, those expectations may prove to be incorrect. All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement. Factors that could cause actual results to differ materially from our expectations include, among others, those factors referenced in the “Risk Factors” section of this prospectus, and such things as:
| · | our future cash flow, liquidity and financial position; |
| · | the amount, nature and timing of our capital expenditures, including future development costs; |
| · | a lack of available capital and financing; |
| · | volatility of stock prices generally and of the price of our Common Stock in particular; |
| · | our operating costs and other expenses; |
| · | risks related to our level of indebtedness; |
| · | the success of strategic plans, expectations and objectives of our future operations; |
| · | loss of senior management or technical personnel; |
| · | acquisitions and other business opportunities (or the lack thereof) that may be presented to and pursued by us; and |
| · | other factors, many of which are beyond our control. |
An investmentinvest in our securities, involves a high degree of risk. Youyou should consider carefully consider and evaluate allthe risks described below, together with other information in this prospectus. If any of the information contained in this prospectus before you decide to purchasefollowing events actually occur, our Common Stock. Any of the risks and uncertainties set forth belowbusiness, operating results, prospects or financial condition could be materially and adversely affect our business, results of operations and financial condition, which in turnaffected. This could materially and adversely affectcause the trading price of our Common Stock. As a result,Stock to decline and you couldmay lose all or part of your investment. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also significantly impair our business operations and could result in a complete loss of your investment.
Risks Related to Our Business, Operations and Industry The risk factors set forth belowWe are not the only risks that may affect our business. primarily dependent on additional borrowings under a Facility Agreement. Our business could alsoplan is dependent upon raising sufficient capital to supplement operational income. It may be affectednecessary for us to obtain additional borrowing at less than favorable terms. On January 3, 2014, we entered into an unsecured “Facility Agreement” with Tetra House Pte. Ltd., (“Tetra House”) an entity controlled by additional risks not currently knownour Chairman, Guy Dubois, pursuant to which Tetra House agreed to make available to us or thatup to $25,000,000 in borrowed funds at an 8% annual interest rate due and payable in arrears semi-annually. The funds may be drawn down at any time and from time to time through May 31, 2014, in minimum amounts of $2,000,000 and in $1,000,000 increments. In addition, we currently deem to be immaterial. If anypaid Tetra House an arrangement fee of $750,000 (3% of the following risks were actuallyaggregate maximum amount under the Facility Agreement). The borrowed funds may be used for acquisitions and for general corporate purposes and are due and payable two years from the closing date. After the loan was executed, Tetra House assigned the Facility Agreement to occur, our business, financial condition or results of operations could be materially adversely affected.Conrent Invest S.A. through its compartment “Safety II.” Since January 3, 2014, we have borrowed $10,000,000 under the Facility Agreement.
TheWe face risks related to our substantial indebtedness. Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our outstanding debentures and other debt instruments. As of March 31, 2014, we had $12,125,628 of indebtedness outstanding.
Our high degree of leverage could have important consequences to us, including: | · | making it more difficult for us to make payments on our debt; | | | | · | increasing our vulnerability to general economic and industry conditions; | | | | · | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities; | | | | · | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; | | | | · | limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and | | | | · | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged. |
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial statements contained in this prospectus have been prepared on the basiscondition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will continue asmaintain a going concern, notwithstanding the fact that our financial performance and condition during the past few years raise substantial doubt as to our ability to do so. There is no assurance we will ever be profitable. In the fiscal year ended September 30, 2009, we incurred a net losslevel of $23,081,500 and negative cash flows from operating activities of $8,521,326. As of September 30, 2009, we had an accumulated deficit of $205,765,496. Duringsufficient to permit us to pay the nine months ended June 30, 2010, we incurred a net loss of $11,084,874principal, premium, if any, and interest on our accumulated deficit as of June 30, 2010 was $216,075,643. These factors rai se substantial doubt about our ability to continue as a going concern. The financial statements included in this prospectus do not include any adjustments that might result from the outcome of this uncertainty. Our plan with respect to this uncertainty is to focus on increasing the number of TrackerPAL™ devices in the marketplace from which we will generate monitoring service revenue. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay indebtedness. If we are unable to increase cash flows from operating activities or obtain additional financing, we will be unable to continue the development of our products and will likely cease operations. We have a history of losses, anticipate significant future losses,If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may be unable to project our revenues and expenses accurately. We will incur significant expenses associated with the development and deployment of our products and promoting our brand. We intend to enter into additional arrangements through current and future strategic alliances that may requirenot permit us to pay consideration in various formsmeet our scheduled debt service obligations. In the absence of such operating results and in amounts that may significantly exceed current estimatesresources, we could face substantial liquidity problems and expectations. We may alsomight be required to offer promotional packagesdispose of hardware and softwarematerial assets or operations to end-users at subsidized prices in order to promotemeet our brand, products and services. These guaranteed payments, promotionsdebt service and other arrangements will result in s ignificant expense. If we do achieve profitability, we cannot be certain that we willobligations. We may not be able to sustainconsummate those dispositions or increase profitability in the future. In addition, because of our limited operating history in our newly targeted markets, we may be unable to project revenues or expenses with any degree of certainty. Management expects expenses to increase significantly in the future as we continue to incur significant sales and marketing, product development and administrative expenses. We cannot guaranteeproceeds that we willrealize from them may not be ableadequate to generate sufficient revenues to offset operating expenses or the costs of the promotional packages or subsidies described above, or that we will be able to achieve or maintain profitability. If revenues fall short of projections, our business, financial condition and operating results would be materially adversely affected.meet any debt service obligations then due.
General economic conditions may affect our revenue and harm our business. As widely reported, financial markets in the United States, Europe and Asia have been experiencingexperienced extreme disruption in recent months.the past two years. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and services, adversely affecting our results of operations and financial condition. Challenging economic conditions also may impair the ability of our customers or distributors to pay for products or services they have purchased, and as a result, our reserves for doubtful account saccounts and write-offs of accounts receivable could increase. Our cash flows may be adversely affected by delayed payments or underpayments by our customers. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S.United States and other countries. Budgetary issues faced by government agencies could adversely impact our future revenue. Our revenues are primarily derived from contracts with state, local and county government agencies in the United States and governments of Caribbean and Latin American nations. Many of these government agencies are experiencing budget deficits and may continue to do so. As a result, the amount spent by our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government clients. In addition, since 2009, the industry has experienced a general decline in average daily lease rate for GPS tracking units. As a result of these factors, our ability to maintain or increase our revenues may be negatively affected. As a result of our increased focus on a newinternational business market,markets, our business is subject to many of the risks of a new or start-up venture. The change in 2009 of ourOur business goals and strategy subjectssubject us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development. If we are to be successful in this new business direction, we must accomplish the following, among other things: | · | Develop and introduce functional and attractive productsproduct and services,service offerings; |
| | | | · | Increase awareness of our brand and develop customer loyalty,loyalty; |
| | | | · | Respond to competitive and technological developments,developments; |
| | | | · | Increase gross profit margins,margins; |
| | | | · | Build an operational structure to support our business,business; and |
| | | | · | Attract, retain and motivate qualified personnel. |
FailureIf we fail to achieve these goals, that failure would have a material adverse effect on our business, prospects, financial condition and operating results. Because the market for our products and services is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. There is no assurance that a market for these products or services will ever develop or that demand for our products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected, or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
Certain individuals orand groups own or control a significant number of our outstanding shares. Certain individuals and groups or persons associated with them beneficially own a substantial number of shares of our outstanding Common Stock or securities and debt instruments convertible into shares of our Common Stock. As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, approval or disapprovalpreclusion of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their suppo rt. support. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve risk to us or our other shareholders. Additionally, they may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. There is no certainty that the market will accept our products and services. Our targeted markets may be slow to or may never accept our products or services. Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to currentlyother available methods of offender monitoring and tracking. In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control. No assurance can be given that key decision-makers will accept our new products, which could have a material adverse effect on our business, financial condition and resu ltsresults of operations. Our relationship with certainWe do not have a chief executive officer and we are dependent upon the services of our stockholders presents potential conflicts of interest, which may result in decisions that favor them oversenior management team; the failure to attract and retain such individuals could adversely affect our other shareholders. operationsOne. We are dependent on the services, abilities and experience of our executive officers. The permanent loss of the services of any of these senior executives and any change in the composition of our senior management team could have a negative impact on our ability to execute on our business and operating strategies. We do not currently have a chief executive officer. In October 2012, the Board of Directors established an Executive Committee and transferred the executive function to this committee, currently comprised of Guy Dubois and David Boone. Messrs. Dubois and Boone will continue to execute the responsibilities of the Company’s principal beneficial ownersexecutive officer through the Executive Committee, until our search for a new chief executive officer is completed. Our inability to identify, hire and founders, David Derrick, provides management and/orsubsequently integrate a new chief executive officer could adversely impact our business, financial servicescondition and assistance to us. When his personal investment interests diverge from our interests, he and his affiliates may exercise their influence in their own best interests. Some decisions concerning our operations or finances may present conflictsresults of interest between us and these stockholders and their affiliated entities. See “TRANSACTIONS WITH RELATED PERSONS,” at p age 31, below.operations.
We rely on significant suppliers for key products and cellular access. If we do not renew these agreements when they expire we may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as we have in the past, which would reduce revenues and could adversely affect our results of operations or financial condition. We have entered into an agreement with a national cellular access company for cellular services. We also rely currently on a single manufacturersource for the manufacture of our TrackerPAL™ReliAlert devices. If any of ourthese significant suppliers were to cease providing productproducts or services to us, we would be required to seek alternative sources. There is no assurance t hatthat alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition. Our business subjects our research, development and ultimate marketing activities to current and possibly to future government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. Our monitoring device products are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies for use in the United States must be manufactured in compliance with applicable rules and regulations of the Federal Communications Commission (“FCC”). There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or re vocationrevocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations. We may be required to comply with FCC regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withd rawalswithdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions. Our products and related manufacturing operations may also be subject to regulation, inspection and licensing by other governmental agencies, including the Occupational Health and Safety Administration. We face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence. Our current and expected markets are rapidly changing. Existing products and services and emerging products and services will compete directly with theour products we are seeking to develop and market. Our technology will compete directly with other technology, and, althoughservices. Although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will havethose advantages that are significant enough to cause users to adopt its use. 60; Competition is expected to increase. Many of theseour competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field. Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our planned products. We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization. We are dependent upon certain customers, the loss of which would adversely affect our results of operations and business condition. During fiscal year 2013, two customers each accounted for more than 10% of total sales. One customer paid $5,252,959 (34% of total sales) under an international contract that was completed during fiscal year 2013 and it is uncertain if we will provide services to this customer in the future. Another customer paid $1,622,326 (10% of total sales) under a three-year contract which was completed in November 2013 and has continued on a month-to-month basis since that time. This contract could be terminated at anytime upon 30 days notice. The loss of either of these customers would result in lower revenues and limit the cash available to grow our business and to achieve profitability. In addition, on November 15, 2013, we entered into a contract with the uniformed prison service of the Republic of Chile known as the Gendarmerie. This is a 41-month contract and barring additional new contracts, this contract is expected to account for more than 10% of sales for fiscal year 2014. Subsequent to the execution of this contract, general elections were held in Chile. There is no assurance that the new government will honor this contract. The loss or interruption of this new contract would adversely affect our results of operations and financial condition. Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets. We may not realize revenues from the sale of some of our new products or services for several years, if at all. Some of the products we are currently evaluating, including the products under development by GPS Global, likely will require further research and development efforts before they can be commercialized. There can be no assurance that our research and development efforts will be successful or that we will be successful in developing any commercially successful products.successful. In addition, the technology which we integrate or that we may expect to integrate with our productsproduct and servicesservice offerings is ra pidlyrapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets and GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user. This limits the effectiveness of GPS if the user is in the lower floors of a tall building, underground or otherwise located where the signals have difficulty penetrating. Other difficulties and uncertainties normally associated with new industries or the application of new technologies in new or existing industries also threaten our business, including the possible lack of consumer acceptance, difficulty in obtaining financing for untested technologies, increasing competition from larger or smaller well-funded competitors, advances in competing or other technologies, and changes in laws and regulations affecting the development, marketing or use of our new products and related services. Our business plan anticipatesWe face risks of litigation and regulatory investigation and actions in connection with our operations. Lawsuits, including regulatory actions, may seek recovery of large, indeterminate amounts or otherwise limit our operations, and their existence and magnitude may remain unknown for substantial periods of time. Relevant authorities in the markets in which we operate may investigate us in the future. These investigations may result in significant growth through monitoring revenuespenalties in multiple jurisdictions, and acquisitions. To manage the expected growth we will require capital and there is no assurance we will be successful in obtaining necessary additional funding. Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities, the success of our development efforts, the cost and timing of establishing or expanding our revenues, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercializa tion efforts and the commercialization efforts of our marketing alliances, the costsmay become involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related todisputes with private parties seeking compensation for damages resulting from the relevant violations. Such substantial legal liability or regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to stockholders (including the purchasers of the Resale Shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories. Any inability or failure to raise capital when neededaction could also have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and credibility. In addition, our business activities are subject to various governmental regulations in countries where we operate, which include investment approvals, export regulations, tariffs, antitrust, anti-bribery, intellectual property, consumer and business taxation, foreign trade and exchange controls, and environmental and recycling requirements. These regulations limit, and other new or amended regulations may further limit, our business activities or increase operating costs. In addition, the enforcement of such regulations, including the imposition of fines or surcharges for violation of such regulations, may adversely affect our results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.operations, financial condition, cash flows, reputation and credibility.
Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights. We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries. We have received several patents. Wepatents; we have also applied for several additional patents and those applications are awaiting action by the U.S.United States Patent Office.and Trademark Office, or PTO, and by similar regulators in other countries. There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any. Our inability to obtain or to maintain patents on our key products could adversely affect our business. We own five15 patents and have filed and intend to file additional patent applications with the in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop. There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circum vented.circumvented. The prosecution of patent applications and the enforcement of patent rights are expensive, and the expense may adversely affect our profitability and the results of our operations. In addition, there can be no assurance that the rights afforded by any patents will guarantee proprietary protection or competitive advantage. Our success will also depend, in part, on our ability to avoid infringing the patent rights of others. We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services. Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities. In addition, if patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there can beis no assurance given that we will be able to obtain any necessary licenses on commercially favorable terms, if at all. Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition. Litigation that could result in substantial costs may also be necessary to enforce patents licensed or issued to us or to determine the scope or validity of third-party proprietary rights. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in proceedings beforedeclared by the U.S. Patent and Trademark OfficePTO to determine priority of invention, which could result in substantial costs, even if we eventually prevail. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we cease using such technology. We also rely on trade secretsecrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable. These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We intendseek to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors. We conduct business internationally with a variety of sovereign governments. Our business is subject to a variety of regulations and political interests that could affect the timing of payment for services and the duration of our contracts. We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust. The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. In addition, because our customers in these foreign jurisdictions are sovereign governments or governmental departments or agencies, it may be difficult for us to enforce our agreements with them in the event of a breach of those agreements, including, for example, the failure to pay for our services or to complete projects that we have commenced. We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses or hardware failures. Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result in negative publicity that could cause us to lose customer accounts or fail to obtain new accounts. In the past we have experienced temporary interruptions of telecommunications or power outages which were promptly mitigated. Such instances may result in loss of customer accounts or similar problems if they occur in the future. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to integrate smoothly and newly developed or purchased modules with our existing systems. Risks Related to the Transaction The success of our business depends on achieving our strategic objectives, including through acquisitions, dispositions and restructurings. With respect to acquisitions such as the Transaction, as well as potential restructuring actions, we may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges, such as personnel and technology. In addition, we may not achieve anticipated cost savings from restructuring actions, which could result in lower margin rates. In the past 18 months, we disposed of entities we had previously acquired. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. Alternatively, we may dispose of a business at a price or on terms that are less than we had anticipated. After reaching an agreement with a buyer or seller for the acquisition or disposition of a business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside our control could affect our future financial results. We may not be able to grow successfully through the Transaction or through future acquisitions, we may not successfully manage future growth, and we may not be able to effectively integrate the business of GPS Global or other businesses that we may acquire. We plan to continue to grow through strategic acquisitions of other businesses. In order to complete acquisitions, we would expect to require additional debt and/or equity financing, which could increase our interest expense, leverage and number of shares outstanding. Businesses that we acquire, such as GPS Global, may not perform as expected. Future revenues, profits and cash flows of an acquired business may not materialize due to the failure or inability to capture expected synergies, increased competition, regulatory issues, changes in market conditions, or other factors beyond our control. In addition, we may not be successful in integrating these acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention. Even if we are successful in integrating GPS Global or future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies or earnings gains, that we expected from such acquisitions, which may result in the commitment of our capital resources without the expected returns on such capital. Also, competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions. Additional risks related to acquisitions include, but are not limited to: | · | the potential disruption of our existing business; | | | | · | entering new markets or industries in which we have limited prior experience; | | | | · | difficulties integrating and retaining key management, sales, research and development, production and other personnel or diversion of management attention from ongoing business concerns to integration matters; | | | | · | difficulties integrating or expanding information technology systems and other business processes or administrative infrastructures to accommodate the acquired businesses; | | | | · | complexities associated with managing the combined businesses and consolidating multiple physical locations; | | | | · | risks associated with integrating financial reporting and internal control systems; and | | | | · | whether any necessary additional debt or equity financing will be available on terms acceptable to us, or at all, and the impact of such financing on our operating performance and results of operations. |
We are exposed to fluctuations in currency exchange rates. A significant portion of our business, particularly our research and development following the completion of the Transaction, is or will be conducted outside the United States. The business of GPS Global, which we acquired on April 1, 2014, is located in Israel. We also have significant contracts with agencies in Central and South America and in the Caribbean. Therefore, we are exposed to currency exchange fluctuations in other currencies such as New Israeli Shekels (“NIS”). Moreover, a portion of our expenses in Israel are paid in NIS, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in NIS are employee salaries, fees for consultants and subcontractors and lease payments on our Israeli facilities. The dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the dollar, which would harm our results of operations. A considerable portion of our expenses related to GPS Global, which we anticipate will ultimately include much of our research and development activities, such as employees’ salaries are linked to an extent to the rate of inflation in Israel. The dollar cost of our operations is expected to be influenced by the extent to which any increase in the rate of inflation in Israel is or is not offset by the devaluation of the NIS in relation to the dollar. As a result, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. During the past few years the inflation-adjusted NIS appreciated against the dollar. We cannot predict whether the NIS will appreciate or depreciate against the dollar in the future. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the dollar, will increase labor and other costs, which will increase the dollar cost of our operations in Israel and adversely affect our results of operations. Political, economic and military instability in Israel may impede our ability to execute our plan of operations. Our GPS Global operations and the research and development facilities to be funded by us under the Purchase Agreement are located in Israel. Accordingly, political, economic and military conditions in Israel may affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Acts of random terrorism periodically occur which could affect our operations or personnel. Ongoing or revived hostilities or other factors related to Israel could harm our operations and research and development process and could impede our ability to execute our plan of operations. In addition, Israeli-based companies and companies doing business with Israel have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries since Israel’s establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars and acts of terrorism have resulted in damage to the Israeli economy, including reducing the level of foreign and local investment. Any hostilities involving Israel, acts of terrorism, or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and research and development and cause our revenues to decrease. Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products. In addition, our business insurance may not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business and financial condition. Our Israeli operations may be disrupted by the obligations of personnel to perform military service. In connection with the Transaction, we now have eight full-time employees and two independent contractors based in Israel. This number may increase in the future as we relocate additional research and development activity to our Israeli operations. Our employees in Israel may be called upon to perform up to 36 days (and in some cases more) of annual military reserve duty until they reach the age of 45 (and in some cases, up to age 49), and in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, since September 2000 there have been occasional call-ups of military reservists, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our operations, business and results of operations. Risks Related to Our Common Stock Offers or availability for resale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline. Sales by the Selling Stockholders under this prospectus, as well as sales of shares of Common Stock issuable upon the exercise of outstanding stock purchase warrants in substantial amounts in the public market, or the resale of substantial amounts of our Common Stock pursuant to a registration statement or upon the expiration of any statutory holding period under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), could create a circumstance commonly referred to as an “ overhang” and in anticipation of which the market price of our Common Stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could exert downward pressure on our stock price and make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. As of November 22, 2010, we had outstanding warrants for the purchase of Common Stock and Series D Preferred, equivalent in the aggregate to 51,740,451 shares of Common Stock. We also had 34,124 shares of Series D Preferred outstanding, convertible into 204,744,000 shares of Common Stock, including the Resale Shares. The exercise of these warrants and the conversion of the Series D Preferred will result in significant dilution to our stockholders, which could cause the market price of our Common Stock to decline.Penny stock regulations may impose certain restrictions on marketability of our securities. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our Common Stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with t heir spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Conseque ntly, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities.
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
| · | Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer, |
| · | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases, |
| · | “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons, |
| · | Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers, and |
| · | Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
Our management is aware of the abuses that have occurred historically in the penny stock market.
Our Board of Directors may authorize the issuance of Preferred Stockpreferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing stockholdersshareholders without their approval. Our Articles of Incorporation authorize us to issue up to 20,000,000 shares of Preferred Stock,preferred stock, at par value $0.0001. The Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of Preferred Stock.preferred stock. The Board of Directors may, without stockholdershareholder approval, issue shares of Preferred Stockpreferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the Common Stock or which could adversely affect the voting power or other rights of the existing holders of outstanding s haresshares of Preferred Stockpreferred stock or Common Stock. Additionally, the issuance of Preferred Stockpreferred stock may have the effect of decreasing the market price of the Common Stock and may adversely affect the voting power of holders of Common Stock and reduce the likelihood that Common Stockholderscommon shareholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of Preferred Stockpreferred stock may also adversely affect an acquisition or change in control of the Company. In November 2009, the The Board of Directors has designated 50,00085,000 shares of Preferred Stockpreferred stock as our Series D Preferred.Preferred stock. Each share of Series D Preferred stock is convertible into 6,000 shares of Common Stock. Holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders,shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. On an as-converted basis, the holders of our Series D Preferred control approximately forty-one percent (41%) of the total voting power of our issued and outstanding voting stock.combination. As of November 22, 2010,April 28, 2014, there were 34,124no outstanding shares of Series D Preferred outstanding, convertible into 204,744,000stock.
Sales by certain of our shareholders of a substantial number of shares of our Common S tock. The holdersStock in the public market, including the sale of 7,850 originalthe Shares in this offering, could adversely affect the market price of our Common Stock. A large number of outstanding shares of Series D Preferred with voting power equivalentour Common Stock are held by several of our principal shareholders, including the Selling Shareholder. If any of these principal shareholders were to 47,100,000decide to sell large amounts of stock over a short period of time such sales could cause the market price of our Common Stock to decline. A decline in the price of our Common Stock could affect our ability to raise additional working capital and adversely impact our operations and would severely dilute existing or future investors if we were to raise funds at lower prices. A prolonged decline in the price of our Common Stock could result in a reduction in our ability to raise capital. Because our operations have been financed in part through the sale of equity securities and convertible debt instruments, a decline in the price of our Common Stock could be especially detrimental to our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. We believe the following factors could cause the market price of our Common Stock to continue to fluctuate widely and could cause our Common Stock to trade at a price below the price at which you purchase your Shares: | · | actual or anticipated variations in our quarterly operating results; | | | | · | announcements of new services, products, acquisitions or strategic relationships by us or our competitors; | | | | · | changes in accounting treatments or principles; | | | | · | changes in earnings estimates by securities analysts and in analyst recommendations; and | | | | · | general political, economic, regulatory and market conditions. |
The market price for our Common Stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, could materially adversely affect the market price of our Common Stock. If we issue additional shares of Common Stock (approximately 16%in the future, it will result in the dilution of our existing shareholders. Our Articles of Incorporation authorize the issuance of 15,000,000 shares of Common Stock. Our Board of Directors has the authority to issue additional shares of Common Stock up to the authorized capital stated in The Articles of Incorporation. The issuance of any such shares of Common Stock will result in a reduction of the book value or market price of the outstanding shares of our Common Stock. If we do issue any such additional shares of Common Stock, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders. Further, any such issuance may result in a change of control of our issued and outstanding voting stock) are the Selling Stockholders under this prospectus.corporation.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSTrading of our Common Stock may be volatile and sporadic, which could depress the market price of our Common Stock and make it difficult for our shareholders to resell their shares. There is currently a limited market for our Common Stock and the volume of our Common Stock traded on any day may vary significantly from one period to another. Our Common Stock is quoted on OTC Market’s OTCQB. Trading in stock quoted on OTC Market’s OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the issuer’s operations or business prospects. The availability of buyers and sellers represented by this volatility could lead to a market price for our Common Stock that is unrelated to operating performance. Moreover, OTC Market’s OTCQB is not a stock exchange, and trading of securities quoted on OTC Market’s OTCQB is often more sporadic than the trading of securities listed on a stock exchange like NASDAQ. We have filed an application to have our Common Stock included on the NASDAQ stock market, but there is no assurance that the application will be accepted or that a sufficient market will develop in the stock, in which case it could be difficult for our shareholders to resell their stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The following Management’sforward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations isOperations” and “Business” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to helpidentify statements about the reader better understandfuture. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The forward-looking statements contained in this prospectus involve a number of risks and uncertainties, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, those discussed in “Risk Factors” elsewhere in this prospectus. Readers are expressly advised to review and consider those Risk Factors. Although we believe that the assumptions underlying the forward-looking statements contained in this prospectus are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. Except as required by applicable laws including the securities laws of the United States, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This prospectus relates to the Shares of our Common Stock that may be offered and sold from time to time by the Selling Shareholder. We will not receive any proceeds upon the sale of the Shares by the Selling Shareholder. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information Our Common Stock is traded on the OTCQB under the symbol “SCRA.QB.” The following table sets forth the range of high and low bid prices of our Common Stock as reported on the OTC Bulletin Board for the periods indicated. The sales information is available online at http://otcbb.com. Fiscal Year Ended September 30, 2012 | | High | | | Low | | | First Quarter ended December 31, 2011 | | $ | 20.00 | | | $ | 13.20 | | | Second Quarter ended March 31, 2012 | | $ | 15.40 | | | $ | 8.00 | | | Third Quarter ended June 30, 2012 | | $ | 10.80 | | | $ | 5.60 | | | Fourth Quarter ended September 30, 2012 | | $ | 7.80 | | | $ | 4.00 | | | | | | | | | | | | | Fiscal Year Ended September 30, 2013 | | High | | | Low | | | First Quarter ended December 31, 2012 | | $ | 14.60 | | | $ | 3.22 | | | Second Quarter ended March 31, 2013 | | $ | 14.60 | | | $ | 11.00 | | | Third Quarter ended June 30, 2013 | | $ | 14.70 | | | $ | 7.00 | | | Fourth Quarter ended September 30, 2013 | | $ | 20.90 | | | $ | 14.40 | |
Holders As of April 28, 2014, we had approximately 2,500 holders of record of our Common Stock and 10,069,876 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 410,851 shares of Common Stock and 42,000 shares of Series D Preferred stock. Dividends Since incorporation, we have not declared any cash dividends on our Common Stock. We do not anticipate declaring cash dividends on our Common Stock for the foreseeable future. The Series D Preferred stock is entitled to dividends at the rate equal to 8% per annum calculated on the purchase amount actually paid for the shares or amount of debt converted in exchange for the shares. The dividend is payable in cash or shares of Common Stock at the sole discretion of the Board of Directors. To date all dividends payable on our preferred stock outstanding have been paid by issuance of shares of common or preferred stock. During the fiscal years ended September 30, 2013 and 2012, we recorded $1,042,897 and $2,480,298 in stock dividend expenses, respectively, payable with respect to our outstanding preferred stock. Dilution The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of Common Stock are reserved for issuance upon exercise of purchase or conversion rights. The issuance of any shares of Common Stock for any reason will result in dilution of the equity and voting interests of existing shareholders. Transfer Agent and Registrar The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York, 11219. Securities Authorized for Issuance under Equity Compensation Plans The 2012 SecureAlert, Inc. Stock Incentive Plan The Board of Directors has adopted the SecureAlert, Inc. 2012 Equity Compensation Plan (the “2012 Plan”), approved by shareholders at the Annual Meeting of Shareholders held on December 21, 2011. We believe that incentives and stock-based awards focus employees on the objective of creating shareholder value and promoting the success of the Company, and that incentive compensation plans like the 2012 Plan are an important attraction, retention and motivation tool for participants in the plan. Under the 2012 Plan, awards for 90,000 shares of Common Stock may be granted. As of the date of this prospectus, options for the purchase of 30,000 shares of Common Stock have been awarded under the 2012 Plan. The following table includes information as of September 30, 2013 for our operations and our present business environment. Thisequity compensation plans: Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | | | (a) | | | (b) | | | (c) | | | | | | | | | | | | | | Equity compensation plans approved by security holders | | | 21,433 | | | $ | 16.66 | | | | 60,000 | | | | | | | | | | | | | | | | | Equity compensation plans not approved by security holders | | | 568,533 | | | $ | 15.28 | | | | - | | | | | | | | | | | | | | | | | Total | | | 589,966 | | | $ | 16.12 | | | | 60,000 | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is provided as a supplement to, and should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal yearsyear ended September 30, 2009 and 20082013 and the accompanying notes thereto. We intend forthree months ended December 31, 2013, included elsewhere in this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.prospectus.
Overview SecureAlert and subsidiaries
We market and deploy offender management programs, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services. Our vision is to be the global market leader for delivering the most reliable offender management solutions, that integrate interactionwhich leverage superior intervention capabilities and integrated communication technologies. We believe that we currently deliver the only offender management technology which effectively integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single piece device, deployable on offenders worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunity to be “free from prison,prison.” while providingThis provides for greater public safety at a lower cost compared to incarceration or traditional resource-intensive alternatives. TrackerPAL™ IIOur ReliAlert and TrackerPAL™ II(e) (“enhanced”), nowReliAlert XC devices are designed in the United States and manufactured in the USA – The TrackerPAL™China and include a portfolio of products, e-Arrest Beacons and monitoring services are designed to create “Jails without Walls,” while re-socializing offender populations. The products and services are customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, andor juvenile offenders). and offer practical solutions and options for the reintegration and effective re-socialization of select offenders safely back into society. Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions. TrackerPAL™ and TrackerPAL™ II(e)Our technologies are designed for domestic or international, federal, state and local agencies to provide location tracking of selectdesignated individuals inwithin the criminal justice system. The TrackerPAL™ II(e) device fastens tosystem and throughout a restricted geography.
Our GPS tracking devices are securely attached around the offender'soffender’s ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection only by a supervising officer, and which is activated through services provided by our SecureAlert Monitoring Center (or other agency-based monitoring centers). ThisDuring fiscal year 2011, we also deployed an upgraded, patented, dual-steel banded SecureCuff strap for “at-risk” offenders who have qualified for electronic monitoring supervision, but who require an incremental level of security and supervision, provided through both hardware and monitoring services. Our monitoring and intervention center actscenters act as an important link between the offender and the supervising officer, as intervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols. AnThe ReliAlert and ReliAlert XC units are intelligent devicedevices with integrated computer circuitry and constructed from case-hardened plastics designed to promptly notify the TrackerPAL™ II(e) unit promptly notifies the monitoring center ifintervention centers of any attempt is made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing. ;
Results of Operations Fiscal Years Ended September 30, 2009 and 2008
Note: During the fiscal yearContinuing Operations - Three months ended September 30, 2008, we divested our subsidiary, ActiveCare, Inc. As a result, we now operate in one segment. Unless otherwise indicated, the results of operations for all periods in this prospectus have been adjustedDecember 31, 2013, compared to reflect continuing operations only. See Note (2) – Discontinued Operations in our Consolidated Financial Statements.three months ended December 31, 2012
Revenues DuringFor the fiscal yearthree months ended September 30, 2009,December 31, 2013, we had net revenues from operations of $12,625,908$2,659,294, compared to net revenues of $12,403,677$5,588,072 for the fiscal yearthree months ended September 30, 2008, an increaseDecember 31, 2012, a decrease of $222,231 (2%$2,928,778 (52%). RevenuesOf these revenues, $2,593,683 and $4,375,575 were from monitoring and other related services for the fiscal yearthree months ended September 30, 2009 totaled $12,055,159, compared to $9,826,077 for the same period ended 2008, resulting in an increase of $2,229,082 (23%). Revenues from product sales for the fiscal year ended September 30, 2009 were $570,749, compared to $2,577,600 for the same period ended 2008, resulting inDecember 31, 2013 and 2012, respectively, a decrease of $2,006,851. This decrease of $2,006,851 is primarily due to a shift in focus to leasing monitoring equipment instead of device sales.
During$1,781,892 (41%). For the fiscal yearthree months ended September 30, 2009, our SecureAlert Monitoring subsidiary provided net revenues of $5,322,191,December 31, 2013, international revenue was $775,130, compared to net revenues of $7,333,659 during$3,819,706 for the fiscal yearthree months ended September 30, 2008,December 31, 2012, a decrease of $2,011,468 (27%$3,044,576 (80%). Revenues; this decrease resulted from monitoring servicesthe completion of a contract with an international contract. Product revenues decreased from $1,212,497 for the fiscal yearthree months ended September 30, 2009 were $5,131,655,December 31, 2012, compared to $5,033,659$65,611 for the prior year, resulting in an increase of $97,996 (2%). Revenues from product sales for the fiscal yearthree months ended September 30, 2009 were $190,536, compared to $2,300,000 for the fiscal year 2008, resulting inDecember 31, 2013, a decrease of $2,109,464. This decrease$1,146,886 (95%). Product revenues decreased primarily from the completion of $2,109,464 is primarily due to our focus on leasing monitoring equipment instead of device sales.
During the fiscal year ended September 30, 2009, our Midwest Monitoring subsidiary provided net revenues of $4,213,972 compared to net revenues of $2,799,914 during the fiscal year ended September 30, 2008, an increase of $1,414,058 (51%). This increase is related to revenues in the amount of $514,744 that Midwest Monitoring recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate. The remaining increase of $899,314 is related to an increase of $86,288 in device sales and $813,026 of monitoring services.
During the fiscal year ended September 30, 2009, our Court Programs subsidiary provided net revenues of $3,086,335 compared to net revenues of $2,270,104 during the fiscal year ended September 30, 2008, an increase of $816,231 (36%). This increase is related to revenues in the amount of $540,935 that Court Programs recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate. The remaining increase is related to an increase of $275,296 in monitoring services.
On January 14, 2009, we purchased Bishop Rock Software. During the fiscal year ended September 30, 2009, Bishop Rock Software had $3,410 of revenue.international contract.
Cost of Revenues During the fiscal yearthree months ended September 30, 2009,December 31, 2013, cost of revenues totaled $10,138,613,$1,398,829, compared to cost of revenues during the fiscal yearthree months ended September 30, 2008December 31, 2012 of $13,108,990,$2,978,518, a decrease of $2,970,377 (23%).$1,579,689. The decrease in cost of revenues in 2013 resulted primarily from reduced communicationlower sales and direct labor cost initiatives, devicea decrease of $1,029,684 in royalties and the cost of goods and software enhancements, offset by a minor increase in equipment amortization.of $468,362 related to international sales. Communication costs, $2,422,541Depreciation for the fiscal yearthree months ended September 30, 2009, primarily refers to theDecember 31, 2013 and 2012 totaled $190,992 and $322,580, respectively. Depreciation costs associated with Subscriber Identity Modules (“SIM”). Embedded in each TrackerPAL™ device is a SIM, which enables the device to transfer voice and data information to a monitoring center. We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue, because the SIM cards are ordered and inserted into devices before the devices are sold or leased.
Amortization, $1,300,783 for the fiscal year ended September 30, 2009, is based on a three-year useful life for TrackerPAL™TrackerPAL® and ReliAlert™ devices. Devices that are leased or retained by us for future deployment or sale are amortizeddepreciated over three years. We believe this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness.
We expect the cost of revenues as a percentage of revenues to decrease in the foreseeable future due to (a) further attempts to lower communication costs,economies of scale realized through projected increases in revenues, and (b) further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs. SecureAlert Monitoring’s cost of revenues totaled $5,583,841 (105% of SecureAlert Monitoring’s net revenue) for the fiscal year ended September 30, 2009, compared to $10,007,725 (136% of SecureAlert Monitoring’s net revenue) for the fiscal year ended September 30, 2008, a decrease of $4,423,884 (44%). This is related to decreases of $1,626,018 in device costs, $521,716 in communication costs, $454,374 in monitoring center costs,Gross Profit and $1,538,129 in other TrackerPAL™ and miscellaneous costs.
Midwest Monitoring’s cost of revenues totaled $2,735,276 (65% of Midwest Monitoring’s revenue) for the fiscal year ended September 30, 2009 compared to $1,630,823 (58% of Midwest Monitoring’s revenue) for the fiscal year ended September 30, 2008, an increase of $1,104,453 (68%). This increase is related to revenues in the amount of $330,504 that Midwest Monitoring recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate. The remaining increase of $773,949 is primarily related to the growth in revenues.
Court Program’s cost of revenues totaled $1,819,496 (59% of Court Program’s revenue) for the fiscal year ended September 30, 2009 compared to $1,470,442 (65% of Court Program’s revenue) for the fiscal year ended September 30, 2008, an increase of $349,054 (24%). This increase is related to revenues in the amount of $311,868 that Court Programs recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate. The remaining increase of $37,186 is primarily related to the growth in revenues.
Gross Margin
During the three months ended December 31, 2013, gross profit totaled $1,260,465, or 47% of net revenues, compared to $2,609,554, or 47% of net revenues during the three months ended December 31, 2012. Despite the completion of an international contract yielding higher margins, gross margin remained stable due to the repurchase of a royalty agreement during fiscal year ended September 30, 2009, gross margin totaled $167,765, compared to negative margin during the fiscal year ended September 30, 2008 of $705,313, an improvement of $873,078. Included in cost of revenues are costs attributable to impairment of inventory and monitoring equipment of $2,319,530 and $570,948 for the years ended September 30, 2009 and 2008, respectively. These impairment costs from disposal of obsolete monitoring equipment were expenses not expected in future periods. Excluding impairment costs, adjusted gross margin for the fiscal year ended September 30, 2009 was $2,487,295, compared to a negative margin of $134,365 for the same period in 2008, an improvement of $2,621,660 while increasing revenues from monitoring services.2013. Research and Development Expenses During the fiscal yearthree months ended September 30, 2009,December 31, 2013, we incurred research and development expenses of $1,777,873$319,570 compared to similar expenses recognized during fiscal year 2008 totaling $4,811,128. This decrease of $3,033,255 is due primarily to management’s decision to bring software enhancements and product design in-house as opposed to using third-party vendors. We anticipate research and development expenses for the three months ended December 31, 2012 totaling $201,594. These research and development costs were incurred to continue to decreaseimprove efficiency in future periods.the software, firmware and hardware of our products and services including the development of our upcoming 3G electronic monitoring device. Selling, General and Administrative Expenses During the fiscal yearthree months ended September 30, 2009,December 31, 2013, our selling, general and administrative expenses totaled $16,540,645,$2,171,447, compared to $36,466,678$2,038,022 for the fiscal yearthree months ended September 30, 2008.December 31, 2012. The improvementincrease of $19,926,033$133,425 is primarily the result of decreasesan increase in the following expenses:travel expense ($153,489), amortization ($157,696), consulting fees ($19,362,378), travel ($1,297,363), advertising and marketing ($132,596), bad debt expense ($68,775), meals and entertainment ($64,677), postage ($43,636), office ($28,895), employee benefits ($25,519), outside services ($23,181)115,627), and other selling, general and administrativelegal fees ($99,090). These decreases76,764), partially offset by a reduction in payroll expense of $408,007. The increase in selling, general, and administrative expense were offset by an increase in payrollalso resulted from preliminary work and taxes ($457,921), legal ($441,611), amortization ($64,955), investment relations ($54,554), contract labor ($40,081), board of director fe es ($35,000), depreciation ($33,714), insurance ($26,625), and other selling, general and administrative expenses ($65,616). Consulting expense for the fiscal year ended September 30, 2009 was $4,245,685 compared to $23,608,063 for the fiscal year ended September 30, 2008,preparation associated with a decrease of $19,362,378. This decrease is primarily due to a significant reduction of non-cash compensation totaling $18,603,062 through options and warrants issued to Board of Directors, executive officers and employees. Cash compensation also decreased by $759,316 since we settled fewer lawsuits related to consulting and brought a significant amount of consulting in-house. large international contract. Other Income and Expense For the fiscal yearthree months ended September 30, 2009,December 31, 2013, interest expense was $5,012,803,$43,918, compared to $1,566,542$843,224 for the fiscal yearthree months ended September 30, 2008. This amount includes non-cashDecember 31, 2012. The decrease in interest expense resulted primarily from a reduction in debt and the acceleration of approximately $2,595,933 related to amortizationa beneficial conversion feature from the conversion of deferred financing costs associated with warrants, debentures and shares ofdebt into Common Stock issued for interest.Stock. During the fiscal year ended September 30, 2008, we redeemed all outstanding shares of SecureAlert Monitoring Series A Preferred Stock in exchange for 7,434,249 shares of our Common Stock for a value of $8,372,566.
Net Loss We had a net loss from continuing operations for the three months ended December 31, 2013 totaling $1,270,193, compared to a net loss of $562,043 for the three months ended December 31, 2012, an increase of $708,150. This increase primarily resulted from the reduction of gross profit generated from monitoring services in connection with an international customer. Additionally, the increase in net loss resulted from preliminary work and preparation in connection with a large international contract and the development of our 3G electronic monitoring device. Discontinued Operations - Three months ended December 31, 2013, compared to three months ended December 31, 2012 We entered into a Stock Purchase Agreement to sell to a former principal all of the issued and outstanding stock of Court Programs Inc. (“Court Programs”), effective January 1, 2013. Court Programs was a component of our consolidated entity, which requires discontinued operations reporting treatment. A summary of the operating results of discontinued operations for the three months ended December 31, 2013 and 2012 is as follows: | | | December 31, | | | December 31, | | | | | 2013 | | | 2012 | | | Revenues | | $ | - | | | $ | 477,298 | | | Cost of revenues | | | - | | | | (163,487 | ) | | Gross profit | | | - | | | | 313,811 | | | Selling, general and administrative | | | - | | | | (319,976 | ) | | Loss from operations | | | - | | | | (6,165 | ) | | Other expense | | | - | | | | (295 | ) | | Net loss from discontinued operations | | $ | - | | | $ | (6,460 | ) |
Continuing Operations – Fiscal Year 2013 compared to Fiscal Year 2012 Net Revenues During the fiscal year ended September 30, 2013, we had net revenues of $15,641,062 compared to net revenues of $13,114,979 for the fiscal year ended September 30, 2009 totaling $23,081,500, compared to a net loss2012, an increase of $49,587,050$2,526,083, or approximately 19%. Revenues from monitoring services for the fiscal year ended September 30, 2008. This decrease of $26,505,550 is due primarily to reductions in communication and device costs, bringing software enhancements and product design in-house as opposed to using high priced third-party vendors, and the reduced use of consulting services by bringing these services in-house. Three months ended June 30, 2010,2013, totaled $15,028,625, compared to three months ended June 30, 2009
For the three months ended June 30, 2010, the Company achieved net revenues$11,519,727 for fiscal year 2012, an increase of $3,079,226$3,508,898 or approximately 30%. Revenues increased as a result of our continued expansion into international markets, which $2,992,842 were attributablecontributed an additional $2,745,667 to monitoring services revenue. This compares to net revenues of $3,208,969 and monitoring services revenue of $3,133,518 for fiscal year 2013. Of the same period ended June 30, 2009. The decrease$15,028,625 in monitoring services revenue of $140,676 can be attributed to the non-renewal of a monitoringrevenues in fiscal year 2013, $5,252,959 (35%) was derived from an international contract with a single customer at Midwest Monitoring and Surveillance, a subsidiary of the Company. This discontinued customer accounted for $0 of revenuesthat was completed during the three months ended June 30, 2010 comparedfiscal year and it is uncertain if we will provide services to $169,964 during the three months ended June 30, 2009. We do not expect the discontinuedthis customer to return in the short-term. As a partial offset against the reduction of $169,964 in monitorin g services revenue from the discontinued customer, the Company was able to close an additional $40,221 in new monitoring services revenue for the same time period. Additionally, product revenues increased $10,933 from $75,451 for the three months ended June 30, 2009 to $86,384 for the three months ended June 30, 2010. For the three months ended June 30, 2010 and 2009, revenues from our activated tracking devices were $1,550,152 and $1,612,211, respectively.
Cost of Revenue
For the three months ended June 30, 2010, cost of revenues declined to $1,715,461 from $2,420,826 during the three months ended June 30, 2009, a decrease of $705,365 or 29%. The decrease in cost of revenues resulted primarily from a reduction in communication cost of $318,330, amortization of devices of $169,915, monitoring center costs of $51,227, freight costs of $47,506, and device costs of $23,803. The reduction of communication costs have been realized due to entering into additional agreements with cellular companies with more favorable rates. Additionally, monitoring center costs have decreased due to the development of software which more effectively automates alarms requiring fewer operators to manage the active devices in the field. While focusing on the reductions in cost of revenues , we have been able to increase gross profit from $788,143, or 24.6% of revenues for the three months ended June 30, 2009 to $1,363,765, or 44.3% of revenues for the three months ended June 30, 2010.
Research and Development Expenses
During the three months ended June 30, 2010 and 2009, research and development expense was $490,258 and $431,201, respectively, and consisted primarily of expenses associated with the development of the TrackerPAL™ device and related services.
Selling, General and Administrative Expenses
During the three months ended June 30, 2010, selling, general and administrative expenses were $2,703,819, compared to $3,178,333 during the three months ended June 30, 2009. The improvement of $474,514 is primarily due to decreases in consulting expense of $405,541, which resulted primarily from discontinuing the services of several consultants.
Interest Expense
During the three months ended June 30, 2010 and 2009, interest expense totaled $229,582 and $1,255,103, respectively. The decrease of $1,025,521 in interest expense resulted primarily from converting several debt instruments into Series D Preferred stock in January 2010.
Nine months ended June 30, 2010, compared to nine months ended June 30, 2009
Revenues
For the nine months ended June 30, 2010, we had net revenues from operations of $9,282,137, compared to $9,478,981 for the nine months ended June 30, 2009, a decrease of $196,844. Although net revenues were relatively flat to slightly declining, revenues from monitoring services increased $71,371, or 0.8% from $8,985,386 for the nine months ended June 30, 2009, compared to $9,056,757 for the nine months ended June 30, 2010. Productfuture. Domestic revenues decreased $268,215by $219,584, or 3%, from $493,595 for the nine months ended June 30, 2009 to $225,380 for the nine months ended June 30, 2010.fiscal year 2012. This decrease resulted primarily from lowering our monitoring daily charge to compete in the domestic marketplace. Revenues from product sales for fiscal year 2013 were $612,437, compared to $1,595,252 for the prior year, a one-timedecrease of $982,815, or 62%. This decrease was primarily due to the sale by Midwest Monitoring and Surveillanceinstallation of $345,000 of merchandise made during the nine months ended June 30, 2009 that did not recur during the nine months ended June 30, 2010. 0; For the nine months ended June 30, 2010 and 2009, revenues from our activated GPS devices were $4,548,540 and $4,527,540, respectively.an onsite charging solution in fiscal year 2012.
Cost of Revenues ForDuring the nine monthsfiscal year ended JuneSeptember 30, 2010,2013, cost of revenues declinedtotaled $8,030,168, compared to $5,375,588 from $8,295,540cost of revenues during the nine monthsfiscal year ended JuneSeptember 30, 2009,2012 of $8,954,364, a decrease as a percentage of $2,919,952. Thenet revenues of 17%, from 68% of revenues in 2012 to 51% of revenues in 2013.
Impairment costs for equipment and parts for the fiscal years ended September 30, 2013 and 2012, were $213,276 and $1,648,762, respectively. These costs resulted from the disposal of obsolete inventory, monitoring equipment, and parts as we continue to make enhancements to the device. Amortization for the fiscal years ended September 30, 2013 and 2012, totaled $1,230,293 and $1,231,773, respectively. Amortization costs are based on a three-year useful life for TrackerPAL and ReliAlert devices. Devices that are leased or retained by us for future deployment or sale are amortized over three years. We believe this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. We expect the cost of revenues, excluding impairment of equipment and parts, as a percentage of revenues to decrease in the foreseeable future due to economies of scale realized through projected increases in revenues, and further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs. Gross Profit and Margin During the fiscal year ended September 30, 2013, gross profit totaled $7,610,894, or 49% of net revenues, compared to $4,160,615, or 32% of net revenues during the fiscal year ended September 30, 2012, an increase of $3,450,279. Included in cost of revenues resulted primarilyare costs attributable to impairment of inventory and monitoring equipment of $213,276 and $1,648,762 for fiscal years 2013 and 2012, respectively. These impairment costs from the following reductions: communication costdisposal and reduction in value of obsolete monitoring equipment are expenses we expect to decrease of $955,074, device amortization decrease of $418,147, monitoring centerin future periods. Excluding impairment costs, decrease of $357,013, utilization rental fees decrease of $336,562, device costs decrease of $219,170 from product sales, freight costs decrease of $157,026, and commissions decrease of $82,549. The reduction of communication costs have been realized due to entering into additional agreements with cellular companies with more favorable rates. Additionally, monitoring center costs have decreased due to the development of so ftware which more effectively automates alarms requiring fewer operators to manage the active devices in the field. While focusing on the reductions in cost of revenues, we have been able to increaseadjusted gross profit from $1,183,441,for the fiscal year ended September 30, 2013 was $7,824,170 or 12.5%50% of net revenues, compared to $5,809,377 or 44% of net revenues, for the nine months ended June 30, 2009, to $3,906,549, or 42.1%same period in 2012, an increase of revenues, for the nine months ended June 30, 2010.$2,014,793. Research and Development Expenses During the nine monthsfiscal year ended JuneSeptember 30, 2010 and 2009,2013, we incurred research and development expense was $1,161,539expenses of $987,934 compared to similar expenses recognized during fiscal year 2012 totaling $1,248,654. This decrease of $260,720 is due primarily to a reduction in research and $1,277,102, respectively, and consisted primarily of expenses associated with the development of the TrackerPAL™ device and related services.staff. Selling, General and Administrative Expenses During the nine monthsfiscal year ended JuneSeptember 30, 2010,2013, our selling, general and administrative expenses were $8,931,801,totaled $7,689,124, compared to $11,078,059 during$12,623,114 for the nine monthsfiscal year ended JuneSeptember 30, 2009.2012. The improvementdecrease of $2,146,258$4,933,990 is primarily due tothe result of reductions in the following decreases:expenses: bad debt expense ($202,782), consulting fees ($2,286,737), insurance ($182,191), legal fees ($170,011), payroll, payroll taxes and employee benefits ($1,426,001), and travel expenses ($102,810). Consulting and non-cash employee compensation expense for the fiscal year ended September 30, 2013 totaled $445,971, compared to $3,904,527 for fiscal year 2012, a decrease of $790,108, legal and professional expense decrease of $504,735, depreciation expense decrease of $216,765, board of director fees decrease of $131,174, outside services decrease of $115,490, insurance expense decrease of $111,086, and travel expense decrease of $94,463.$3,458,556. The decrease in consulting expenseand non-cash employee compensation expenses resulted primarily from discontinuing the services of several consultants and the decrease in legal and professional fees is primari ly related to the settlement of two lawsuits. Interest Expense
During the nine months ended June 30, 2010 and 2009, interest expense related to operations totaled $3,840,232 and $2,790,006, respectively. The increase of $1,050,226 resulted primarily from a non-cash expense related to amortization of debt discount from the issuance of stockCommon Stock and warrantsacceleration of expense in connection with cancellation of stock options during fiscal year 2012.
Other Income and Expense For the fiscal year ended September 30, 2013, interest expense was $17,048,519, compared to $1,431,416 for the fiscal year ended September 30, 2012. This increase of $15,617,103 is a result primarily of non-cash interest expense of $15,960,382 related to the amortization of debt obligations.discounts on convertible debentures. Also included in interest expense is $939,770 in accrued interest on a loan and security agreement with a related party, of which $936,627 was converted into Common Stock in fiscal year 2013. Net Loss We had a net loss from continuing operations for the fiscal year ended September 30, 2013 totaling $18,334,070 (approximately $3.79 per share), compared to a net loss of $17,150,288 (approximately $6.27 per share) for the fiscal year ended September 30, 2012. This increase of $1,183,782 is due primarily to the amortization of the beneficial conversion feature of our convertible debentures recorded as non-cash interest expense as described above. Discontinued Operations - Fiscal Year 2013 compared to Fiscal Year 2012 Effective October 1, 2012, we sold all of the issued and outstanding capital stock of our subsidiary, Midwest, to the former principals of Midwest. Because Midwest was a component of our consolidated entity, this sale requires discontinued operations reporting treatment of the Midwest operations. Effective January 1, 2013, we sold all of the issued and outstanding capital stock of Court Programs, Inc. to the former principal of that entity, together with all issued and outstanding capital stock of its affiliated entities. Because these entities were a component of our consolidated entity, this sale requires that we report their operating results as discontinued operations for accounting purposes. A summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012, is as follows: | | | 2013 | | | 2012 | | | Revenues | | $ | 477,298 | | | $ | 6,676,513 | | | Cost of revenues | | | (163,487) | | | | (4,112,410) | | | Gross profit | | | 313,811 | | | | 2,564,103 | | | Selling, general and administrative expense | | | (319,976) | | | | (2,782,628) | | | Loss from operations | | | (6,165) | | | | (218,525) | | | Other expense | | | (295) | | | | (89,294) | | | Net loss from discontinued operations | | $ | (6,460) | | | $ | (307,819) | |
Liquidity and Capital Resources We are currently unableDuring the fiscal year ended September 30, 2013, we were able to finance our business solely from cash flows only in part from operating activities. We supplemented cash flows with the proceeds from borrowings.
During the ninethree months ended June 30, 2010,December 31, 2013, we supplemented cash flows to finance our business from the issuance of debt and equity securities, providing net cash proceeds from financing activities of $7,507,554.$2,623,664. As of JuneSeptember 30, 2010,2013, we had unrestricted cash of $1,879,955 and$3,382,428, compared to unrestricted cash of $458,029 as of September 30, 2012. As of September 30, 2013, we had a working capital surplus of $6,836,442, compared to a working capital deficit of $3,831,420,$13,600,345 as of September 30, 2012. The increase in working capital in fiscal year 2013 primarily resulted from the conversion of amounts owed to a related party under a loan and security agreement into shares of Common Stock. As of December 31, 2013, we had unrestricted cash of $1,326,278 and a working capital surplus of $2,218,469, compared to unrestricted cash of $602,321$3,382,428 and a working capital deficitsurplus of $16,476,897$6,836,442 as of September 30, 2009. The improvement in working capital deficit is largely due to the conversion of $16,910,753 in debt in exchange for shares of our Series D Preferred stock.2013. For the ninethree months ended June 30, 2010,December 31, 2013, our operating activities used cash of $4,484,573,$520,921 compared to $6,705,204$1,044,446 of cash usedprovided in operating activities for the ninethree months ended June 30, 2009.December 31, 2012. During fiscal year 2013, our operating activities provided cash of $838,910, compared to $1,910,067 of cash used during fiscal year 2012. This improvement in cash provided from operating activities of $2,748,977 resulted primarily from an increase in revenues of $2,526,083 in fiscal year 2013. We used cash of $1,745,347$4,158,893 for investing activities during the ninethree months ended June 30, 2010,December 31, 2013, compared to $1,454,508$232,826 of cash used in investing activities in the ninethree months ended JuneDecember 31, 2012. Of the $4,158,893 of cash used for investing activities, $3,346,622 was cash deposited and held in escrow to secure a contract with an international customer. Investing activities during the fiscal year ended September 30, 2009.2013, used cash of $560,425, compared to $2,847,274 used during fiscal year 2012. The decrease of $2,286,849 in cash used by investing activities during fiscal year 2013 resulted primarily from the decrease in cash used for the purchase of monitoring equipment. Financing activities forduring the nine monthsfiscal year ended JuneSeptember 30, 2010,2013, provided cash$2,500,724 of $7,507,554net cash compared to $6,968,926 for$4,396,563 of cash provided during fiscal year 2012. During the nine monthsfiscal year ended JuneSeptember 30, 2009. For the nine months ended June 30, 2010,2013, we made net cash payments of $299,276 on notes payable. During fiscal year 2013, we had netcash proceeds of $7,615,300totaling $2,800,000 from the issuance of convertible debentures to related parties. During the fiscal year ended September 30, 2012, we made net payments of $687,354 on notes payable, and we paid $207,578 on related-party notes payable and $1,147,250 of commissions in connection with capital raises. During fiscal year 2012, we had proceeds of $2,004,000 from the sale of Series D Convertible Preferred stock, net advances from the line of credit of $747,400, proceeds of $500,000 from the issuance of related-party note and $3,217convertible debentures, proceeds of $2,900,000 from the issuance of convertible debentures to related parties, and $1,033,000 from the sale of Common Stock to a related party. Financing activities for the three months ended December 31, 2013, provided cash of $2,623,664, compared to $1,612,053 for the three months ended December 31, 2012. For the three months ended December 31, 2013, we received proceeds of $2,700,000 from the issuances of notes payable.payable from a significant shareholder and $8,000 from the exercise of warrants. Cash decreased by $595,393 in connection with$24,336 due to principal payments made on notes payable $137,970 in net paymentsand $60,000 was used to pay off a related-party line of credit, $600,000 in payments on related-party notes payable, and $25,000 in payments on a Series A 15% Debenture.note payable. Cash provided by financing activities also was used to fundsupport operating activities and purchase monitoring equipment.activities. Going Concern
WeDuring the fiscal year ended September 30, 2013, we incurred a net loss of $11,084,874 for the nine months ended June 30, 2010 and a loss from continuing operations of $7,541,526. In addition,$18,334,070 and we had an accumulated deficit of $216,075,643 as of June 30, 2010. These factors, as well as the risk factors set out elsewhere in this prospectus, raise substantial doubt about our ability to continue as a going concern. Our financial statements included in this prospectus do not include any adjustments that may result from the outcome of this uncertainty. Our plans with respect to this uncertainty are to increase leases of the TrackerPAL™ product and to increase monitoring services revenue. There can be no assurance that revenues will increase rapidly enough to deliver profitable operating results and pay our debts as they come due.&# 160; Likewise, there can be no assurance that we will be successful in raising additional capital from the sale of equity or debt securities. If we are unable to increasepositive cash flows from operating activities or obtain additional financing, we will be unableof $838,910, compared to continuea net loss of $17,150,288 and negative cash flows from operating activities of $1,910,067 for fiscal year 2012. As of September 30, 2013, our working capital surplus was $6,836,442, our stockholders’ equity was $23,963,342, and the development of our business and may have to cease operations.accumulated deficit totaled $266,429,337.
Inflation We do not believe that inflation has had a material impact on our historical operations or profitability. Critical Accounting Policies In Note (3)(2) to the audited financial statementsConsolidated Financial Statements for the fiscal year ended September 30, 2009 included in this prospectus,2013, we discuss those accounting policies that are considered to be significant in determining the results of operations and our financial position. The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions. With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivable, we apply the following critical accounting policies discussed below in the preparation of our financial statements:statements. Inventory Reserves The nature of our business requires maintenance of sufficient inventory on hand at all times to meet the requirements of our customers. We record finished goods inventory at the lower of standard cost, which approximates actual cost (first-in, first-out method) or market. Rawand raw materials are stated at the lower of cost, (first-in, first-out method), or market.market, which approximates actual cost. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things: | · | Current inventory quantities on hand; |
| | | | · | Product acceptance in the marketplace; |
| | | | · | Customer demand; | | | | · | Historical sales; |
| | | | · | Product obsolescence; and |
| | | | · | Technological innovations. |
Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management. Revenue Recognition Our revenue has historically been from two sources: (i) monitoring services; (ii) monitoring device and other(ii) product sales. Monitoring Services Monitoring services include two components: (a)(i) lease contracts in which we provide monitoring services and lease devices to distributors or end users and we retain ownership of the leased device; and (b)(ii) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use our monitoring services. We typically lease our devices under one-year contracts with customers that opt to use our monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under our standard leasing contract, the leased device becomes billable on the date of activation or seven7 to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned to us.returned. We recognize revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue. Monitoring Device Product Sales
Although not the focus of our business model, weWe may sell our monitoring devices in certain situations.situations to our customers. In addition, we may sell home securityequipment in connection with the building out and Personal Emergency Response Systems (“PERS”) units.setting up a monitoring center on behalf of customers. We recognize product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL and ReliAlert devices) from us,, customers may, but are not required to, enter into one of our monitoring service contracts with us.contracts. We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitorin gmonitoring services have been provided.
We sell and install standalone tracking systems that do not require our ongoing monitoring. We have experience in component installation costs and direct labor hours related to this type of sale and can typically reasonably estimate costs, therefore we recognize revenue over the period in which the installation services are performed using the percentage-of-completion method of accounting for material installations. We typically use labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project’s progress toward completion. We evaluate our estimated labor hours and costs and determine the estimated gross profit or loss on each installation for each reporting period. If it is determined that total cost estimates are likely to exceed revenues, we accrue the estimated losses immediately. Multiple Element Arrangements The majority of our revenue transactions do not have multiple elements. OnHowever, on occasion, we haveenter into revenue transactions that have multiple elements (suchelements. These may include different combinations of products or monitoring services that are included in a single billable rate. These products or monitoring services are delivered over time as product sales and monitoring services).the customer utilizes our services. For revenue arrangements that have multiple elements, we consider whether: (i)whether the delivered devices have standalone value to the customer; (ii)customer, there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services;services, and (iii) the customer does not have a general right of return. Based on these criteria, we recognize revenue from the sale of devices separately from the monitoring services to be provided to the customer. In accordance with FASB ASC Subsection 605-25 , ifcustomer as the fair value of the undelivered element exists, but the fair value does not exist for oneproducts or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteriaservices are met.delivered. Other Matters We consider an arrangement with payment terms longer than our normal terms not to be fixed or determinable, and we recognize revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days, and normal payment terms for device sales are between 120 and 180 days. We sell our devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices soldwe sell to them by us.them. Generally, title and risk of loss pass to the buyer upon delivery of the devices. We estimate our product returns based on historical experience and maintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue. Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues. Impairment of Long-lived Assets We review our long-lived assets such as goodwill and intangibles for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use an equity 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 identifia bleidentifiable fair market value that is independent of other groups of assets. As of September 30, 2009, we 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. Allowance for Doubtful Accounts We must make estimates of the collectability of accounts receivable. In doing so, weWe analyze accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. Recent Accounting Pronouncements Effective for December 2008,From time to time, 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 statementspronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies, which are available to be issued. In particular, this Topic sets forth: (i)adopted by us as of the period afterspecified effective date. Unless otherwise discussed, we believe that the balance sheet date during which managementimpact 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 disclosure of subsequen t events. This Topic does not apply to subsequent events or transactionsrecently issued standards 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 wasnot yet effective for interim and annual periods ending after June 15, 2009, which was September 30, 2009 for us. The adoption of this Topic didwill 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 users to apply accord ingly. 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 asset s 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 beg inning 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 currently assessing the fut ure 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 wi thin 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.upon adoption.
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 statements on a nonrecu rring 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 significantly impact our r esults 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 and financial positi on.
Accounting for Stock-Based Compensation For the fiscal years ended September 30, 2009 and 2008, we calculatedWe recognize compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of $67,406 and $214,251, respectively related to the vesting of stock options granted in prior years.
Theaward based on their grant date fair value of each stock option grant is estimated onvalue. We estimate the date of grant using the Black-Scholes option-pricing model. We granted 1,517,714 and 1,725,000 stock options to employees during the fiscal years ended September 30, 2009 and 2008 valued at $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. Theusing a Black-Scholes option pricing model which requires us to make estimates for certain assumptions regarding risk-free interest rate, 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 onof stock and expected dividend yield of stock.
Financial and Certain Pro Forma Information Regarding GPS Global At the historical price volatil ity of Common Stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected lifetime of the related stock options.Transaction, GPS Global was a privately owned company established in 2007 in the State of Israel. GPS Global provides tracking, monitoring and surveillance solutions of offenders, vehicles, facilities and human resources. GPS Global specializes in developing innovative products using advanced technologies to provide a complete solution for its customers. GPS Global has had limited operations. Its business has involved primarily the research and development of solutions for offender tracking and monitoring, human resources and personnel locating, vehicle and asset tracking, locating and control, and facility monitoring. It does not own any patents at this time. The dividend yield representsfinancial and certain pro forma financial information regarding GPS Global specified in Rule 3-05(b) or Rule 8-04(b) of Regulation S-X under the Company’s anticipated cash dividends overSecurities and Exchange Act of 1934, as amended (“Exchange Act”), will be filed by amendment to this registration statement on Form S-1/A within the expected life of the stock options.71 days allowed. The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2009 and 2008, respectively:BUSINESS | | | 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 summaryOur ReliAlert portfolio of stock option activitydevices and services are customizable to provide secure reintegration solutions for the fiscal years ended September 30 2009various offender types, including domestic abusers, sexual predators, gang members, pre-trial defendants, or juvenile offenders. Our proprietary software, device firmware and 2008 is presented below:processes accommodate agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions.
| | 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 | | | | | | | | 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 | |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe believe successful monitoring requires effective, persistent management of monitored individuals. Our monitoring and intervention centers act as an important link between offenders and their supervising officers. SecureAlert intervention specialists initiate contact at the direction of the supervising agency or when an offender violates any established restriction or protocol. The monitoring that is enabled by our state-of-the-art devices, which give us the unique ability to conduct live, three-way voice communication with monitored individuals and officers, provides the situational context that is the basis for behavior management and modification. In addition, if necessary, monitoring allows us to provide interaction details to law enforcement officers, giving them greater insights prior to intervention or other actions.
Our Strategy Our global growth strategy is to continue to expand offerings which empower professionals in security, law enforcement, corrections and rehabilitation organizations worldwide with single-sourced offender management solutions that integrate reliable intervention technologies to support re-socialization and monitoring initiatives. To accomplish this objective, we are implementing a growing portfolio of proprietary and non-proprietary real-time monitoring and intervention products and services. These include GPS, RF, drug and alcohol testing for defendants and offenders as well other individuals and assets in the corrections, law enforcement and rehabilitation arena. In addition, our product and service offerings will expand upon our exception-based reporting, analytical capabilities and behavioral-monitoring knowledge. These customizable solutions will be available through Web portals and mobile device platforms, in addition to traditional desktops, to leverage our real-time monitoring data, best-practice monitoring, and interaction protocols and analytics capabilities. Customer insights will be increased further by aggregating real-time data from additional monitoring device types and technologies, regardless of manufacturer, as well as other critical data sources. In summary, we are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services for the global offender management marketplace. We will continue to work with agencies to increase public safety and officer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and improve monitoring program success rates, all while offering defendants and offenders opportunities for accountable freedom instead of incarceration. Marketing Our businessstrategic purpose is extending to severalproduce or acquire and globally deploy leading edge tracking technology and monitoring services in the criminal justice arena. During fiscal year 2013, we worked to meet this objective by expanding sales and marketing activities domestically and internationally through the addition of sales resources and increase of marketing efforts such as trade show participation. As in fiscal 2012, new account acquisition was aided by the lack of public funding for enforcement and corrections agencies, the need to reduce jail operating and expansion expenses, and a desire for greater control of monitoring of high risk and high flight risk device wearers. Also, the view continues to widen that society needs to look at alternative ways of sentencing offenders, as well as keeping track of certain types of offenders, such as those convicted of sexual or domestic violence offenses who have been released from custody. Several countries outsideincluding the United States began or continued the process of evaluating sentencing laws which would release sentenced felons to GPS monitoring, after partially serving their incarceration sentences. We foresee that these views and the harsh economic and funding realities will continue to fuel wider implementation of electronic monitoring programs globally, increasing demand for our products and monitoring services. Our products’ unique and patented functionality make us a good match for these opportunities. In particular, our customers have expressed interest for the patented two- and three-way voice communication technology on our ReliAlert device, and our SecureCuff steel reinforced band. Other SecureAlert features, including our 95 decibel siren, the real-time posting of location traces and flexible mapping, are also instrumental in winning accounts. During fiscal year 2013, we continued our commitment to ongoing enhancements to the ReliAlert device line and our TrackerPAL tracking and monitoring software. Device enhancements centered on the continuation of integrating componentry designed to expand the life span and robustness of the devices, enhance GPS sensitivity, and increase battery operation time. We also enhanced our TrackerPAL software in the areas of selection and reporting features. Research and Development Program During the fiscal year ended September 30, 2013, we spent $987,934 on research and development, compared to research and development expenditures of $1,248,654 in the fiscal year ended September 30, 2012. These costs of $987,934 were to further develop our TrackerPAL and ReliAlert portfolio of products and services. Monitoring Center During fiscal year 2013, we continued to realize productivity enhancements and additions to our key core competency and differentiator, our Intervention Monitoring Center. Productivity gains were achieved through monitoring software enhancements as well as continuous optimization of processes and procedures and ongoing training. The Intervention Monitoring Center employs bilingual Spanish-speaking staff who provide 24/7 coverage. The bilingual staff addresses the needs of both domestic and international customers. Competition During fiscal year 2013, as in past years, we continued to encounter electronic offender monitoring competition from traditional competitors, a few of which had consolidated in 2011 and 2012. We also saw a couple of major new entrants come into the United States market. Traditional competition includes: | · | BI Incorporated, Denver, Colorado, a subsidiary of GEO Care, Inc., Boca Raton, Florida – This international company provides a wide variety of private correctional services from facilities operation and management to correctional health care services. BI Incorporated, which was purchased by GEO Care, Inc. in 2011, has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States. | | | | · | Omnilink Systems, Inc., Alpharetta, Georgia – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. In fiscal year 2013, Omnilink completed an agreement with Alcohol Monitoring Systems, Inc. (AMS) for AMS to distribute Omnilink GPS devices as “SCRAM One-Piece GPS™”, to extend AMS’ product line for those agencies looking for a one-stop shop for their monitoring needs. | | | | · | 3M Electronic Monitoring, Odessa, Florida (purchased and consolidated Attenti Group, (ElmoTech and ProTech) in 2011) – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks. | | | | · | Satellite Tracking of People, LLC, Houston, Texas – This company provides a broad line of GPS tracking systems and services to government agencies. | | | | · | Sentinel Offender Services, LLC, Augusta, Georgia (purchased and consolidated G4S’ United States Offender Monitoring operation in 2012) – This company supplies monitoring and supervision solutions for the offender population. Through their acquisition and consolidation of G4S’ United States Offender Monitoring operation, they expanded their customer base to which they provide electronic monitoring of offenders, prison and detention center management and transitional support services. Through this acquisition, they also resell Omnilink’s active GPS device, in addition to their own. |
The following companies entered the United States market in fiscal year 2013: | · | Buddi, Ltd., Aylesbury, Binkghamshire, United Kingdom – This company was started in 2005 to provide consumer tracking for the elderly and for Alzheimer’s sufferers. Buddi has recently entered offender monitoring and are pursuing business within the United States. | | | | · | Corrisoft, LLC, Lexington, Kentucky – This company produces offerings for the monitoring of low and medium risk offenders, and distributes other companies’ products for higher risk offenders. They have announced that they will be developing additional products for the monitoring of all offender types. |
We also continue to face competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services. Some of these entities utilize less well-known technologies or are resellers of the above competitors’ products. We do not believe there is reliable publicly available information to indicate our relative market share or that of our competitors. Dependence on Major Customers Two customers each represented more than 10% of gross revenues for the years ended September 30, 2013 and 2012 as follows: | | 2013 | | | % | | 2012 | | | % | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 5,252,959 | | | | 34 | % | | $ | 2,450,984 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 1,622,326 | | | | 10 | % | | $ | 1,876,285 | | | | 12 | % |
No other customer represented more than 10% of total revenues for the fiscal years ended September 30, 2013 or 2012. Our contract with Secretaría de Gobernación de México was completed during fiscal year 2013. The Ministry of National Security in the Bahamas arrangement involved a three-year contract which concluded in November 2013, and services have continued on a month-to-month basis since that time. This arrangement could be terminated at anytime with a 30-day notice. Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, is shown in the table below: | | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | | | La Oficina de Servicios con Antelación al Juicio de Puerto Rico | | $ | 887,233 | | | | 24 | % | | $ | 681,781 | | | | 24 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 732,163 | | | | 20 | % | | $ | 475,800 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 892,897 | | | | 24 | % | | $ | - | | | | 0 | % |
Subsequent to the fiscal year ended September 30, 2013, we received $387,483 from la Oficina de Servicios con Antelación al Juicio de Puerto Rico and $518,137 from The Ministry of National Security in the Bahamas. Dependence on Major Suppliers We purchase cellular services from several suppliers. The cost to us for these services during the fiscal years ended September 30, 2013 and 2012, was approximately $974,709 and $961,994, respectively. Our cellular costs increased by approximately 1% in 2013 compared to 2012, due to the increase in the number of monitoring devices assigned to customers. Product Returns During fiscal year 2013, we made improvements to the ReliAlert device as well as internal processes to improve product reliability and reduce product returns. These improvements include the following: | · | We redesigned the shell of the ReliAlert device addressing several issues related to devices that were returned to us by our customers. | | | | · | We refined our assembly and inspection processes (outgoing and incoming inspections) to ensure continued quality improvements. | | | | · | We instituted a formal change control process to ensure that we have a structured, strategic, and documented approach to addressing and implementing changes. This also includes improvements in our internal communications processes to ensure that different groups within the Company have visibility into current issues, and everyone has input into the process of continual improvement of our processes and design. | | | | · | We cross-trained technical support staff and returns analysis staff to enable them to have improved visibility of the customer experience. This has helped our staff to quickly and correctly diagnose issues in the field. |
Intellectual Property Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own six trademarks that are registered with the United States Patent and Trademark Office plus one trademark registered in Mexico and one in Canada. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States. The following table summarizes our trademark registrations and applications: | Trademark | | Application Number | | Registration Number | | Status/Next Action | Mobile911 Siren with 2-Way Voice Communication & Design® | | 76/013,886 | | 2,595,328 | | Registered | PAL Services® | | 78/514,514 | | 3,100,192 | | Registered | TrackerPAL® | | 78/843,035 | | 3,345,878 | | Registered | Mobile911® | | 78/851,384 | | 3,212,937 | | Registered | TrackerPAL® | | CA 1,315,487 | | 749,417 | | Registered | TrackerPAL® | | MX 805,365 | | 960954 | | Registered | Foresight® | | 77/137/822 | | 3481509 | | Registered | Bishop Rock Software® | | 77/132,255 | | 3481474 | | Registered | | ReliAlert™ | | 85/238,049 | | In process | | Pending | | HomeAware™ | | 85/238,064 | | In process | | Pending | | SecureCuff™ | | 85/238,058 | | In process | | Pending | | TrueDetect™ | | 85/237,202 | | In process | | Pending | | SecureAlert™ | | 86/031,550 | | In process | | Pending |
Patents. We have 15 patents issued and two patents pending in the United States. At foreign patent offices we have three patents issued and 12 patents pending. We are also preparing patents that will be filed in other countries in the coming year. The following tables summarize information regarding our patents and patent applications. There is no assurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications. | | | | | | | | | | | | Domestic Patents | | Application# | | Date Filed | | Patent# | | Issued | | Status | | | | | | | | | | | | Emergency Phone for Automatically Summoning Multiple Emergency Response Services | | 09/173645 | | 16-Oct-98 | | 6226510 | | 1-May-01 | | Issued | | | | | | | | | | | | Combination Emergency Phone and Personal Audio Device | | 09/185191 | | 3-Nov-98 | | 6285867 | | 4-Sep-01 | | Issued | | | | | | | | | | | | | Panic Button Phone | | 09/044497 | | 19-Mar-98 | | 6044257 | | 28-Mar-00 | | Issued | | | | | | | | | | | | Interference Structure for Emergency Response System Wristwatch | | 09/651523 | | 29-Aug-00 | | 6366538 | | 2-Apr-02 | | Issued | | | | | | | | | | | | Emergency Phone With Alternate Number Calling Capability | | 09/684831 | | 10-Oct-00 | | 7092695 | | 15-Aug-06 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 11/202427 | | 10-Aug-05 | | 7330122 | | 12-Feb-08 | | Issued | | | | | | | | | | | | Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors | | 11/486991 | | 14-Jul-06 | | 7545318 | | 9-Jun-09 | | Issued | | | | | | | | | | | | Alarm and Alarm Management System for Remote Tracking Devices | | 11/486992 | | 14-Jul-06 | | 7737841 | | 15-Jun-10 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 12/028088 | | 8-Feb-08 | | 7804412 | | 28-Sep-10 | | Issued | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center | | 11/486976 | | 14-Jul-06 | | 7936262 | | 3-May-11 | | Issued | Alarm and Alarm Management System for Remote Tracking Devices | | 12/792572 | | 2-Jun-10 | | 8013736 | | 6-Sep-11 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 12/875988 | | 3-Sep-10 | | 8031077 | | 4-Oct-11 | | Issued | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 12/818,453 | | 18-Jun-10 | | 8514070 | | 20-Aug-13 | | Issued | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device | | 12/399151 | | 6-Mar-09 | | 8232876 | | 31-Jul-12 | | Issued | | | | | | | | | | | | | Emergency Phone with Single-Button Activation | | 11/174191 | | 30-Jun-05 | | 7251471 | | 7/31/2007 | | Issued | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 13/970,007 | | 19-Aug-13 | | - | | - | | Pending | | | | | | | | | | | | A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center | | 11/486989 | | 14-Jul-06 | | - | | - | | Pending |
| International Patents | | Application# | | Date Filed | | Patent# | | Issued | | Status | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - EPO | | 9716860.3 | | 6-Oct-10 | | 2260482 | | 1/9/2013 | | Issued | | | | | | | | | | | | | | Remote Tracking and Communication Device - | | MX/a/2008/ | | | | | | | | | | Mexico | | 1932 | | 4-Aug-06 | | 278405 | | 24-Aug-10 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking | | MX/a/2010/ | | | | | | | | | | Device - Mexico | | 9680 | | 2-Sep-10 | | 306920 | | 1/22/2013 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Canada | | 2717866 | | 3-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | | Remote Tracking and Communication Device - EPO | | 6836098.1 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Brazil | | PI0614742.9 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Canada | | 2617923 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - EPO | | 7812596 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - Brazil | | PI0714367.2 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - EPO | | 10 009 091.9 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Brazil | | PI11001593 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico | | MX/a/2011/002283 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Canada | | 2732654 | | 23-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Brazil | | PI0909172-6 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico - DIV | | MX/a/2013/12524 | | 25-Oct-13 | | - | | - | | Pending |
Royalty Agreement. On August 4, 2011, with an effective date of July 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen Container Corp., a corporation organized under the laws of the Commonwealth of Puerto Rico (“Borinquen”) to purchase Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a Puerto Rico corporation (“ISS”) in consideration of 310,000 shares of our Common Stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. We also agreed to pay to Borinquen quarterly royalty payments in an amount equal to 20% of our net revenues from the sale or lease of our monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. We redeemed and terminated this royalty obligation in February 2013 using the proceeds of a loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). The obligation to Sapinda Asia was converted to Common Stock and satisfied in full in September 2013. Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel. Seasonality Given the consistency in recurring domestic monitoring revenues by customer throughout 2013, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic deployment opportunities slow down in the months of July and August. We believe that this is due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season during these two months. Properties Our headquarters and monitoring facility are housed in approximately 7,500 square feet of commercial office space located at 150 West Civic Center Drive, Suite 400, Sandy, Utah. Lease payments are approximately $18,000 per month. This lease expires on May 31, 2014. In addition, we lease 6,152 square feet of warehousing and pallet shipping functions and capabilities in a facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $6,500; the lease expires on August 31, 2014. GPS Global’ s operations are housed in approximately 350 square meters of commercial office space located at 23 Htaas St Kfar-Saba, Israel. The monthly lease is approximately $5,100. The lease expires on May 31, 2014 and the operations will likely be relocated to a comparable space in the same commercial area. 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 March 31, 2014, we had 94 full-time employees and four part-time employees in the United States. None of these 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 relations with employees are good. We acquired eight employees and two independent contractors in Israel in connection with the acquisition of GPS Global. Israeli labor laws and regulations apply to all employees based in Israel. The laws principally cover matters such as paid vacation, paid sick days, length of the workday, payment for overtime and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance payments may be funded, in whole or in part, through a managers’ insurance fund or a pension fund. The payments to the managers’ insurance fund or pension fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute of Israel, which also include payments for health insurance. The payments to the National Insurance Institute amount to approximately 14.5% of wages, of which the employee contributes 66% and the employer contributes 34%. Additional Available Information We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.securealert.com. The information found on, or otherwise accessible through, our website, is not incorporated into and does not form a part of this prospectus. We make available, free of charge at our corporate website copies of our annual reports filed with the SEC on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request. All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Legal Proceedings Lazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. We believe these allegations are inaccurate and intend to defend the case vigorously. 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. Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. We intend to defend this matter. 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. Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming we had breached a contract for computer services and intentionally interfered with its economic relations. We reached a settlement with Integratechs in March 2014, and agreed to pay $20,000 to Integratechs; neither party admitted any wrongdoing or liability and the lawsuit was dismissed with prejudice. Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against us in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that we breached a 2006 consulting agreement with him and claims damages of not less than $210,000. We dispute the plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is remote. SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, we filed a complaint in the United States District Court, District of Utah, Central Division against Satellite Tracking of People, LLC (a.k.a. STOP, LLC) asserting claims for declaratory relief, reimbursement for overpayment and unjust enrichment related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. On February 14, 2014, STOP filed an answer denying our claims and asserted counterclaims for breach of contract against us related to the same Settlement Agreement. On March 1, 2014, we entered into a Supplemental Settlement Agreement that included a stipulation and dismissal of all claims and counterclaims in this litigation. Under the terms of the settlement, both parties restructured their relationship and provided reciprocal licenses for all patents listed in the Settlement Agreement effective January 29, 2010. In addition both parties provided the other with reciprocal license for future patents awarded the respective parties, but excluding patents held by or acquired by SecureAlert related to: (i) GPS or cellular tracking by a device not attached to a person’s limb, (ii) related to alcohol/drug monitoring, (iii) any patent held by an entity acquired by SecureAlert for so long as that entity is paying or owes STOP a royalty or fee until such time as any royalty or fee is no longer owed to STOP, unless STOP already has a right to those patents, and (iv) any patent not used in the electronic monitoring and tracking services, using cellular and/or GPS technologies, for governmental law enforcement agencies (e.g. offender tracking). In addition, we agreed to pay to STOP a total of $4,500,000 in 24 equal monthly installments of $187,500 in exchange for a release of all royalty and other payment obligations called for under the Settlement Agreement dated January 29, 2010. SecureAlert, Inc. v. Derrick Brooks and STOP, LLC. On February 21, 2014, we filed a complaint in the Third Judicial District Court, Salt Lake County, State of Utah, against Derrick Brooks and STOP, asserting claims for declaratory relief, breach of contract, tortious interference with prospective economic relations, tortious interference with contract, misappropriation of trade secrets, injurious falsehood/trade libel/business disparagement, defamation, respondeat superior, injunctive relief and punitive damages. On March 20, 2014, we entered into a settlement agreement with STOP and all of the claims between us and STOP in the litigation have been dismissed with prejudice. On April 9, 2014, Mr. Brooks filed an answer denying our claims and asserted counterclaims for constructive discharge, interference with contract/interference with prospective economic relations and blacklisting. In his counterclaim Mr. Brooks seeks to recover “not less than $150,000” on each of his claims. We have not yet responded to Mr. Brooks’ counterclaims, but believe them to be without merit and we intend to continue to expand our foreign operations. As a result, our revenues and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.vigorously defend against them. Foreign Currency Risks. We had no revenues from sources outside the United States for the three and nine months ended June 30, 2010 and 2009. Sales of monitoring equipment during the periods indicated were transacted in U.S. dollars and, therefore, we did not experience any effect from foreign currency exchange in connection with these international sales. We occasionally purchase goods and services in foreign currencies which resulted in currency exchange rate losses of $8,756 and $0 for the nine months ended June 30, 2010 and 2009, respectively. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rat e fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for trading or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
Interest Rate Risks. As of June 30, 2010, we had $1,000,000 of borrowings outstanding on a line of credit with a bank with an interest rate of 3.28%. The interest rate on this line of credit is subject to change from time to time based on changes in an independent index which is the Prime Rate as published in The Wall Street Journal.
MANAGEMENT Director Independence
A majority of the members of our Board of Directors and all of the members of certain committees are composed of “independent directors,” as defined in the rules of the Nasdaq Stock Market. In general, an “independent director” is a person other than an officer or employee of the Company or any other individual who does not have a relationship, which, in the opinion of the Board of Directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Additional independence and qualification requirements apply to our directors serving on certain committees. Our Board has a separately-designated standing Audit Committee, Compensation Committee, and Nominating Committee. All members of the Audit Committee, Compensation Committe e, and Nominating Committee meet the definition of "independent," described above.
Board of DirectorsExecutive Officers
The following table sets forth information about the members of our Board of Directors as of September 30, 2010:April 1, 2014: Name | | Age | | Position | | | | | | Edgar BernardiDavid S. Boone | | 53 | | Director | Robert E. ChildersGuy Dubois | | 6455 | | Director | David G. Derrick | | 57 | | Director, Chief Executive Officer | David P. Hanlon | | 64 | | Director | John L. Hastings, III | | 47 | | President and Chief Operating Officer | | Rene Klinkhammer | | 3034 | | Director | Larry G. SchafranWinfried Kunz | | 7148 | | Director | | Dan L. Mabey | | 62 | | Director | | George F. Schmitt | | 70 | | Director |
Dr. Edgar BernardiDavid S. Boone joinedis the CEO of Paranet Solutions, LLC, in Dallas, Texas. He became a director of our Company on December 21, 2011. He has served in executive roles with a variety of publicly traded and start-up organizations including Kraft General Foods, Sears, PepsiCo, Safeway and Belo Corporation, and was the CFO of Intira Corporation. In addition, he has served as a consultant with the Boston Consulting Group. Mr. Boone was CEO, President and Director of American CareSource Holdings Inc. (Nasdaq: ACS) from 2005 to 2011. He was the 2009 Ernst and Young Entrepreneur of the Year winner for Health Care in the Southwest Region. Mr. Boone serves on a number of private company boards and serves on the board in January 2010. Heof the Texas Kidney Foundation. Mr. Boone graduated from the University of Wuppertal, Wuppertal, Germany,Illinois, cum laude, in 19761983 majoring in physics and mathematics.accounting. He received his master’s degree in physicsbusiness administration from University Bonn, Physics Institute, Bonn, GermanyHarvard Business School in 1984, emphasizing elementary particle physics. In 1988, he received his Ph.D.1989.
Guy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director at Singapore-based Tetra House Pte. Ltd., that provides consulting and advisory services worldwide. Mr. Dubois was Chief Executive Officer of gategroup AG from September 2008 until April 2011. He previously held the University Hamburg, Hamburg, Germany, specializing in elementary particle physics. From 2001 through 2009, Dr. Bernardipositions of President, Executive Vice President Finance and Administration, Chief Administrative Officer and Chief Financial Officer of Gate Gourmet Holding LLC. He served as CTO, COO, CSO and CIO for euromicron AG, a holding company with buy and build strategy in the core business o f network and fiber optics technology in Germany. From 1999 through 2001, he served as the general manager for Christian Schwaiger GmbH & Co., KG, an entity engaged in the production and trade of antenna, satellite and cable TV reception systems. From 1998 through 1999, Dr. Bernardi was the director of network operator services for Alcatel Sel AG, a worldwide manufacturer of telecommunication network equipment. From 1991 through 1998, he served in two capacities for Mannesmann Mobilfunk GmbH (Vodafone GmbH), which was the first private mobile network operator in Germany, of which he was the head of the departmentBoard of network planningManagers of Gate Gourmet Holding LLC from March 2007 until April 2011, and optimization and headas a member of the departmentBoard of system aspects. Fromgategroup AG from February 2008 until April 2011. Prior to joining Gate Gourmet in July 2003, Mr. Dubois was Vice President Finance, Administration, Demand and Supply Chain for Roche’s Vitamins Inc. in New Jersey from 2000 to 2003. He was Area Manager, Finance and Administration for Roche’s Vitamins Asia-Pacific Pte. Ltd. in Singapore from 1997 to 1999, and Finance Manager from 1995 to 1997. Mr. Dubois worked in corporate finance for Hoffman-La Roche in 1994. Mr. Dubois also served on the European Organization for Nuclear Research (CERN) team in Switzerland in various roles, including Treasurer and Chief Accountant, Manager General Accounting and Financial Accountant from 1989 to 1994. He also worked with IBM in Sweden from 1984 to 1988 through 1990, heas Product Support Specialist for Financial Applications. He attended the Limburg Business School in Diepenbeek, Belgium, and has a degree in Financial Science and Accountancy. Mr. Dubois’ appointment to the Board of Directors was with Robert Bosch GmbH, a worldwide manufacturerrequirement of automotive and telecommunication equipment and serveda financing arrangement as the main adviserpart of the business unity public telecommunications and development center, and an adviser in the business unit for pu blic telecommunications development center.terms of a loan agreement with Sapinda Asia. Robert E. Childers joined our board in July 2001. Since 1977, he has served as the Chief Executive Officer of Structures Resources Inc., a firm which he founded in 1972. He has more than 30 years of business experience in construction and real estate development. Mr. Childers has served or is currently serving as General Partner in 16 public limited partnerships in the Middle Atlantic States. Partners include First Union Bank and Fannie Mae. Structures Resources has successfully completed over 300 projects (offices, hotels, apartments, and shopping centers) from New York to North Carolina. Recently Mr. Childers has founded a new company providing construction services to major companies developing gas wells in the Marcellus shale. He is a co-founder of Life Science Group, a boutique biotech investment-banking firm. Mr. Childers was the founding President of Associated Building Contractors for the State of West Virginia and served as a director of The Twentieth Street Bank until its merger with City Holding Bank. He is a former naval officer serving in Atlantic fleet submarines. Mr. Childers is a member of the Compensation Committee and the Nominating Committee of our Board of Directors.
David G. Derrick has been our CEO and Chairman since February 2001. Prior to joining us, Mr. Derrick occupied directorship and management positions in other companies. From 1979 to 1982, Mr. Derrick was a faculty member at the University of Utah, College of Business. Mr. Derrick graduated from the University of Utah with a Bachelor of Arts degree in Economics and a Masters in Business Administration degree with an emphasis in Finance.
David P. Hanlon has been a member of our Board of Directors since October 2006. He served previously as Chief Executive Officer and President of Empire Resorts, Inc., a public company in the gaming industry, until May 2009. Prior to starting his own gaming consulting business in 2000, in which he advised a number of Indian and international gaming ventures, Mr. Hanlon was President and Chief Operating Officer of Rio Suites Hotel & Casino from 1996-1999, a period in which the Rio Suites Hotel & Casino underwent a major expansion. From 1994-1995, Mr. Hanlon served as President and Chief Executive Officer of International Game Technology, the world's leading manufacturer of microprocessor gaming machines. From 1988 - -1993, Mr. Hanlon served as President and Chief Executive Officer of Merv Griffin's Resorts International, and prior to that, Mr. Hanlon served as President of Harrah's Atlantic City (Harrah's Marina and Trump Plaza). Mr. Hanlon's education includes a B.S. in Hotel Administration from Cornell University, an M.S. in Accounting, an M.B.A. in Finance from the Wharton School, University of Pennsylvania, and completion of the Advanced Management Program at the Harvard Business School. Mr. Hanlon is a member of the Audit Committee of our Board of Directors.
John L. Hastings, III became our President on June 19, 2008 and Chief Operating Officer on November 20, 2008. Mr. Hastings has worked for Nestle/Stouffer’s, Kraft/General Foods, Nissan Motor Acceptance Corp., NCR/Teradata, Unisys Corp. and VNU/AC Nielsen. He has also served on the boards of small entrepreneurial companies. From 1998 through 2006, Mr. Hastings worked with VNU – AC Nielsen in several executive posts, last serving as its Senior Vice President and General Manager of Global Business Intelligence, reporting directly to VNU’s chief executive officer. Upon acquisition and privatization of VNU in 2006, and until his appointment as our President, Mr. Hastings served as the interim President and CEO of Klever Marketing, Inc., a Utah-based retail marketing company. Mr. Hastings received a BA from Cal State University, Fullerton CA (1985) and an MBA from Pepperdine University, Malibu CA (1987).
Rene Klinkhammerbecame a director in January 2010. He graduated from European Business School, Oestrich-Winkel, Germany, in 2004, with an MBA-equivalent degree in business administration. His majors were Banking, Finance and International Management. After graduating, Mr. Klinkhammer joined Deutsche Bank’s Investment Banking Division as an analyst in the Corporate Finance Advisory Group, specializing in mergers &and acquisitions, along with debt and equity financing transactions for larger German clients of the bank. InFrom 2007 to June 2013, Mr. Klinkhammer joinedworked for Sapinda Group,Holding B.V. and its subsidiaries, a group of privately-owned investment companycompanies with offices in Amsterdam, Berlin, London and London.other major cities around the world. Since July 2013, Mr. Klinkhammer works for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. Winfried Kunz became a director on December 21, 2011. He studied Business Administration and Economics from 1984 -1989 at the Universities in Munich and Cologne. In 1985 he started working as a system analyst and from 1987 – 1998 as a management consultant for German, British and American companies in the information technology industry, where he served in executive positions. Mr. Kunz worked as an executive at Precision Software Ltd., Contact Software International Inc., and Symantec Corp. For the past threemore than 15 years, Mr. Klink hammerKunz has worked as an independent consultant and managing partner of Asecon GmbH, a company he founded in 1997, developing and implementing investor innovative business models for residential properties with a focus in Munich for his own portfolio and for third parties. For more than 10 years he has been a consultant to JK Wohnbau GmbH, a Munich-based real estate developer, where he served as COO from 2009 until the Companycompany’s initial public offering in 2010. From 2009 to 2011, Mr. Kunz has also worked with us as an investor. Dan L. Mabey became a director on December 21, 2011. He is the CEO of BigHorn Oil and Gas, an energy development company (Casper, Wyoming), and he has served in both public and private company leadership positions in the high-tech industry including President of 1-2-1 View digital signage company (Singapore), Chief Operating Officer and Director of In Media Corporation IPTV service company (California), President of Interactive Devices, Inc. a video compression company (Folsom, California) and Vice President of Broadcast International, a satellite broadcast company ( Salt Lake City, Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development Office, growing Utah exports from $700 million to $3.6 billion a year. He helped recruit the 2002 Winter Olympics to Salt Lake City, Utah, and managed international business development for the games. Throughout his career, Mr. Mabey has been active in civic and community organizations and is the recipient of numerous service awards. He is also the co-inventor or lead inventor on six patents and the sole inventor of a seventh. Mr. Mabey received a Masters of Public Administration (MPA) degree from Idaho State University in 1978 and a B.A. degree from Boise State University in 1974. George F. Schmitt became a director on December 21, 2011. He is a director and CEO of MBTH Technology Holdings. He has held this position since December, 2010. Mr. Schmitt is also a director of XG Technology, Inc. a publicly traded company, Kentrox and Calient. Mr. Schmitt previously served as a director of TeleAtlas, Objective Systems Integrators, Omnipoint and LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and is a former Trustee of Saint Mary’s College of California. In addition, Mr. Schmitt has served as a director of many privately held companies including Voice Objects, Knowledge Adventure, Jungo and Cybergate, among others. Mr. Schmitt has also served as Financial Vice President of Pacific Telesis and chaired the audit committee of Objective Systems Integrations and TeleATLAS. Mr. Schmitt received an investorM.S. in Management from Stanford University, where he was a Sloan Fellow, and advisor.a B.A. in Political Science from Saint Mary’s College. Board of Directors Election and Meetings Directors hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are appointed by the Board of Directors and hold office until their successors are appointed and duly qualified. Vacancies on the Board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the Board, with such new director serving the remainder of the term or until his/her successor shall be elected and qualify. The Board of Directors is elected by and is accountable to our shareholders. The Board establishes policy and provides strategic direction, oversight, and control. The Board met 18 times during fiscal year 2013. All directors attended at least 80% of the meetings of the Board and of the committees of the Board of Directors of which they are members. Director Independence The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15). The Board determined the independence of all directors based on the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer and Dan L. Mabey meet the standards to be considered independent. The Board has not appointed a lead independent director. Shareholder Communications with Directors If we receive correspondence from our shareholders that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o SecureAlert, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Committees of the Board of Directors The Board of Directors has three standing committees: the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. These committees assist the Board of Directors to perform its responsibilities and make informed decisions. Audit Committee. The primary duties of the Audit Committee are to oversee (i) management’s conduct of our financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing our systems of internal accounting and financial controls, (ii) our independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of our independent auditors. The Audit Committee assists the Board in providing oversight of our financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on our website at www.securealert.com. The Audit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm, and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm. The Audit Committee met four times during both fiscal years 2012 and 2013 and all members of the Audit Committee attended at least 75% of the committee’s meetings. Members of the Audit Committee as of March 31, 2014, are Messrs. Boone, Schmitt and Kunz. In the opinion of the Board of Directors, each member of the Audit Committee satisfies the definition of independent director established in the NASDAQ Listing Standards. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors has designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the SEC. The Audit Committee reviewed and discussed the matters required by United States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 2013 with management and our independent registered public accounting firm. The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. Compensation Committee. Members of the Compensation Committee are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee met two times during fiscal year 2013. Members of the Compensation Committee are appointed by the Board of Directors. Messrs. Mabey, Boone, and Schmitt are independent directors, as determined by the Board of Directors in accordance with the NASDAQ listing standards. The Compensation Committee is governed by a charter approved by the Board of Directors, a copy of which is available on the Company’s website www.securealert.com. The Compensation Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to shareholders. The Committee monitors the results of such policy to assure that the compensation payable to our executive officers provides overall competitive pay levels, creates proper incentives to enhance shareholder value, rewards superior performance, and is justified by the returns available to shareholders. The Compensation Committee also acts on behalf of the Board of Directors in administering compensation plans approved by the Board, in a manner consistent with the terms of such plans (including, as applicable, the granting of stock options, restricted stock, stock units and other awards, the review of performance goals established before the start of the relevant plan year, and the determination of performance compared to the goals at the end of the plan year). The Committee reviews and makes recommendations to the Board with respect to new compensation incentive plans and equity-based plans; reviews and recommends the compensation of the Company’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of executive officers of the Company. Larry G. SchafranNominating and Corporate Governance Committee. Mr. Schmitt serves as the chair of the Nominating and Corporate Governance Committee. Messrs. Kunz and Klinkhammer also currently serve as members of this committee. The Nominating and Corporate Governance Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created Board positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for senior management succession.
The Nominating and Corporate Governance Committee is required to review the qualifications and backgrounds of all directors and nominees (without regard to whether a nominee has been a memberrecommended by shareholders), as well as the overall composition of ourthe Board of Directors, since October 2006. Heand recommend a slate of directors to be nominated for election at the annual meeting of shareholders, or, in the case of a vacancy on the Board of Directors, recommend a director to be elected by the Board to fill such vacancy. The Nominating and Corporate Governance Committee held one meeting during fiscal 2013. The Nominating and Corporate Governance Committee’s charter is associatedavailable on our website, www.securealert.com. Code of Ethics. We have established a Code of Business Ethics that applies to our officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting our business consistent with Providence Capital, Inc. (“PCI”)the highest standards of business ethics, and is intended to qualify as a Managing Director. PCI“code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. We will post on our website www.securealert.com any amendments to or waivers from a provision of our Code of Business Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions and that relates to any element of the Code of Business Ethics. Involvement in Certain Legal Proceedings There are no material proceedings to which any director or executive officer or any associate of any such director or officer is a New York City-based investmentparty adverse to us or has a material interest adverse to our Company. Except as discussed below, no director or executive officer has been involved in any of the following events during the past ten years: | · | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | | | | · | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | | | | · | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | | | | · | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | | | | · | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and- desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | | | | · | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
An executive of gategroup holdings AG, an airline catering company headquartered in Switzerland was convicted in a Danish court in September 2012 of fraud and advisory firm. Additionally, Mr. Schafran was Lead Director and Audit Committee Chairman and later a consultant to the Chairman of WorldSpace, Inc. In addition, Mr. Schafran is alsoembezzlement involving that company’s assets. Guy Dubois, a director of the following publicly traded U. S. corporations: Sulphco, Inc., New Frontier Energy, Inc., DollarDays International, Inc., Subaye Corp.Company since December 2012, was Chief Executive Officer of gategroup holdings AG at the time the executive committed the acts leading to her conviction, voluntarily resigned from gategroup holdings AG in 2011. The Zurich State Prosecutor initiated an investigation in 2011 focused on whether other individuals, including Mr. Dubois were aware of or benefitted personally from the fraud and National Patent Development Corporation. In recent years,embezzlement that occurred. Mr. Schafran served in several capacities, including, as a directorDubois, who has indicated he was unaware of PubliCard, Inc., Tarragon Corpora tion, and ElectroEnergy, and Trustee, Chairman/Interim-CEO/President and Co-Liquidating Trusteeany of Special Liquidating Trust of Banyan Strategic Realty Trust; Director and/or Chairman ofthese activities at the Executive Committees of Dart Group Corporation, Crown Books Corporation, TrakAuto Corporation, and Shoppers Food Warehouse, Inc. (Vice-Chairman); director and member of the Strategic Planning and Finance Committees of COMSAT Corporation, and Managing General Partner of L. G. Schafran & Partners, LP, a real estate investment and development firm. Mr. Schafran is Chairman of the Audit and Nominating Committees and a member of the Compensation Committee of our Board of Directors.time they were being committed, has been cooperating with that investigation. Current Executive Officers
The following table sets forth certain information regarding our principal executive officer and principal financial and accounting officer as of September 30, 2010, regarding the current executive officers of the Company.March 31, 2014: | Name | | Age | | Position | | | | | | | David G. DerrickExecutive Committee of Board of Directors | | 57 | | ChiefPrincipal Executive Officer and Chairman | John L. Hastings, IIIR. Merrill | | 47 | | President and Chief Operating Officer | Chad Olsen | | 3944 | | Chief Financial Officer | Bernadette Suckel | | 53 | | Managing Director of Sales & Marketing | Bruce G. Derrick | | 51 | | Chief Technology Officer |
David G. Derrick has been our CEO and Chairman since February 2001. His work and education information is detailed with ourThe Executive Committee of the Board of Directors table above.was established to act temporarily in the principal executive officer function following the resignation of our Chief Executive Officer in October 2012. Current members of the Executive Committee are Guy Dubois and David S. Boone. On April 16, 2013, Mr. Dubois was granted warrants valued at $300,000 for his additional work as a director and member of the Board’s Executive Committee. This grant is of warrants to purchase 64,665 shares of Common Stock at an exercise price of $9.00 per share. These warrants vest in equal monthly increments over a period of one year or immediately upon the hiring of a new Chief Executive Officer. These warrants were valued at the date of grant using the Black-Scholes option-pricing model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer.
John L. Hastings, IIIR. Merrill became our PresidentMr. Merrill joined the Company on June 19, 2008April 21, 2014 and Chief Operating Officer on November 20, 2008. His work and education information is detailed with our Board of Directors table above. Chad Olsen became ourofficially assumed the duties as Chief Financial Officer in January 2010. Prior to that time, he served as our corporate controller since September 2001. From 1992 to 1997, Mr. Olsen worked in the banking and investment industry where he assisted clients with tax, investment and banking services. From 1997 to 2001, Mr. Olsen worked with a certified public accounting firm performing tax, auditing, and business advisory services. Additionally, Mr. Olsen owned and operated his own accounting practice performing tax, accounting, and consulting services. Mr. Olsen received a Bachelor of Science Degree in Accounting from Brigham Young University.
Bernadette Suckel joined us on April 24, 2008.2014. Mr. Merrill is also the Chief Financial Officer for TenXNetworks and IPVidTech.com, a network intelligence provider of both hardware and services. From 2010 to 2013, Mr. Merrill worked as an advisor in the healthcare technology industry facilitating both due diligence and integration of certain acquired companies. Prior to joining us, Ms. Suckel served as2010, Mr. Merrill was the VP/SolutionChief Financial Officer of Park City Group, Inc. (Nasdaq: PCYG) and Client Principal,Prescient Applied Intelligence, Inc. (OTC: PPID), software-as-a-service providers of supply chain solutions for The Nielsen Company/ACNielsen from 2000 through April 2008. From November 2006 through April 2008, she consulted on a part-time basis to Klever Marketing, Inc. to focus on cost reduction strategies. Ms. Suckel also worked previously for Cogit.comboth retailers and NCR/AT&T GIS/Teradata. She receivedtheir suppliers. Throughout his career, Mr. Merrill has held various financial roles within broadcasting, sports marketing, and the retail industry. He began his career with KPMG and holds a BS in Business Administration, Marketing Option, from California State University, Fresno.
Bruce G. Derrick has been our Chief Technology Officer since November 21, 2004. He has extensive experience in managementand a Masters of custom solutions development and customer management in the wireless telecom marketplace. From 2001 to 2004 Mr. Derrick was a senior product development manager for WatchMark Corporation. WatchMark collects cellular network performance data for quality assurance and capacity planning. Prior to joining WatchMark, Mr. Derrick was responsible for forming and managing the Professional Services team for Marconi’s MSI division. Mr. Derrick also worked in management positions at Boeing and Western Wireless, built and managed the Corporate Computer and Network Operations d epartment for Avaya’s Mosaix division. He was a Senior Programmer in applied research at the University of Utah’s Department of Medical Informatics where he developed and implemented medical informatics and physiological monitoring services for ICU care and participated in development of IEEE standards for automated physiological monitoring for NASA’s Space Station program. Mr. Derrick holds a Bachelor’s Degree in Computer ScienceAccounting from the University of Utah. Bruce Derrick isSouth Florida.
Compliance with Section 16(a) of the brotherExchange Act Section 16(a) of David Derrick, our Chairman and CEO. There are no other family relationships amongthe Exchange Act requires our officers, directors, and directors.persons who beneficially own more than 10% of our Common Stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file. Based solely upon a review of these forms that were furnished to us, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2013 and that such filings were timely except the following: | · | Mr. Klinkhammer, a director, filed two late reports on Form 4 reporting two transactions; and | | | | · | Mr. Schmitt, a director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Dubois, a director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Boone, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Mabey, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Kunz, a director, filed one late report on Form 4 reporting one transaction. |
Compensation of Directors The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2013, who are serving as directors as of March 31, 2014: | (a) | | (b) | | | (c) | | | (d) | | | (e) | | | | | Fees earned | | | Stock awards | | | Option awards | | | Total | | | Name | | ($) | | | ($) | | | ($) | | | ($) | | | David S. Boone | | $ | - | | | $ | - | | | $ | 76,385 | | | $ | 76,385 | | | Guy Dubois | | $ | - | | | $ | - | | | $ | 335,322 | | | $ | 335,322 | | | Rene Klinkhammer | | $ | - | | | $ | 7,500 | | | $ | 46,859 | | | $ | 54,359 | | | Winfried Kunz | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | | | Dan L. Mabey | | $ | - | | | $ | 15,000 | | | $ | 35,047 | | | $ | 50,047 | | | George F. Schmitt | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | |
Effective January 1, 2012, we began to accrue $2,500 per month for each director, to be issued in shares of Common Stock valued on the last date of the quarter; provided, that in the alternative, the director may elect to receive stock purchase warrants for the purchase of three times the number of shares otherwise issuable to the director, valued at the date of grant using the Black-Scholes valuation method. Additionally, the Chairman of the Audit Committee is paid $5,000 per month, rather than $2,500 paid to the other directors. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013. Amounts indicated in the table include the fair market value on the date of grant of warrants to purchase 73,413 shares of Common Stock granted to Mr. Dubois with exercise prices ranging from $9.00 to $19.46; these warrants expire at different dates from March 2015 to September 2015. The values of all shares and warrants listed above were determined using the Black-Scholes option-pricing model as of the date of grant or issuance. The table below summarizes outstanding warrants previously issued for compensation to our current non-employee directors as of September 30, 2013: | | Grant | Expiration | | Exercise | | | Number of | | | Compensation | | | Name | Date | Date | | Price | | | Options | | | Expense | | | | | | | | | | | | | | | | Winfried Kunz | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | George F. Schmitt | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | Rene Klinkhammer | 1/20/10 | 1/19/15 | | $ | 26.00 | | | | 1,000 | | | $ | 21,036 | | | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | | | | | | | | | | | | | | | | | David S. Boone | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 2,280 | | | $ | 17,698 | | | | | | | | | | | | | | | | | | | Dan L. Mabey | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | | | | | | | | | | | | | | | | | Guy Dubois | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 2,385 | | | $ | 11,682 | | | 4/16/13 | 4/15/15 | | $ | 9.00 | | | | 64,665 | | | $ | 300,000 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | |
Reimbursement of Expenses We reimburse travel expenses of members of the Board of Directors for their attendance at Board meetings and other necessary business travel. Compensation Risks Assessment As required by rules adopted by the SEC, management has made an assessment of our compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, we have determined that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. EXECUTIVE COMPENSATION Summary Compensation Table TheSet out in the following summary compensation table summarizesare the totalparticulars of compensation paid or earned byto the following persons for our principal executive officer, our principal financial officer and two other most highly compensated executive officers (the “Named Executive Officers”) who served as executive officers during the last two fiscal years ended September 30, 2010.2013 and 2012:
| (a) | | | (b) | | | | (c) | | | | (d) | | | | (e) | | | | (f) | | | | (g) | | | | (h) | | | | (i) | | | | (j) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nonqualified | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Equity | | Deferred | | | | | | Name and | | | | | | | | | | | | | | Stock | | Option | | Incentive Plan | | Compensation | | All Other | | | | Principal | | | | | | Salary | | Bonus | | Awards | | Awards | | Compensation | | Earnings | | Compensation | | Total | | Position | | Year | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | David G. Derrick (1) Chief Executive Officer | | | 2010 2009 | | | $ $ | 240,000 240,000 | | | $ $ | - 300,000 | | | $ $ | - - | | | $ $ | 83,991 185,571 | | | $ $ | | - - | | $ $ | | - - | | $ $ | 74,197 5,929 | | | $ $ | 398,188 731,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | John L. Hastings, III (2) President Chief Operating Officer | | | 2010 2009 | | | $ $ | 325,000 302,885 | | | $ $ | - 94,330 | | | $ $ | - - | | | $ $ | 131,326 46,393 | | | $ $ | | - - | | $ $ | | - - | | $ $ | 174,853 18,868 | | | $ $ | 631,179 462,476 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Michael G. Acton (3) Chief Financial Officer | | | 2010 2009 | | | $ $ | 3,076 81,538 | | | $ $ | - - | | | $ $ | - - | | | $ $ | - - | | | $ $ | | - - | | $ $ | | - - | | $ $ | - 9,806 | | | $ $ | 3,076 91,344 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad Olsen (4) Chief Financial Officer | | | 2010 | | | $ | 165,000 | | | $ | 17,580 | | | $ | - | | | $ | 14,264 | | | $ | | - | | $ | | - | | $ | 25,845 | | | $ | 222,689 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel (5) Managing Director of Sales and Marketing | | | 2010 2009 | | | $ $ | 121,541 126,161 | | | $ $ | - - | | | $ $ | - 11,500 | | | $ $ | 81,313 104,520 | | | $ $ | | - - | | $ $ | | - - | | $ $ | 5,259 - | | | $ $ | 208,113 242,181 | |
(1)(a) | Column (c), Salary, includes $240,000our principal executive officer (note, we currently have no principal executive officer, rather the executive committee of the Board of Directors acts as our principal executive officer and compensation expense incurred bypaid to members of this committee is included in the Company in connection with Mr. Derrick’s base salary in each fiscal year. DuringDirector Compensation table above); and
| | | | (b) | our most highly compensated executive officer who was serving as an executive officer at the end of the fiscal year ended September 30, 2008, we issued 1,000,000 shares of restricted common stock valued at $1.52 per share to ADP Management2013 who had total compensation exceeding $100,000 (with the principal executive officer, the Named Executive Officers); and | | | | (c) | an additional individual for whom disclosure would have been provided under a management agreement(b) but for the fact that the individual was not serving as a prepayment for Mr. Derrick’s services as our CEO; the amount paid was to be allocated to Mr. Derrick’s base salary which was set at $240,000 per year and was in lieu of cash payments. At September 30, 2009, ADP Management continued to hold those shares, which had a market value as of such date of $110,000. For accounting and reporting purposes, we valued the shares paid as compensationan executive officer at the date of grant and recorded the expense over the termend of the agreement at a rate of $240,000 permost recently completed financial year. No portion of the amount in colu mn (c) was paid to Mr. Derrick in cash. In each of the fiscal years 2010 and 2009, we recorded $240,000 as salary expense, $420,000 being attributable to amortization of the 1,000,000 shares of restricted Common Stock granted in 2008 and $60,000 being accrued, but not paid, as of September 30, 2010. Effective July 2010, ADP Management returned the shares and they were cancelled by us. Column (d) includes a $300,000 bonus payment to Mr. Derrick, which was accrued and ultimately paid by issuance of 300 shares of Series D Preferred rather than in cash. Option awards (column (f)) include $83,991 and $185,571 of expense in connection with the issuance and re-pricing of Common Stock purchase warrants during the fiscal years ended September 30, 2010 and 2009, respectively. Column (i) includes additional compensation for health, dental, life, and vision insurance we paid on Mr. Der rick’s behalf. Amounts shown do not include consideration and fees paid to ADP Management, an affiliate of Mr. Derrick, in connection with a line of credit agreement unrelated to Mr. Derrick’s compensation for services rendered as our CEO. See “TRANSACTIONS WITH RELATED PERSONS,” on page 31. |
| Name and | | | | | | | | | | | | | | | | | | | | | Principal | | | | | | | | | Stock | | | Option | | | All Other | | | | | | Position | Year | | Salary | | | Bonus | | | Awards | | | Awards | | | Compensation | | | Total | | | ( a ) | ( b ) | | ( c ) | | | ( d ) | | | ( e ) | | | ( f ) | | | ( g ) | | | ( h ) | | Chad D. Olsen (1) | 2013 | | $ | 192,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,740 | | | $ | 200,740 | | | Chief Financial Officer | 2012 | | $ | 192,000 | | | $ | 35,000 | | | $ | 124,000 | | | $ | 432,352 | | | $ | 42,195 | | | $ | 825,547 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel (2) | 2013 | | $ | 168,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,061 | | | $ | 176,061 | | | Managing Director Global Customer Service | 2012 | | $ | 168,000 | | | $ | 35,000 | | | $ | 77,500 | | | $ | 270,219 | | | $ | 7,950 | | | $ | 558,669 | | | (1) | Mr. Olsen served as our Chief Financial Officer from January 2010 to April 2014. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller. Column (g) includes additional compensation for paid time off, health, dental, life and vision insurance. | | (2) | Mrs. Suckel has served as Managing Director of Global Customer Service and Account Management of the Company since June 2008. Column (g) includes additional compensation for health, dental, life and vision insurance. |
Outstanding Equity Awards The table below summarizes outstanding equity awards held by our Named Executive Officers and Mrs. Suckel as of September 30, 2013: (2) | Mr. Hastings became our President in June 2008 and Chief Operating Officer in November 2008. Column (f) includes $131,326 and $46,393 of compensation expense incurred in connection with the vesting and re-pricing of Common Stock purchase warrants previously granted to Mr. Hastings during the fiscal years ended September 30, 2010 and 2009, respectively. Column (i) includes $162,138 additional compensation paid by us for services and benefits on behalf of Mr. Hastings as part of his signing package, as well as payments for health, dental, and vision insurance. Outstanding Equity Awards at Fiscal Year-End 2013 |
(3) | Mr. Acton was our Chief Financial Officer from 2001 through June 19, 2008 and from November 20, 2008 to January 2010. Column (i) includes additional compensation for health, dental, life, and vision insurance paid by us on Mr. Acton’s behalf. |
| Name | | Number of securities underlying unexercised options (#) exercisable | | | Number of securities underlying unexercised options (#) unexercisable | | | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad D. Olsen | | | 1,000 | | | | - | | | | - | | | $ | 15.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 125 | | | | - | | | | - | | | $ | 15.00 | | 3/14/14 | | | - | | | | - | | | | - | | | | | | 3,590 | | | | - | | | | - | | | $ | 15.00 | | 9/29/15 | | | - | | | | - | | | | - | | | | | | 30,000 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel | | | 1,000 | | | | - | | | | - | | | $ | 60.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 18,750 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | 3,500 | | | | - | | | | - | | | $ | 30.00 | | 9/29/15 | | | - | | | | - | | | | - | |
(4) | Mr. Olsen became our Chief Financial Officer in January 2010. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller. Column (f) includes $14,264 of compensation expense in connection with the vesting of options granted to Mr. Olsen during the fiscal year ended September 30, 2010. Column (i) includes additional compensation for paid-time off, health, dental, life and vision insurance. |
(5) | Mrs. Suckel has served as Managing Director of Offender Management Solutions of the Company since June 2008. Column (f), option/warrant awards, includes $81,313 and $104,520 of compensation expense in connection with stock options that vested during the years ended September 30, 2010 and 2009, respectively. For fiscal year ended September 30, 2009, column (e) includes the value of 50,000 restricted shares of Common Stock on the date of grant. Column (i) includes additional compensation paid for health, dental, life and vision insurance. |
Outstanding Equity Awards at Fiscal Year-End 2010
| | | | Option awards | Stock Awards | | (a) | (b) | (c) | (d) | | (e) | | (f) | (g) | (h) | (i) | (j) | | Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | | Option exercise price ($) | | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)(1) | | | | David G. Derrick | 2,000,000 | - | - | | $0.13 | | 8/28/2012 | - | $ - | - | $ - | | John L. Hastings, III | 1,500,000 | - | - | | $0.13 | | Various (2) | - | $ - | - | $ - | | Chad D. Olsen | 943,000 | - | 538,500 | | Various (3) | | Various (3) | | | | | | Bernadette Suckel | 1,000,000 | - | 525,000 | | Various (4) | | Various (4) | - | $ - | - | $ - |
| (1) | Market value is based on the fair market value of our Common Stock on September 30, 2010 in the amount of $0.11 per share based on market price. |
| (2) | 1,250,000 options granted June 26, 2008 exercisable at $0.13 per share expire on June 26, 2013 and 250,000 options granted on January 16, 2009 exercisable at $0.13 per share expire on January 15, 2014. |
| (3) | 200,000 options granted on January 16, 2009, exercisable at $0.30 per share expire on January 15, 2014 and 25,000 options granted on March 15, 2009 exercisable at $0.12 per share expire on March 14, 2014, and 718,000 options granted on September 30, 2010 vest over three years and are exercisable at a price of $0.15 per share, expiring September 29, 2015 (of which 179,500 have vested). |
| (4) | 100,000 options granted on June 9, 2008 are exercisable at $1.55 per share, expiring June 8, 2013. Also, 200,000 options granted on January 16, 2009, exercisable at $0.30 per share expire on January 15, 2014 and 700,000 options granted September 30, 2010 vest over three years and are exercisable at $0.15 per share, expiring on September 29, 2015, of which 175,000 have vested. |
No options held by executive officersthe Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2010. We have adopted our 2012 Plan and our 2006 Plan. We have also granted individual plans to certain executives and directors in the form of stock purchase warrants, which are included in the table above. Employment AgreementsOur Strategy
Our global growth strategy is to continue to expand offerings which empower professionals in security, law enforcement, corrections and rehabilitation organizations worldwide with single-sourced offender management solutions that integrate reliable intervention technologies to support re-socialization and monitoring initiatives. To accomplish this objective, we are implementing a growing portfolio of proprietary and non-proprietary real-time monitoring and intervention products and services. These include GPS, RF, drug and alcohol testing for defendants and offenders as well other individuals and assets in the corrections, law enforcement and rehabilitation arena. In addition, our product and service offerings will expand upon our exception-based reporting, analytical capabilities and behavioral-monitoring knowledge. These customizable solutions will be available through Web portals and mobile device platforms, in addition to traditional desktops, to leverage our real-time monitoring data, best-practice monitoring, and interaction protocols and analytics capabilities. Customer insights will be increased further by aggregating real-time data from additional monitoring device types and technologies, regardless of manufacturer, as well as other critical data sources. In summary, we are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services for the global offender management marketplace. We will continue to work with agencies to increase public safety and officer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and improve monitoring program success rates, all while offering defendants and offenders opportunities for accountable freedom instead of incarceration. Marketing Our strategic purpose is to produce or acquire and globally deploy leading edge tracking technology and monitoring services in the criminal justice arena. During fiscal year 2013, we worked to meet this objective by expanding sales and marketing activities domestically and internationally through the addition of sales resources and increase of marketing efforts such as trade show participation. As in fiscal 2012, new account acquisition was aided by the lack of public funding for enforcement and corrections agencies, the need to reduce jail operating and expansion expenses, and a desire for greater control of monitoring of high risk and high flight risk device wearers. Also, the view continues to widen that society needs to look at alternative ways of sentencing offenders, as well as keeping track of certain types of offenders, such as those convicted of sexual or domestic violence offenses who have been released from custody. Several countries including the United States began or continued the process of evaluating sentencing laws which would release sentenced felons to GPS monitoring, after partially serving their incarceration sentences. We foresee that these views and the harsh economic and funding realities will continue to fuel wider implementation of electronic monitoring programs globally, increasing demand for our products and monitoring services. Our products’ unique and patented functionality make us a good match for these opportunities. In particular, our customers have expressed interest for the patented two- and three-way voice communication technology on our ReliAlert device, and our SecureCuff steel reinforced band. Other SecureAlert features, including our 95 decibel siren, the real-time posting of location traces and flexible mapping, are also instrumental in winning accounts. During fiscal year 2013, we continued our commitment to ongoing enhancements to the ReliAlert device line and our TrackerPAL tracking and monitoring software. Device enhancements centered on the continuation of integrating componentry designed to expand the life span and robustness of the devices, enhance GPS sensitivity, and increase battery operation time. We also enhanced our TrackerPAL software in the areas of selection and reporting features. Research and Development Program During the fiscal year ended September 30, 2013, we spent $987,934 on research and development, compared to research and development expenditures of $1,248,654 in the fiscal year ended September 30, 2012. These costs of $987,934 were to further develop our TrackerPAL and ReliAlert portfolio of products and services. Monitoring Center During fiscal year 2013, we continued to realize productivity enhancements and additions to our key core competency and differentiator, our Intervention Monitoring Center. Productivity gains were achieved through monitoring software enhancements as well as continuous optimization of processes and procedures and ongoing training. The Intervention Monitoring Center employs bilingual Spanish-speaking staff who provide 24/7 coverage. The bilingual staff addresses the needs of both domestic and international customers. Competition During fiscal year 2013, as in past years, we continued to encounter electronic offender monitoring competition from traditional competitors, a few of which had consolidated in 2011 and 2012. We also saw a couple of major new entrants come into the United States market. Traditional competition includes: | · | BI Incorporated, Denver, Colorado, a subsidiary of GEO Care, Inc., Boca Raton, Florida – This international company provides a wide variety of private correctional services from facilities operation and management to correctional health care services. BI Incorporated, which was purchased by GEO Care, Inc. in 2011, has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States. | | | | · | Omnilink Systems, Inc., Alpharetta, Georgia – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. In fiscal year 2013, Omnilink completed an agreement with Alcohol Monitoring Systems, Inc. (AMS) for AMS to distribute Omnilink GPS devices as “SCRAM One-Piece GPS™”, to extend AMS’ product line for those agencies looking for a one-stop shop for their monitoring needs. | | | | · | 3M Electronic Monitoring, Odessa, Florida (purchased and consolidated Attenti Group, (ElmoTech and ProTech) in 2011) – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks. | | | | · | Satellite Tracking of People, LLC, Houston, Texas – This company provides a broad line of GPS tracking systems and services to government agencies. | | | | · | Sentinel Offender Services, LLC, Augusta, Georgia (purchased and consolidated G4S’ United States Offender Monitoring operation in 2012) – This company supplies monitoring and supervision solutions for the offender population. Through their acquisition and consolidation of G4S’ United States Offender Monitoring operation, they expanded their customer base to which they provide electronic monitoring of offenders, prison and detention center management and transitional support services. Through this acquisition, they also resell Omnilink’s active GPS device, in addition to their own. |
The following companies entered the United States market in fiscal year 2013: | · | Buddi, Ltd., Aylesbury, Binkghamshire, United Kingdom – This company was started in 2005 to provide consumer tracking for the elderly and for Alzheimer’s sufferers. Buddi has recently entered offender monitoring and are pursuing business within the United States. | | | | · | Corrisoft, LLC, Lexington, Kentucky – This company produces offerings for the monitoring of low and medium risk offenders, and distributes other companies’ products for higher risk offenders. They have announced that they will be developing additional products for the monitoring of all offender types. |
We also continue to face competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services. Some of these entities utilize less well-known technologies or are resellers of the above competitors’ products. We do not believe there is reliable publicly available information to indicate our relative market share or that of our competitors. Dependence on Major Customers Two customers each represented more than 10% of gross revenues for the years ended September 30, 2013 and 2012 as follows: | | 2013 | | | % | | 2012 | | | % | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 5,252,959 | | | | 34 | % | | $ | 2,450,984 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 1,622,326 | | | | 10 | % | | $ | 1,876,285 | | | | 12 | % |
No other customer represented more than 10% of total revenues for the fiscal years ended September 30, 2013 or 2012. Our contract with Secretaría de Gobernación de México was completed during fiscal year 2013. The Ministry of National Security in the Bahamas arrangement involved a three-year contract which concluded in November 2013, and services have continued on a month-to-month basis since that time. This arrangement could be terminated at anytime with a 30-day notice. Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, is shown in the table below: | | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | | | La Oficina de Servicios con Antelación al Juicio de Puerto Rico | | $ | 887,233 | | | | 24 | % | | $ | 681,781 | | | | 24 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 732,163 | | | | 20 | % | | $ | 475,800 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 892,897 | | | | 24 | % | | $ | - | | | | 0 | % |
Subsequent to the fiscal year ended September 30, 2013, we received $387,483 from la Oficina de Servicios con Antelación al Juicio de Puerto Rico and $518,137 from The Ministry of National Security in the Bahamas. Dependence on Major Suppliers We purchase cellular services from several suppliers. The cost to us for these services during the fiscal years ended September 30, 2013 and 2012, was approximately $974,709 and $961,994, respectively. Our cellular costs increased by approximately 1% in 2013 compared to 2012, due to the increase in the number of monitoring devices assigned to customers. Product Returns During fiscal year 2013, we made improvements to the ReliAlert device as well as internal processes to improve product reliability and reduce product returns. These improvements include the following: | · | We redesigned the shell of the ReliAlert device addressing several issues related to devices that were returned to us by our customers. | | | | · | We refined our assembly and inspection processes (outgoing and incoming inspections) to ensure continued quality improvements. | | | | · | We instituted a formal change control process to ensure that we have a structured, strategic, and documented approach to addressing and implementing changes. This also includes improvements in our internal communications processes to ensure that different groups within the Company have visibility into current issues, and everyone has input into the process of continual improvement of our processes and design. | | | | · | We cross-trained technical support staff and returns analysis staff to enable them to have improved visibility of the customer experience. This has helped our staff to quickly and correctly diagnose issues in the field. |
Intellectual Property Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own six trademarks that are registered with the United States Patent and Trademark Office plus one trademark registered in Mexico and one in Canada. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States. The following table summarizes our trademark registrations and applications: | Trademark | | Application Number | | Registration Number | | Status/Next Action | Mobile911 Siren with 2-Way Voice Communication & Design® | | 76/013,886 | | 2,595,328 | | Registered | PAL Services® | | 78/514,514 | | 3,100,192 | | Registered | TrackerPAL® | | 78/843,035 | | 3,345,878 | | Registered | Mobile911® | | 78/851,384 | | 3,212,937 | | Registered | TrackerPAL® | | CA 1,315,487 | | 749,417 | | Registered | TrackerPAL® | | MX 805,365 | | 960954 | | Registered | Foresight® | | 77/137/822 | | 3481509 | | Registered | Bishop Rock Software® | | 77/132,255 | | 3481474 | | Registered | | ReliAlert™ | | 85/238,049 | | In process | | Pending | | HomeAware™ | | 85/238,064 | | In process | | Pending | | SecureCuff™ | | 85/238,058 | | In process | | Pending | | TrueDetect™ | | 85/237,202 | | In process | | Pending | | SecureAlert™ | | 86/031,550 | | In process | | Pending |
Patents. We have 15 patents issued and two patents pending in the United States. At foreign patent offices we have three patents issued and 12 patents pending. We are also preparing patents that will be filed in other countries in the coming year. The following tables summarize information regarding our patents and patent applications. There is no employment agreementsassurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications. | | | | | | | | | | | | Domestic Patents | | Application# | | Date Filed | | Patent# | | Issued | | Status | | | | | | | | | | | | Emergency Phone for Automatically Summoning Multiple Emergency Response Services | | 09/173645 | | 16-Oct-98 | | 6226510 | | 1-May-01 | | Issued | | | | | | | | | | | | Combination Emergency Phone and Personal Audio Device | | 09/185191 | | 3-Nov-98 | | 6285867 | | 4-Sep-01 | | Issued | | | | | | | | | | | | | Panic Button Phone | | 09/044497 | | 19-Mar-98 | | 6044257 | | 28-Mar-00 | | Issued | | | | | | | | | | | | Interference Structure for Emergency Response System Wristwatch | | 09/651523 | | 29-Aug-00 | | 6366538 | | 2-Apr-02 | | Issued | | | | | | | | | | | | Emergency Phone With Alternate Number Calling Capability | | 09/684831 | | 10-Oct-00 | | 7092695 | | 15-Aug-06 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 11/202427 | | 10-Aug-05 | | 7330122 | | 12-Feb-08 | | Issued | | | | | | | | | | | | Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors | | 11/486991 | | 14-Jul-06 | | 7545318 | | 9-Jun-09 | | Issued | | | | | | | | | | | | Alarm and Alarm Management System for Remote Tracking Devices | | 11/486992 | | 14-Jul-06 | | 7737841 | | 15-Jun-10 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 12/028088 | | 8-Feb-08 | | 7804412 | | 28-Sep-10 | | Issued | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center | | 11/486976 | | 14-Jul-06 | | 7936262 | | 3-May-11 | | Issued | Alarm and Alarm Management System for Remote Tracking Devices | | 12/792572 | | 2-Jun-10 | | 8013736 | | 6-Sep-11 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | | 12/875988 | | 3-Sep-10 | | 8031077 | | 4-Oct-11 | | Issued | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 12/818,453 | | 18-Jun-10 | | 8514070 | | 20-Aug-13 | | Issued | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device | | 12/399151 | | 6-Mar-09 | | 8232876 | | 31-Jul-12 | | Issued | | | | | | | | | | | | | Emergency Phone with Single-Button Activation | | 11/174191 | | 30-Jun-05 | | 7251471 | | 7/31/2007 | | Issued | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 13/970,007 | | 19-Aug-13 | | - | | - | | Pending | | | | | | | | | | | | A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center | | 11/486989 | | 14-Jul-06 | | - | | - | | Pending |
| International Patents | | Application# | | Date Filed | | Patent# | | Issued | | Status | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - EPO | | 9716860.3 | | 6-Oct-10 | | 2260482 | | 1/9/2013 | | Issued | | | | | | | | | | | | | | Remote Tracking and Communication Device - | | MX/a/2008/ | | | | | | | | | | Mexico | | 1932 | | 4-Aug-06 | | 278405 | | 24-Aug-10 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking | | MX/a/2010/ | | | | | | | | | | Device - Mexico | | 9680 | | 2-Sep-10 | | 306920 | | 1/22/2013 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Canada | | 2717866 | | 3-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | | Remote Tracking and Communication Device - EPO | | 6836098.1 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Brazil | | PI0614742.9 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Canada | | 2617923 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - EPO | | 7812596 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - Brazil | | PI0714367.2 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - EPO | | 10 009 091.9 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Brazil | | PI11001593 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico | | MX/a/2011/002283 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Canada | | 2732654 | | 23-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Brazil | | PI0909172-6 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico - DIV | | MX/a/2013/12524 | | 25-Oct-13 | | - | | - | | Pending |
Royalty Agreement. On August 4, 2011, with any executive officersan effective date of July 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen Container Corp., a corporation organized under the laws of the Commonwealth of Puerto Rico (“Borinquen”) to purchase Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a Puerto Rico corporation (“ISS”) in consideration of 310,000 shares of our Common Stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. We also agreed to pay to Borinquen quarterly royalty payments in an amount equal to 20% of our net revenues from the sale or lease of our monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. We redeemed and terminated this time. By agreement, however, the salary of Mr. Derrick is paid by ADP Management Corporation fromroyalty obligation in February 2013 using the proceeds of a loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). The obligation to Sapinda Asia was converted to Common Stock and satisfied in full in September 2013. Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management feeand technical personnel. Seasonality Given the consistency in recurring domestic monitoring revenues by customer throughout 2013, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic deployment opportunities slow down in the months of July and August. We believe that this is due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season during these two months. Properties Our headquarters and monitoring facility are housed in approximately 7,500 square feet of commercial office space located at 150 West Civic Center Drive, Suite 400, Sandy, Utah. Lease payments are approximately $18,000 per month. This lease expires on May 31, 2014. In addition, we lease 6,152 square feet of warehousing and pallet shipping functions and capabilities in a facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $6,500; the lease expires on August 31, 2014. GPS Global’ s operations are housed in approximately 350 square meters of commercial office space located at 23 Htaas St Kfar-Saba, Israel. The monthly lease is approximately $5,100. The lease expires on May 31, 2014 and the operations will likely be relocated to a comparable space in the same commercial area. 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 March 31, 2014, we had 94 full-time employees and four part-time employees in the United States. None of these 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 relations with employees are good. We acquired eight employees and two independent contractors in Israel in connection with the acquisition of GPS Global. Israeli labor laws and regulations apply to all employees based in Israel. The laws principally cover matters such as paid vacation, paid sick days, length of the workday, payment for overtime and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance payments may be funded, in whole or in part, through a managers’ insurance fund or a pension fund. The payments to the managers’ insurance fund or pension fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute of Israel, which also include payments for health insurance. The payments to the National Insurance Institute amount to approximately 14.5% of wages, of which the employee contributes 66% and the employer contributes 34%. Additional Available Information We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.securealert.com. The information found on, or otherwise accessible through, our website, is not incorporated into and does not form a part of this prospectus. We make available, free of charge at our corporate website copies of our annual reports filed with the SEC on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request. All reports filed by us to ADP Management Corporation.with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Compensation DiscussionLegal Proceedings
Lazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and AnalysisBen Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. We believe these allegations are inaccurate and intend to defend the case vigorously. 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. Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. We intend to defend this matter. 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. Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming we had breached a contract for computer services and intentionally interfered with its economic relations. We reached a settlement with Integratechs in March 2014, and agreed to pay $20,000 to Integratechs; neither party admitted any wrongdoing or liability and the lawsuit was dismissed with prejudice. Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against us in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that we breached a 2006 consulting agreement with him and claims damages of not less than $210,000. We dispute the plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is remote. SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, we filed a complaint in the United States District Court, District of Utah, Central Division against Satellite Tracking of People, LLC (a.k.a. STOP, LLC) asserting claims for declaratory relief, reimbursement for overpayment and unjust enrichment related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. On February 14, 2014, STOP filed an answer denying our claims and asserted counterclaims for breach of contract against us related to the same Settlement Agreement. On March 1, 2014, we entered into a Supplemental Settlement Agreement that included a stipulation and dismissal of all claims and counterclaims in this litigation. Under the terms of the settlement, both parties restructured their relationship and provided reciprocal licenses for all patents listed in the Settlement Agreement effective January 29, 2010. In addition both parties provided the other with reciprocal license for future patents awarded the respective parties, but excluding patents held by or acquired by SecureAlert related to: (i) GPS or cellular tracking by a device not attached to a person’s limb, (ii) related to alcohol/drug monitoring, (iii) any patent held by an entity acquired by SecureAlert for so long as that entity is paying or owes STOP a royalty or fee until such time as any royalty or fee is no longer owed to STOP, unless STOP already has a right to those patents, and (iv) any patent not used in the electronic monitoring and tracking services, using cellular and/or GPS technologies, for governmental law enforcement agencies (e.g. offender tracking). In addition, we agreed to pay to STOP a total of $4,500,000 in 24 equal monthly installments of $187,500 in exchange for a release of all royalty and other payment obligations called for under the Settlement Agreement dated January 29, 2010. SecureAlert, Inc. v. Derrick Brooks and STOP, LLC. On February 21, 2014, we filed a complaint in the Third Judicial District Court, Salt Lake County, State of Utah, against Derrick Brooks and STOP, asserting claims for declaratory relief, breach of contract, tortious interference with prospective economic relations, tortious interference with contract, misappropriation of trade secrets, injurious falsehood/trade libel/business disparagement, defamation, respondeat superior, injunctive relief and punitive damages. On March 20, 2014, we entered into a settlement agreement with STOP and all of the claims between us and STOP in the litigation have been dismissed with prejudice. On April 9, 2014, Mr. Brooks filed an answer denying our claims and asserted counterclaims for constructive discharge, interference with contract/interference with prospective economic relations and blacklisting. In his counterclaim Mr. Brooks seeks to recover “not less than $150,000” on each of his claims. We have not yet responded to Mr. Brooks’ counterclaims, but believe them to be without merit and we intend to vigorously defend against them. MANAGEMENT Directors and Executive Officers The following is a discussion of our program for compensation of our Named Executive Officers. The Compensation Committeetable sets forth information about the members of our Board of Directors as of April 1, 2014: | Name | | Age | | Position | | David S. Boone | | 53 | | Director | | Guy Dubois | | 55 | | Director | | Rene Klinkhammer | | 34 | | Director | | Winfried Kunz | | 48 | | Director | | Dan L. Mabey | | 62 | | Director | | George F. Schmitt | | 70 | | Director |
David S. Boone is the CEO of Paranet Solutions, LLC, in Dallas, Texas. He became a director of our Company on December 21, 2011. He has served in executive roles with a variety of publicly traded and start-up organizations including Kraft General Foods, Sears, PepsiCo, Safeway and Belo Corporation, and was the CFO of Intira Corporation. In addition, he has served as a consultant with the Boston Consulting Group. Mr. Boone was CEO, President and Director of American CareSource Holdings Inc. (Nasdaq: ACS) from 2005 to 2011. He was the 2009 Ernst and Young Entrepreneur of the Year winner for Health Care in the Southwest Region. Mr. Boone serves on a number of private company boards and serves on the board of the Texas Kidney Foundation. Mr. Boone graduated from the University of Illinois, cum laude, in 1983 majoring in accounting. He received his master’s degree in business administration from Harvard Business School in 1989. Guy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director at Singapore-based Tetra House Pte. Ltd., that provides consulting and advisory services worldwide. Mr. Dubois was Chief Executive Officer of gategroup AG from September 2008 until April 2011. He previously held the positions of President, Executive Vice President Finance and Administration, Chief Administrative Officer and Chief Financial Officer of Gate Gourmet Holding LLC. He served as a manager of the Board of Managers of Gate Gourmet Holding LLC from March 2007 until April 2011, and as a member of the Board of gategroup AG from February 2008 until April 2011. Prior to joining Gate Gourmet in July 2003, Mr. Dubois was Vice President Finance, Administration, Demand and Supply Chain for Roche’s Vitamins Inc. in New Jersey from 2000 to 2003. He was Area Manager, Finance and Administration for Roche’s Vitamins Asia-Pacific Pte. Ltd. in Singapore from 1997 to 1999, and Finance Manager from 1995 to 1997. Mr. Dubois worked in corporate finance for Hoffman-La Roche in 1994. Mr. Dubois also served on the European Organization for Nuclear Research (CERN) team in Switzerland in various roles, including Treasurer and Chief Accountant, Manager General Accounting and Financial Accountant from 1989 to 1994. He also worked with IBM in Sweden from 1984 to 1988 as Product Support Specialist for Financial Applications. He attended the Limburg Business School in Diepenbeek, Belgium, and has a degree in Financial Science and Accountancy. Mr. Dubois’ appointment to the Board of Directors was a requirement of a financing arrangement as part of the terms of a loan agreement with Sapinda Asia. Rene Klinkhammer became a director in January 2010. He graduated from European Business School, Oestrich-Winkel, Germany, in 2004, with an MBA-equivalent degree in business administration. His majors were Banking, Finance and International Management. After graduating, Mr. Klinkhammer joined Deutsche Bank’s Investment Banking Division as an analyst in the Corporate Finance Advisory Group, specializing in mergers and acquisitions, along with debt and equity financing transactions for larger German clients of the bank. From 2007 to June 2013, Mr. Klinkhammer worked for Sapinda Holding B.V. and its subsidiaries, a group of privately-owned investment companies with offices in Amsterdam, Berlin, London and other major cities around the world. Since July 2013, Mr. Klinkhammer works for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. Winfried Kunz became a director on December 21, 2011. He studied Business Administration and Economics from 1984 -1989 at the Universities in Munich and Cologne. In 1985 he started working as a system analyst and from 1987 – 1998 as a management consultant for German, British and American companies in the information technology industry, where he served in executive positions. Mr. Kunz worked as an executive at Precision Software Ltd., Contact Software International Inc., and Symantec Corp. For more than 15 years, Mr. Kunz has worked as an independent consultant and managing partner of Asecon GmbH, a company he founded in 1997, developing and implementing investor innovative business models for residential properties with a focus in Munich for his own portfolio and for third parties. For more than 10 years he has been a consultant to JK Wohnbau GmbH, a Munich-based real estate developer, where he served as COO from 2009 until the company’s initial public offering in 2010. From 2009 to 2011, Mr. Kunz has also worked with us as an investor. Dan L. Mabey became a director on December 21, 2011. He is the CEO of BigHorn Oil and Gas, an energy development company (Casper, Wyoming), and he has served in both public and private company leadership positions in the high-tech industry including President of 1-2-1 View digital signage company (Singapore), Chief Operating Officer and Director of In Media Corporation IPTV service company (California), President of Interactive Devices, Inc. a video compression company (Folsom, California) and Vice President of Broadcast International, a satellite broadcast company ( Salt Lake City, Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development Office, growing Utah exports from $700 million to $3.6 billion a year. He helped recruit the 2002 Winter Olympics to Salt Lake City, Utah, and managed international business development for the games. Throughout his career, Mr. Mabey has been active in civic and community organizations and is the recipient of numerous service awards. He is also the co-inventor or lead inventor on six patents and the sole inventor of a seventh. Mr. Mabey received a Masters of Public Administration (MPA) degree from Idaho State University in 1978 and a B.A. degree from Boise State University in 1974. George F. Schmitt became a director on December 21, 2011. He is a director and CEO of MBTH Technology Holdings. He has held this position since December, 2010. Mr. Schmitt is also a director of XG Technology, Inc. a publicly traded company, Kentrox and Calient. Mr. Schmitt previously served as a director of TeleAtlas, Objective Systems Integrators, Omnipoint and LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and is a former Trustee of Saint Mary’s College of California. In addition, Mr. Schmitt has served as a director of many privately held companies including Voice Objects, Knowledge Adventure, Jungo and Cybergate, among others. Mr. Schmitt has also served as Financial Vice President of Pacific Telesis and chaired the audit committee of Objective Systems Integrations and TeleATLAS. Mr. Schmitt received an M.S. in Management from Stanford University, where he was a Sloan Fellow, and a B.A. in Political Science from Saint Mary’s College. Board of Directors Election and Meetings Directors hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are appointed by the Board of Directors and hold office until their successors are appointed and duly qualified. Vacancies on the Board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the Board, with such new director serving the remainder of the term or until his/her successor shall be elected and qualify. The Board of Directors is elected by and is accountable to our shareholders. The Board establishes policy and provides strategic direction, oversight, and control. The Board met 18 times during fiscal year 2013. All directors attended at least 80% of the meetings of the Board and of the committees of the Board of Directors of which they are members. Director Independence The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15). The Board determined the independence of all directors based on the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer and Dan L. Mabey meet the standards to be considered independent. The Board has not appointed a lead independent director. Shareholder Communications with Directors If we receive correspondence from our shareholders that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o SecureAlert, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Committees of the Board of Directors The Board of Directors has three standing committees: the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. These committees assist the Board of Directors to perform its responsibilities and make informed decisions. Audit Committee. The primary duties of the Audit Committee are to oversee (i) management’s conduct of our financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing our systems of internal accounting and financial controls, (ii) our independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of our independent auditors. The Audit Committee assists the Board in providing oversight of our financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on our website at www.securealert.com. The Audit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm, and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm. The Audit Committee met four times during both fiscal years 2012 and 2013 and all members of the Audit Committee attended at least 75% of the committee’s meetings. Members of the Audit Committee as of March 31, 2014, are Messrs. Boone, Schmitt and Kunz. In the opinion of the Board of Directors, each member of the Audit Committee satisfies the definition of independent director established in the NASDAQ Listing Standards. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors has designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the SEC. The Audit Committee reviewed and discussed the matters required by United States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 2013 with management and our independent registered public accounting firm. The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. Compensation Committee. Members of the Compensation Committee are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee met two times during fiscal year 2013. Members of the Compensation Committee are appointed by the Board of Directors. Messrs. Mabey, Boone, and Schmitt are independent directors, as determined by the Board of Directors in accordance with the NASDAQ listing standards. The Compensation Committee is governed by a charter approved by the Board of Directors, a copy of which is available on the Company’s website www.securealert.com. The Compensation Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to stockholders.shareholders. The Compensation Committee monitors the results of such policy to assure that the compensation payable to our executive officers provides overall competitive pay levels, creates proper incentives to enhance stockholdershareholder value, rewards superior performance, and is justified by the returns available to stockholders.shareholders. Compensation Program Objectives
Our compensation program is designed to encompass several factors in determining the compensation of our Named Executive Officers. The following are the main objectives of the compensation program for our Named Executive Officers:
| · | Retain qualified officers. |
| · | Provide overall corporate direction for the officers and also to provide direction that is specific to the officer’s respective areas of authority. The level of compensation amongst the officer group, in relation to one another, is also considered in order to maintain a high level of satisfaction within the leadership group. We consider the relationship that the officers maintain to be one of the most important elements of the leadership group. |
| · | Provide a performance incentive for the officers. |
| · | Our compensation program is designed to reward the officers in the following areas: |
| · | achievement of specific goals; |
| · | professional education and development; |
| · | creativity in the form of innovative ideas and analysis for new programs and projects; |
| · | new program implementation; |
| · | attainment of company goals, budgets, and objectives; |
| · | results oriented determination and organization; |
| · | positive and supportive direction for company personnel; and |
In fiscal years 2008 and 2009, there were four principal elements of Named Executive Officer compensation. The Compensation Committee determines the portion of compensation allocated to each element for each individual Named Executive Officer. The discussions of compensation practices and policies are of historical practices and policies. Our Compensation Committee is expected to continue these policies and practices, but will reevaluate the practices and policies as it considers advisable. The elements of the compensation program include the following:
| · | Performance bonus and commissions; |
| · | Stock options and stock awards; |
| · | Employee benefits in the form of: |
| · | health and dental insurance; |
| · | paid parking and auto reimbursement; and |
| · | Other de minimis benefits.
|
Base salary
Base salary is intended to provide competitive compensation for job performance and to attract and retain qualified executive officers. The base salary level is determined by considering several factors inherent in the marketplace such as: the size of the company; the prevailing salary levels for the particular office or position; prevailing salary levels in a given geographic locale; and the qualifications and experience of the executive officer.
Our Chief Executive Officer, Mr. Derrick, is paid a base salary of $240,000 per year. The amount of the base salary was determined after negotiations between Mr. Derrick and our Compensation Committee. Factors considered in determining the base salary included Mr. Derrick’s status as one of our founders; his experience and length of service with us; his 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 also considered the fact that Mr. Derrick has provided and facilitated credit agreements and other financing for us. The salary payable to Mr. Derrick is paid by ADP Management Corporation from amounts paid to ADP Management Corporat ion for consulting and other services. Of the total base salary expense related to Mr. Derrick’s compensation in the fiscal years ended September 30, 2010 and 2009, $420,000 was attributable to the amortization of restricted shares of Common Stock which were returned and cancelled, resulting in no cash payment or personal benefit to Mr. Derrick and $60,000 was accrued for, but unpaid at September 30, 2010.
Our President and Chief Operating Officer, Mr. Hastings, is paid a base annual salary of $325,000. The amount of the base salary was determined after negotiations between Mr. Hastings and our Compensation Committee. Factors considered in determining Mr. Hastings’ base salary included his background in the industries in which we operate; his educational and work background, and reviews of sample salaries at companies of comparable size and industry.
Performance bonus and commissions
Bonuses are in large part basedacts on our performance. The most important determining factors used to calculate the performance bonus for the Chief Executive Officer, President and Chief Financial Officer are based upon the terms outlined below. Policy decisions to waive or modify performance goals have not been a significant factor to date in that there have not been contractual changes made other than the normal renewal or updating of contracts or compensation as would be expected as part of an annual review.
Stock options and stock awards
Stock ownership is provided to enable Named Executive Officers and directors to participate in our success. The direct or potential ownership of stock will also provide the incentive to expand the involvement of the Named Executive Officer to include, and therefore be mindful of, the perspective of our stockholders. Stock options and stock awards were approved by the Board of Directors and the Compensation Committee and are based, in part, upon the placement of activated TrackerPAL™ devices in the marketplace. Bonuses may be issued in the form of stock options or stock awards.
Employee benefits
Several of the employee benefits for the Named Executive Officers are selected to provide security for the Named Executive Officers. Most notably, insurance coverage for health, life, and liability are intended to provide a level of protection that will enable the Named Executive Officers to function without having the distraction of having to manage undue risk. The health insurance also provides access to preventative medical care which will help the Named Executive Officers function at a high energy level and manage job related stress, and contribute to the overall well-being of the Named Executive Officers, all of which contribute to enhance job performance in the opinion of the Compensation Committee.
Other de minimis benefits
Other de minimis employee benefits such as cell phones, parking, and auto usage reimbursements are directly related to job functions but contain a personal use element which is considered to be a goodwill gesture that contributes to enhanced job performance.
As discussed above, the Board of Directors determines the portion of compensation allocated to each element for each individual Named Executive Officer. As a general rule, salary is competitively based while giving consideration to employee retention, qualifications, performance, and general market conditions. Typically, stock options are based on the current market value of the option and how that will contribute to the overall compensation of the Named Executive Officer. Consideration is also given to the fact that the option has the potential for an appreciated future value. As such, the future value may be the most significant factor of the option, but it is also more difficult to quantify as a benefit to the Named Executive Officer.
Accordingly, in determining the compensation program for us, as well as setting the compensation for each Named Executive Officer, the Board of Directors attempts to attract the interest of the Named Executive Officer within the constraints of a compensation package that is fair and equitable to all parties involved.
Director Summary Compensation Table
The following table summarizes the compensation we paid to our non-employee directors in the fiscal year ended September 30, 2010 who were serving as directors as of such date.
| (a) | | | (b) | | | | (c) | | | | (d) | | | | (e) | | | | (f) | | | | (g) | | | | (h) | | | Name | | | Fees earned or paid in cash ($) | | | | Stock awards ($) | | | | Option awards ($) | | | | Non-equity incentive plan compensation ($) | | | | Change in pension value and nonqualified compensation earnings ($) | | | | All other compensation ($) | | | | Total ($) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | David Hanlon | | $ | - | | | $ | - | | | $ | 54,575 | (1) | | $ | - | | | $ | - | | | $ | - | | | $ | 54,575 | | | Robert Childers | | $ | - | | | $ | - | | | $ | 65,925 | (1) | | $ | - | | | $ | - | | | $ | - | | | $ | 65,925 | | | Larry Schafran | | $ | - | | | $ | - | | | $ | 69,833 | (1) | | $ | - | | | $ | - | | | $ | - | | | $ | 69,833 | | | Rene Klinkhammer | | $ | - | | | $ | - | | | $ | 15,883 | (2) | | $ | - | | | $ | - | | | $ | - | | | $ | 15,883 | | | Edgar Bernardi | | $ | - | | | $ | - | | | $ | 15,883 | (2) | | $ | - | | | $ | - | | | $ | - | | | $ | 15,883 | |
| (1) | At the commencement of the fiscal year ended September 30, 2010, we granted each member of the Board of Directors options for the purchase of 250,000 shares of Common Stock at an exercise price of $0.13 per share, which vested over the period of October 1, 2009 through December 31, 2010, for services valued at $21,177. Additional compensation expense was recorded and included in column (d) in connection with the re-pricing of previously granted Common Stock purchase warrants to a price of $0.13 per share, as follows:
|
Name | Grant Date | Expiration Date | Exercise Price | Number of Options | Compensation Expense | | David Hanlon | 9/8/06 | 9/7/11 | $1.41 | 50,000 | $ 3,107 | | | 7/14/08 | 7/13/13 | $1.22 | 459,000 | $ 6,761 | | | 8/29/07 | 8/28/12 | $2.15 | 100,000 | $ 23,530 | | | | | | | | | Robert Childers | 10/5/06 | 10/4/11 | $1.73 | 50,867 | $ 3,336 | | | 8/29/07 | 8/28/12 | $2.15 | 150,000 | $ 10,141 | | | 7/14/08 | 7/13/13 | $1.22 | 610,000 | $ 31,271 | | | | | | | | | Larry Schafran | 9/8/06 | 9/7/11 | $1.41 | 53,900 | $ 3,350 | | | 8/29/07 | 8/28/12 | $2.15 | 150,000 | $ 10,141 | | | 12/5/07 | 12/4/12 | $4.05 | 50,000 | $ 3,894 | | | 7/14/08 | 7/13/13 | $1.22 | 610,000 | $ 31,271 |
The following table summarizes the re-pricing of previously granted Common Stock warrants to an exercise price of $0.13 per share, included in column (d) of the Director Compensation Table:
| Name | Grant Date | Expiration Date | Exercise Price | Number of Options | | David Hanlon | 9/8/06 | 9/7/11 | $1.41 | 50,000 | | | 7/14/08 | 7/13/13 | $1.22 | 459,000 | | | 8/29/07 | 8/28/12 | $2.15 | 100,000 | | | | | | | | Robert Childers | 10/5/06 | 10/4/11 | $1.73 | 50,867 | | | 8/29/07 | 8/28/12 | $2.15 | 150,000 | | | 7/14/08 | 7/13/13 | $1.22 | 610,000 | | | | | | | | Larry Schafran | 9/8/06 | 9/7/11 | $1.41 | 53,900 | | | 8/29/07 | 8/28/12 | $2.15 | 150,000 | | | 12/5/07 | 12/4/12 | $4.05 | 50,000 | | | 7/14/08 | 7/13/13 | $1.22 | 610,000 |
| (2) | After they joined the Board of Directors, we granted to each of these new directors options for the purchase of 200,000 shares of Common Stock at an exercise price of $0.13 per share, which vest from January 1, 2010 to December 31, 2010, in consideration for services valued at $15,883. |
We also reimburse travel expenses of members for their attendance at board meetings. Messrs. Derrick and Hastings are not included in these tables because as employees of the Company they receive no additional compensation for their services as directors. See “Summary Compensation Table” on page 22.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee has been an officer or employee of the Company. None of our executive officers serves as a memberbehalf of the Board of Directors orin administering compensation plans approved by the compensation committee of any entity that has one or more executive officers serving on the Company’s Board, of Directors, or on our Compensation Committee.
Security Ownership of Certain Beneficial Owners and Management
The following table presents information regarding beneficial ownership as of November 22, 2010 of all classes of our voting securities by:
| · | Each stockholder known to us to be the beneficial owner of more than five percent of any class of our voting securities; |
| · | Each of our Named Executive Officers; |
| · | Each of our directors; and |
| · | All of our executive officers and directors as a group. |
Security ownership information for beneficial owners is taken from statements filedin a manner consistent with the Securitiesterms of such plans (including, as applicable, the granting of stock options, restricted stock, stock units and Exchange Commission pursuant to Sections 13(d), 13(g)other awards, the review of performance goals established before the start of the relevant plan year, and 16(a) and information made knownthe determination of performance compared to the Company. Beneficial ownership is determined undergoals at the rulesend of the SECplan year). The Committee reviews and generally includes voting or investment powermakes recommendations to the Board with respect to securities. Unless indicated below, to our knowledge,new compensation incentive plans and equity-based plans; reviews and recommends the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of Common Stock underlying convertible securities, options and warrants that are currently exercisable or exercisable within 60 dayscompensation of the dateCompany’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of this prospectus are deemed to be outstanding and to be beneficially owned byexecutive officers of the person holding such securities, options or warrants for the purpose o f computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Percentage of total voting power represents voting power with respect to all shares of our Common Stock and Series D Preferred Stock, as a single class. Holders of Common Stock are entitled to one vote per share and holders of Series D Preferred Stock are entitled to 6,000 votes per share.
Company. | | | Shares Beneficially Owned | | | | Shares Beneficially Owned | | | | | Prior to this Offering | | Shares of | | After this Offering | | | | | Series D | | % of | | Common | | Series D | | % of | | | Name and Address of | | Common Stock | | | Preferred Stock | | Total Voting | | Being | | Common Stock | | Preferred Stock | | Total Voting | | | Beneficial Owner (1) | | Shares | | % | | | Shares | | % | | Power | | Offered | | Shares | | % | | Shares | | % | | Power | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5% Stockholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D January 13 Purchasers (2) | | | 139,704,000 | | 47.5% | | | 23,284 | | 68.2% | | 28.0% | | 30,000,000 | | 109,704,000 | | 32.1% | | 19,186 | | 73.0% | | 24.3% | | | Winfried Kill (3) | | | 53,361,305 | | 18.1% | | | 0 | | - | | 10.7% | | 0 | | 53,361,305 | | 15.6% | | 0 | | - | | 10.7% | | Advance Technology Investors, LLC (4) | | | 34,690,665 | | 11.8% | | | 3,403 | | 10.0% | | 7.0% | | 0 | | 34,690,665 | | 10.2% | | 3,403 | | 13.0% | | 7.0% | | | Kofler Ventures S.a.r.l (5) | | | 24,456,161 | | 8.3% | | | 0 | | - | | 4.9% | | 0 | | 24,456,161 | | 7.2% | | 0 | | - | | 4.9% | | | Radenko Milakovic (6) | | | 24,726,562 | | 8.4% | | | 4,000 | | 11.7% | | 5.0% | | 0 | | 24,726,562 | | 7.2% | | 4,000 | | 15.2% | | 5.0% | | | Laemi Real Estate, Inc. (7) | | | 21,040,304 | | 7.1% | | | 3,330 | | 9.8% | | 4.2% | | 19,980,000 | | 1,060,304 | | * | | 0 | | - | | * | | | Stephan Goetz (8) | | | 18,635,901 | | 6.3% | | | 3,000 | | 8.8% | | 3.7% | | 0 | | 18,635,901 | | 5.5% | | 3,000 | | 11.4% | | 3.7% | | | Commerce Financial, LLC (9) | | | 13,684,508 | | 4.6% | | | 2,149 | | 6.3% | | 2.7% | | 0 | | 13,684,508 | | 4.0% | | 2,149 | | 8.2% | | 2.7% | | | Comediahill Business S.A. (10) | | | 14,026,868 | | 4.8% | | | 2,220 | | 6.5% | | 2.8% | | 13,320,0000 | | 706,868 | | * | | 0 | | - | | * | | | Tim Whyte (11) | | | 12,349,010 | | 4.2% | | | 2,000 | | 5.9% | | 2.5% | | 0 | | 12,349,010 | | 3.6% | | 2,000 | | 7.6% | | 2.5% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Directors and Named Executive Officers: | | | | | | | | | | | | | | | | | | | | | | | | David G. Derrick (12) | | | 19,698,313 | | 6.7% | | | 2,233 | | 6.5% | | 3.4% | | 0 | | 19,698,313 | | 5.8% | | 2,233 | | 8.5% | | 3.9% | | | Chad D. Olsen (13) | | | 3,285,656 | | 1.1% | | | 172 | | * | | * | | 0 | | 4,003,656 | | 1.0% | | 172 | | * | | * | | | John L. Hastings, III (14) | | | 1,500,000 | | * | | | 0 | | - | | * | | 0 | | 1,500,000 | | * | | 0 | | - | | * | | | Robert Childers (15) | | | 2,374,975 | | * | | | 50 | | * | | * | | 0 | | 2,374,975 | | * | | 50 | | * | | * | | | Larry Schafran (16) | | | 1,933,500 | | * | | | 110 | | * | | * | | 0 | | 1,933,500 | | * | | 110 | | * | | * | | | David Hanlon (17) | | | 1,716,635 | | * | | | 115 | | * | | * | | 0 | | 1,716,635 | | * | | 115 | | * | | * | | | Bernadette Suckel (18) | | | 525,000 | | * | | | 0 | | - | | * | | 0 | | 531,250 | | * | | 0 | | - | | * | | | Edgar Bernardi (19) | | | 1,400,000 | | * | | | 200 | | * | | * | | 0 | | 1,400,000 | | * | | 0 | | - | | * | | | Rene Klinkhammer (20) | | | 200,000 | | * | | | 0 | | - | | * | | 0 | | 200,000 | | * | | 0 | | - | | * | | | All directors and executive officers as a group (9 persons) (21) | | | 32,634,079 | | 11.1% | | | 2,880 | | 8.4% | | 6.5% | | 0 | | 32,634,079 | | 9.6% | | 2,880 | | 11.0% | | 6.5% | |
Nominating and Corporate Governance Committee. Mr. Schmitt serves as the chair of the Nominating and Corporate Governance Committee. Messrs. Kunz and Klinkhammer also currently serve as members of this committee. The Nominating and Corporate Governance Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created Board positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for senior management succession.
The Nominating and Corporate Governance Committee is required to review the qualifications and backgrounds of all directors and nominees (without regard to whether a nominee has been recommended by shareholders), as well as the overall composition of the Board of Directors, and recommend a slate of directors to be nominated for election at the annual meeting of shareholders, or, in the case of a vacancy on the Board of Directors, recommend a director to be elected by the Board to fill such vacancy. The Nominating and Corporate Governance Committee held one meeting during fiscal 2013. The Nominating and Corporate Governance Committee’s charter is available on our website, www.securealert.com.Code of Ethics. We have established a Code of Business Ethics that applies to our officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. We will post on our website www.securealert.com any amendments to or waivers from a provision of our Code of Business Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions and that relates to any element of the Code of Business Ethics. Involvement in Certain Legal Proceedings There are no material proceedings to which any director or executive officer or any associate of any such director or officer is a party adverse to us or has a material interest adverse to our Company. Except as discussed below, no director or executive officer has been involved in any of the following events during the past ten years: | · | * | Represents beneficial ownershipany bankruptcy petition filed by or against any business of less than one percentwhich such person was a general partner or executive officer either at the time of the outstanding sharesbankruptcy or within two years prior to that time; | | | | · | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | | | | · | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | | | | · | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | | | | · | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and- desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | | | | · | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the classExchange Act), any registered entity (as defined in Section 1(a)(29) of voting securities indicated.the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
| (1) | Except as otherwise indicated, the business address for each of our beneficial owners is c/o the Company, 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. |
An executive of gategroup holdings AG, an airline catering company headquartered in Switzerland was convicted in a Danish court in September 2012 of fraud and embezzlement involving that company’s assets. Guy Dubois, a director of the Company since December 2012, was Chief Executive Officer of gategroup holdings AG at the time the executive committed the acts leading to her conviction, voluntarily resigned from gategroup holdings AG in 2011. The Zurich State Prosecutor initiated an investigation in 2011 focused on whether other individuals, including Mr. Dubois were aware of or benefitted personally from the fraud and embezzlement that occurred. Mr. Dubois, who has indicated he was unaware of any of these activities at the time they were being committed, has been cooperating with that investigation. | (2) | For purposes of this table, shares of Common Stock beneficially owned by individual members of this class or group are excluded from this entry. The purported members of this group disclaim any ownership interest of any kind in or to any other securities beneficially owned by any other purported member of the group. This group includes all parties acquiring shares of the Series D Preferred who had acquired shares as of January 13, 2010 and in conjunction with such acquisition, had also given consent to an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of Common Stock of the Company. The “group” includes the following purchasers of the Series D Preferred (with the number of shares of Series D Preferred acquired on January 13, 2010) who continued to own such shares as of November 22, 2010: |
Executive OfficersThe following table sets forth certain information regarding our principal executive officer and principal financial and accounting officer as of March 31, 2014: Otter Capital, LLCName | 406 | Age | | Position | Advance Technology Investors, LLC | 3,189 | | | | Steven C. WeidmanExecutive Committee of Board of Directors | 107 | Dina Weidman | 107 | Mountain Land Cattle, LLC | 75 | Taube Family Trust | 205 | TFT Partners, LLC | 52 | Laurence Blickman | 103 | Robert Naify Living Trust | 103 | Adrienne Baker | 90 | Anasazi Partners III, LLC | 252 | The Klapper Family Trust | 590 | Clydesdale Partners II, LLC | 780 | Stuart J. Kahn | 300 | William B. Stevenson | 300Principal Executive Officer | John C. WalseyR. Merrill | 300 | Commerce Financial, LLC | 2,149 | David Derrick § | 3,400 | Robert Childers § | 50 | James Dalton | 15 | Larry Schafran § | 110 | David Hanlon § | 115 | Anasazi Partner III Offshore | 132 | Christopher Baker | 285 | Clydesdale Partners, LLC | 355 | James and Beverly Carter | 88 | Robert and Barbara Saragenti | 88 | Charles Alberta | 44 | Scott Carter | 44 | JBD Management, LLC | 1,000 | Comediahill Business S.A.* | 2,000 | Mara Holdings Limited | 1,000 | Kofler Ventures S.a.r.1 | 2,000 | V. Mark Peterson Roth IRA, FBO Jeff Peterson | 200 | Laemi Real Estates, Inc.* | 3,000 | Chad Olsen § | 172 | Ladd Olsen | 25 | Veloy and Tamara Cook | 15 | Jennifer Cooper | 13 | Dylan and Jaryn McGrath | 10 | Dorothy Darnell | 5 | Joseph W. Darnell | 5 | James K. Tracy | 5 | Total | 23,284Chief Financial Officer |
The Executive Committee of the Board of Directors was established to act temporarily in the principal executive officer function following the resignation of our Chief Executive Officer in October 2012. Current members of the Executive Committee are Guy Dubois and David S. Boone. On April 16, 2013, Mr. Dubois was granted warrants valued at $300,000 for his additional work as a director and member of the Board’s Executive Committee. This grant is of warrants to purchase 64,665 shares of Common Stock at an exercise price of $9.00 per share. These warrants vest in equal monthly increments over a period of one year or immediately upon the hiring of a new Chief Executive Officer. These warrants were valued at the date of grant using the Black-Scholes option-pricing model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer.
John R. Merrill Mr. Merrill joined the Company on April 21, 2014 and officially assumed the duties as Chief Financial Officer on April 24, 2014. Mr. Merrill is also the Chief Financial Officer for TenXNetworks and IPVidTech.com, a network intelligence provider of both hardware and services. From 2010 to 2013, Mr. Merrill worked as an advisor in the healthcare technology industry facilitating both due diligence and integration of certain acquired companies. Prior to 2010, Mr. Merrill was the Chief Financial Officer of Park City Group, Inc. (Nasdaq: PCYG) and Prescient Applied Intelligence, Inc. (OTC: PPID), software-as-a-service providers of supply chain solutions for both retailers and their suppliers. Throughout his career, Mr. Merrill has held various financial roles within broadcasting, sports marketing, and the retail industry. He began his career with KPMG and holds a BS and a Masters of Accounting from the University of South Florida.Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10% of our Common Stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file. Based solely upon a review of these forms that were furnished to us, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2013 and that such filings were timely except the following: | · | *Mr. Klinkhammer, a director, filed two late reports on Form 4 reporting two transactions; and | | Indicates | | · | Mr. Schmitt, a Selling Stockholder whose total beneficial ownership of our voting securities is included elsewhere in this table.director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Dubois, a director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Boone, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Mabey, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Kunz, a director, filed one late report on Form 4 reporting one transaction. |
| § | Indicates one of our directors or executive officers whose total beneficial ownership of our voting securities is included elsewhere in this table. |
Compensation of Directors | (3) | This disclosure is based on Schedule 13D/A filed with the SEC on December 16, 2008 by Dr. Winfried Kill, Parkstrasse 32A, Bergisch-Gladbach 2M, 51427 Germany. Schedule 13D/A reported the following: “On December 16, 2008, Dr. Kill and NORD/LB entered into the Third Supplement to the Purchase Agreement pursuant to which he purchased 22,337,305 shares of the Issuer’s Common Stock at a price of EUR 0.80583 per share (approximately $1.1129 per share) for a total purchase price amount of EUR 18,000,070 from NORD/LB pursuant to the Purchase Agreement as further described in Item 6 of this Statement. Dr. Kill paid EUR 6,000,000 on December 15, 2008, and the remainder of the purchase price is due and payable no later than December 15, 2009.” |
The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2013, who are serving as directors as of March 31, 2014: | (4) | Address is 154 Rock Hill Road, Spring Valley, NY 10977. Amount includes 12,438,663 shares of Common Stock and 1,670,000 shares issuable upon exercise of warrants. Includes 132,001 shares of Common Stock owned of record by Dina Weidman and 32,001 shares of Common Stock owned of record by U/W Mark Weidman Trust. Includes Common Stock underlying 3,189 shares of Series D Preferred (2,898 included in the Resale Shares and 291 shares of Series D Preferred issued upon debt conversions not included in the Resale Shares) owned of record by Advance Technology Investors, LLC. Additionally, includes Common Stock issuable upon conversion of 107 shares of Series D Preferred owned of record by Dina Weidman and 107 shares of Series D Preferred owned of record by Steven C. Weidman.
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| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | | | Fees earned | | | Stock awards | | | Option awards | | | Total | | | Name | | ($) | | | ($) | | | ($) | | | ($) | | | David S. Boone | | $ | - | | | $ | - | | | $ | 76,385 | | | $ | 76,385 | | | Guy Dubois | | $ | - | | | $ | - | | | $ | 335,322 | | | $ | 335,322 | | | Rene Klinkhammer | | $ | - | | | $ | 7,500 | | | $ | 46,859 | | | $ | 54,359 | | | Winfried Kunz | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | | | Dan L. Mabey | | $ | - | | | $ | 15,000 | | | $ | 35,047 | | | $ | 50,047 | | | George F. Schmitt | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | |
| (5) | Includes 12,456,161 shares of Common Stock and 12,000,000 shares issuable upon exercise of Series D Preferred warrants. Stockholder’s address is R.C.S. Luxembourg B-0090554, 412F, route d’Esch, L-2086 Luxembourg. |
Effective January 1, 2012, we began to accrue $2,500 per month for each director, to be issued in shares of Common Stock valued on the last date of the quarter; provided, that in the alternative, the director may elect to receive stock purchase warrants for the purchase of three times the number of shares otherwise issuable to the director, valued at the date of grant using the Black-Scholes valuation method. Additionally, the Chairman of the Audit Committee is paid $5,000 per month, rather than $2,500 paid to the other directors. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013. Amounts indicated in the table include the fair market value on the date of grant of warrants to purchase 73,413 shares of Common Stock granted to Mr. Dubois with exercise prices ranging from $9.00 to $19.46; these warrants expire at different dates from March 2015 to September 2015. The values of all shares and warrants listed above were determined using the Black-Scholes option-pricing model as of the date of grant or issuance. The table below summarizes outstanding warrants previously issued for compensation to our current non-employee directors as of September 30, 2013: | (6) | Includes 24,000,000 shares of Common Stock issuable upon conversion of 4,000 shares of Series D Preferred and 726,562 shares of Common Stock. Stockholder’s address is Les Caravelles, 25 Boulevard Albert 1er, Bloc B. 13 etage, Monaco 98000. |
| | Grant | Expiration | | Exercise | | | Number of | | | Compensation | | | Name | Date | Date | | Price | | | Options | | | Expense | | | | | | | | | | | | | | | | Winfried Kunz | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | George F. Schmitt | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | Rene Klinkhammer | 1/20/10 | 1/19/15 | | $ | 26.00 | | | | 1,000 | | | $ | 21,036 | | | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | | | | | | | | | | | | | | | | | David S. Boone | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 2,280 | | | $ | 17,698 | | | | | | | | | | | | | | | | | | | Dan L. Mabey | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | | | | | | | | | | | | | | | | | Guy Dubois | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 2,385 | | | $ | 11,682 | | | 4/16/13 | 4/15/15 | | $ | 9.00 | | | | 64,665 | | | $ | 300,000 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | |
| (7) | Includes 19,980,000 shares of Common Stock issuable upon conversion of 3,330 shares of Series D Preferred Stock and 1,060,304 shares of Common Stock. Address is MMG Tower, 53rd E Street, Marbella, Panama City, Panama.
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Reimbursement of Expenses | (8) | Includes 18,000,000 shares of Common Stock issuable upon conversion of 3,000 shares of Series D Preferred and 635,901 shares of Common Stock. Stockholder’s address is Oberfohringer Str. 105, 81925 Munich, Germany. |
We reimburse travel expenses of members of the Board of Directors for their attendance at Board meetings and other necessary business travel. | (9) | Includes 12,894,000 shares of Common Stock issuable upon conversion of 2,149 shares of Series D Preferred and 790,508 shares of Common Stock. Stockholder’s address is 1050 Kapukalua Pl., Paia, HI 96779. |
Compensation Risks Assessment | (10) | Includes 13,320,000 shares of Common Stock issuable upon conversion of 2,220 shares of Series D Preferred and 706,868 shares of Common Stock. Stockholder’s address is Postfach 373, Stadtle 1 Fl., Vaduz, Liechtenstein 09490. |
| (11) | Includes 12,000,000 shares of Common Stock issuable upon conversion of 2,000 shares of Series D Preferred and 349,010 shares of Common Stock. Stockholder’s address is 6 John Le Quesne Close, Rue De Maupertuis St. Clements, Jersey, Channel Islands. |
| (12) | Mr. Derrick is our Chief Executive Officer and Chairman of the Board of Directors. Common Stock beneficially owned includes 1,655,250 shares owned of record by Mr. Derrick, 2,645,063 shares held in the name of ADP Management, and 2,000,000 vested stock purchase warrants. Also includes 13,398,000 shares of Common Stock issuable upon conversion of 2,233 shares of Series D Preferred. |
| (13) | Mr. Olsen is our Chief Financial Officer. Common Stock beneficially owned includes 331,156 shares owned of record by Mr. Olsen and 1,922,500 vested stock purchase warrants, as well as 1,032,000 shares of Common Stock issuable upon conversion of 172 shares of Series D Preferred. |
| (14) | Mr. Hastings is our Chief Operating Officer and President. Amount indicated includes 1,500,000 shares of Common Stock issuable upon the exercise of vested stock purchase warrants. |
| (15) | Mr. Childers is a director. Common Stock beneficially owned by Mr. Childers includes 352,407 shares owned of record by the Robert E. Childers Living Trust and 661,701 shares owned of record by Mr. Childers directly, as well as 1,060,867 shares issuable upon the exercise of Common Stock purchase warrants, as well as 300,000 shares of Common Stock issuable upon conversion of 50 shares of Series D Preferred owned of record by Mr. Childers. |
| (16) | Mr. Schafran is a director. Common Stock includes 159,600 shares owned of record by Mr. Schafran and 1,113,900 shares of Common Stock issuable upon exercise of stock purchase warrants, as well as 660,000 shares of Common Stock issuable upon conversion of 110 shares of Series D Preferred. |
| (17) | Mr. Hanlon is a director. Amount indicated includes 167,635 shares of Common Stock owned of record by David P. Hanlon Living Trust and 859,000 shares issuable upon exercise of warrants, as well as 690,000 shares of Common Stock issuable upon conversion of 115 shares of Series D Preferred. |
As required by rules adopted by the SEC, management has made an assessment of our compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, we have determined that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. EXECUTIVE COMPENSATION Summary Compensation Set out in the following summary compensation table are the particulars of compensation paid to the following persons for our fiscal years ended September 30, 2013 and 2012: | (a) | our principal executive officer (note, we currently have no principal executive officer, rather the executive committee of the Board of Directors acts as our principal executive officer and compensation paid to members of this committee is included in the Director Compensation table above); and | | | (18) | | (b) | Mrs. Suckel is a Vice Presidentour most highly compensated executive officer who was serving as an executive officer at the end of the Company, responsiblefiscal year ended September 30, 2013 who had total compensation exceeding $100,000 (with the principal executive officer, the Named Executive Officers); and | | | | (c) | an additional individual for Sales and Marketing. Common Stock beneficially owned includes 50,000 shareswhom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer at the end of Common Stock owned of record by Mrs. Suckel and 475,000 shares issuable upon the exercise of Common Stock purchase warrants.most recently completed financial year. |
| (19) | Dr. Bernardi is a director. Includes 200,000 shares of Common Stock issuable upon exercise of stock purchase warrants and 1,200,000 shares of Common Stock issuable upon conversion of 200 shares of Series D Preferred Stock owned of record by Dr. Bernardi’s wife. |
| Name and | | | | | | | | | | | | | | | | | | | | | Principal | | | | | | | | | Stock | | | Option | | | All Other | | | | | | Position | Year | | Salary | | | Bonus | | | Awards | | | Awards | | | Compensation | | | Total | | | ( a ) | ( b ) | | ( c ) | | | ( d ) | | | ( e ) | | | ( f ) | | | ( g ) | | | ( h ) | | Chad D. Olsen (1) | 2013 | | $ | 192,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,740 | | | $ | 200,740 | | | Chief Financial Officer | 2012 | | $ | 192,000 | | | $ | 35,000 | | | $ | 124,000 | | | $ | 432,352 | | | $ | 42,195 | | | $ | 825,547 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel (2) | 2013 | | $ | 168,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,061 | | | $ | 176,061 | | | Managing Director Global Customer Service | 2012 | | $ | 168,000 | | | $ | 35,000 | | | $ | 77,500 | | | $ | 270,219 | | | $ | 7,950 | | | $ | 558,669 | | | (1) | Mr. Olsen served as our Chief Financial Officer from January 2010 to April 2014. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller. Column (g) includes additional compensation for paid time off, health, dental, life and vision insurance. | | (2) | Mrs. Suckel has served as Managing Director of Global Customer Service and Account Management of the Company since June 2008. Column (g) includes additional compensation for health, dental, life and vision insurance. |
| (20) | Mr. Klinkhammer is a director. Includes 200,000 shares of Common Stock issuable upon exercise of stock purchase warrants. |
Outstanding Equity Awards | (21) | Duplicate entries have been eliminated. |
TRANSACTIONS WITH RELATED PERSONSIndemnification of Directors and Named Executive Officers
We have agreed to indemnifyThe table below summarizes outstanding equity awards held by our directors and Named Executive Officers to the fullest extent permitted under the Utah Revised Uniform Business Corporations Act for expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by them in any action or proceeding arising out of their servicesMrs. Suckel as a director or officer.
Review, Approval or Ratification of Transactions with Related Parties
Pursuant to our Code of Business Conduct and Ethics, the Board of Directors will review and approve all relationships and transactions in which it and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of its voting securities and their family members, have a direct or indirect material interest. In approving or rejecting such proposed relationships and transactions, the Board of Directors shall consider the relevant facts and circumstances available and deemed relevant to this determination.
Transactions with Related Persons
Our Board of Directors has adopted a policy that our business affairs will be conducted in all respects by standards applicable to publicly held corporations and that we will not enter into any future transactions and/or loans between us and our officers, directors and 5% stockholders unless the terms are no less favorable than could be obtained from independent, third parties and will be approved by a majority of our independent and disinterested directors. In our view, all of the transactions described below meet this standard.
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 September 30, 2009, we owed $1,500,000 in principal plus $12,197 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.2013:
Note #2. Effective March 1, 2010, we purchased the remaining 49% ownership of Court Programs. We paid $100,000 in cash and entered into an unsecured note payable of $200,000 due in four equal installments of $50,000 each on July 15, 2010, October 15, 2010, January 15, 2011, and April 15, 2011, together with interest on any unpaid amounts at 8% per annum. As of June 30, 2010, we owed $200,000 in principal plus $5,908 in accrued interest under this note, which is payable to an employee of the Company (the former principal and Selling Stockholder of Court Programs).
Note #3. We entered into a promissory note on March 16, 2010 with Mr. Derrick for $500,000 accruing interest at a rate of 12% per annum or $5,000, whichever is greater, maturing on April 15, 2010. We also paid a one percent origination fee. On April 1, 2010, we repaid 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, we entered into an agreement with ADP Management whereby ADP Management agreed to loan to or invest in the Company between $1,000,000 and $5,000,000 to finance the manufacturing of TrackerPAL II(e) devices and to provide us with additional working capital. We agreed to pay a 10% origination fee to ADP Management for money loaned and/or invested (up to a maximum fee of $500,000) payable in shares of Series D Preferred stock (at a ratio of $600 per share, an effective conversion rate of $0.10 per share of Common Stock based on this conversion rate). As of June 30, 2010, we accrued $192,725 in origination fees in connection with the agreement and had received $1,927,250 in proceeds in which ADP Managemen t facilitated the funding on behalf of the Company.
Note #5. In September 2008, we borrowed $250,000 from Randy Olshen, the former President of our subsidiary SecureAlert Monitoring. The unsecured note payable accrued interest at 11% and was due and payable on December 31, 2009 or upon demand whichever occurs first. As of September 30, 2009, this note was paid in full.
Foreclosure Liability
In July 2009, we entered into a promissory note with an unrelated entity in the amount of $1,000,000 payable on December 31, 2010. The note bore interest at a rate of 15% per annum paid quarterly. As additional consideration for the loan, to settle a registration right dispute, and to induce the lender to loan the money, we granted the lender 8,000,000 shares of Common Stock. Additionally, ADP Management collateralized this note with 5,000,000 shares of our Common Stock. In August 2009, we defaulted on the loan because we 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 pledged by ADP Management as collateral. As of September 30, 2009, we accrued $775,000 as a “foreclosure liability” to record our obligation to repay the 5,000,000 shares of Common Stock to ADP Management. In January 2010, we agreed to issue 833 shares of Series D Preferred to ADP Management as payment of this liability.
Related-Party Series A 15% Debenture
On May 1, 2009, we issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by our Chief Financial Officer 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 our 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. In March 2010 we issued 250 shares of Series D Preferred in exchange for cancellation of the debenture.
Consulting Arrangements
We agreed to pay consulting fees to ADP Management for assisting us to develop our 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 we 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 our President.
The agreement also requires ADP Management to pay the salary of Mr. Derrick as our Chief Executive Officer and Chairman of the Board of Directors. The Board of Directors, which Mr. Derrick abstaining, approved both of these arrangements.
During the fiscal year ended September 30, 2008, we agreed to prepay ADP Management for Mr. Derrick’s salary in non-cash instruments by issuing 1,000,000 shares of restricted Common Stock valued at $1.52 per share (as valued on July 2, 2008, the date of issuance). We 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.
Series D Preferred
In connection with the private placement of our Series D Preferred, members of the Board of Directors and certain of our Named Executive Officers acquired shares of the Series D Preferred. See the discussion at pages 50 and 51 of this prospectus for a description of the factors considered by the Board of Directors in authorizing the issuance of the shares of Series D Preferred to related parties.
SecureAlert and its subsidiaries market and deploy offender management programs, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services. Our vision is to be the market leader for delivering offender management solutions that integrate interaction technologies. We believe that we currently deliver the only offender management technology which integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single device, deployable on offenders worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an opportunity to be “free from prison,” while providing for greater public safety at a lower cost to incarceration or traditional resource-intensive alternatives.
TrackerPAL™ II and TrackerPAL™ II(e) (“enhanced”), now manufactured in the USA – The TrackerPAL™ portfolio of products, e-Arrest Beacons and monitoring services are designed to create “Jails without Walls,” customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, juvenile offenders, etc.). Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions. TrackerPAL™ II(e) is designed for federal, state and local agencies to provide location tracking of select individuals i n the criminal justice system. The TrackerPAL™ II(e) device fastens to the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection by a supervising officer through services provided by our SecureAlert Monitoring Center (or other monitoring centers). This monitoring and intervention center acts as an important link between the offender and the supervising officer as intervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols. An intelligent device with integrated computer circuitry and constructed from case-hardened plastics, the TrackerPAL™ II(e) unit promptly notifies the monitoring center if any attempt is made to breach protocols or to remove or otherwise tamper with the device or optical strap housing.
According to the Bureau of Justice Statistics annual report March 2009 (available online at http://bjs.ojp.udsoj.gov), it is currently estimated that over 2.3 million inmates, or one in every 131 U.S. residents, were held in custody in state or federal prisons or in local jails. Nearly 5.1 million adults were under community supervision at year-end 2008—the equivalent of about 1 in every 45 adults in the United States. Probationers (4,270,917) represented the majority (84%) of the community supervision population in 2008; parolees (828,169) accounted for a smaller share (16%). Sadly, approximately 7.4 million people are now either incarcerated (State or Federal prisons or local jails) or on parole or probation. The average cost of incarcerating an inmate ranges from $65 to $175 (plus) per day dependent upon facility type, security level, amenities and jurisdiction. But this annualized “equivalency” number pales in comparison to actual populations. The Bureau of Justice Statistics also reports that over one-third of all inmates held in custody at midyear 2008 were in local jails. More than half (52%) were housed in the 180 largest jail facilities, with average daily populations of 1,000 inmates or more. Overall, an estimated 13.6 million inmates were admitted to local jails during the 12-month period ending June 30, 2008. Statistics for 2009 have not been published, but we believe this number continues to grow and to push capacity and resource levels.
Due to ever-growing economic pressures, it is widely recognized that these costs are unsustainable with ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. Thus, electronic monitoring alternatives to incarceration for low and moderate risk offenders (adult and juveniles), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments are now strongly encouraged and seriously considered by legislative and judicial branches of government in many jurisdictions. For between 10% to 15% of the traditional costs of incarceration, or for roughly (1/3) one-third the variable costs (inmate daily food, laundry, uniforms, medical, guard o vertime, etc.), our TrackerPAL™ monitoring and intervention center and patented TrackerPAL™ II(e) devices can monitor offenders continuously, providing real-time location tracking, interactive voice access and intervention-based contact, thus reducing the potential for subsequent or repeat offenses (recidivism).
The ongoing budget crisis and the “Great Recession” have forced many jurisdictions to embrace or reconsider embracing “offender pay”, “parent pay” and/or “partial pay” programs, and in doing so, shifting the burden of the tracking and monitoring costs in whole or part to the offender directly, defraying the cost to the public. We estimate that approximately 30% of our gross revenues (up from 20% in 2008) come from offender payments directly under court order and threat of re-incarceration for non-payment. The majority of these offenders remain in compliance because of the severe consequences of non-payment. This aspect of our business is growing significantly and we expect that it will outpace traditional taxpayer obligated payment programs.
Strategically, and in continued support of ever-growing rehabilitation and re-socialization efforts, we embrace a broader services charter, necessary to support and encourage many evolving rehabilitation initiatives. Our “C.A.R.E.” programs support Corrections and Accountability objectives in concert with Rehabilitation and Empowerment agendas. Specifically, our technology facilitates a stringent protocol enforcement capability, incorporating restricted movement provisions, coupled with enablement of positive reinforcement communications, all in support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and/or sponsors. We believe that our programs are uniquely positioned to allow for regular, frequent, and positive inter actions and daily affirmations with offenders, as they strive to again become responsible and contributing members of society, while living within the virtual “electronic fence” boundaries established through our proprietary technologies. As it stands, according to the Bureau of Justice Statistics’ report on recidivism, 65% of offenders recommit a violation within three years of release and re-entry (recidivism), which we believe can be dramatically reduced through the utilization of monitoring services, intervention and interaction technologies.
We believe that it is important to focus on a reduction in recidivism and leverage our technologies and services to provide frameworks and foundations for stopping repeat and new offenses by those offenders on our programs. For example, according to the Bureau of Justice Statistics’ report on recidivism, of the 272,111 persons released from prisons in 15 states in 1994, an estimated 67.5% were rearrested for a felony or serious misdemeanor within 3 years, 46.9% were reconvicted, and 25.4% resentenced to prison for a new crime. Incredibly, after 15 years, the 272,111 offenders discharged in 1994 accounted for nearly 4,877,000 arrest charges over their recorded careers. Society simply cannot sustain these financial costs or the victimization or re-victimization of the public, which is why o ur programs are strategically and tactically positioned to impact this number measurably.
As identified, the offender marketplace today provides significant opportunity for growth, as local agencies, county governments and state legislators are confronted with ever-growing offender populations, pre-trial overcrowding, resource limitations and economic crises. We are strategically positioned to capitalize on these public sector challenges. We offer offender service offerings and tools to provide enhanced effectiveness and coverage for agencies with reduced resources. This results in a force multiplier effect that allows smaller or understaffed agencies to grow while reducing the number of offenders using valuable resources. We are also attracting new customers to the industry, who historically have only leveraged now obsolete “home arrest” technologies, and are now seeking GPS track ing and fulltime monitoring alternatives. Additionally, we are very encouraged by the interest and expansion of many rehabilitation initiatives, which will avail themselves of our program offerings in a mutual pursuit to reduce recidivism, encourage re-socialization and to facilitate the earlier release of qualified candidates.
During the fiscal year ended September 30, 2009, in response to these evolving market factors, we restructured and right-sized our direct sales force throughout the United States, while embracing an expanded and growing distributorship model domestically and internationally. We believe that this will help to ensure localized market knowledge, relationship leverage and enhanced ability to respond effectively to requests for sole-sourced and/or competitive proposals. This model has also allowed us to better focus on expanded market sectors, judicial branch contacts and legislature interfaces in ongoing efforts to work from both the bottom up at agencies, as well as from the top down in county and state governments, securing multi-l evel commitments to embed our programs into ongoing probation, parole and policing efforts.
In 2009, we acquired control of Midwest Monitoring & Surveillance, Inc. (“Midwest Monitoring’) and the Court Programs group of entities (“Court Programs”). These acquisitions extended our reach into new markets and provided us with additional product and service offerings in existing markets. The assimilation of these acquired entities is subject to uncertainties and risks. There can be no assurance that we will successfully integrate these companies into our operations without incurring significant unanticipated costs or experiencing unexpected operational problems. Some of the potential risks include:
| · | Management of expanded inventory baseOutstanding Equity Awards at Fiscal Year-End 2013 |
| · | Control of operations that are more geographically diverse than our prior operations |
| Name | | Number of securities underlying unexercised options (#) exercisable | | | Number of securities underlying unexercised options (#) unexercisable | | | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad D. Olsen | | | 1,000 | | | | - | | | | - | | | $ | 15.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 125 | | | | - | | | | - | | | $ | 15.00 | | 3/14/14 | | | - | | | | - | | | | - | | | | | | 3,590 | | | | - | | | | - | | | $ | 15.00 | | 9/29/15 | | | - | | | | - | | | | - | | | | | | 30,000 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel | | | 1,000 | | | | - | | | | - | | | $ | 60.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 18,750 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | 3,500 | | | | - | | | | - | | | $ | 30.00 | | 9/29/15 | | | - | | | | - | | | | - | |
| · | Account collections of added customer accounts |
| · | The need to secure additional operating and working capital |
| · | The ability to reduce overhead costs and streamline operations |
| · | Potential conflicts arising from the distribution of products or services from providers who are or may be our competitors |
| · | Availability of trained support personnel |
In summary,No options held by the Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2009, we were case managing and/or electronically monitoring approximately 14,000 offenders domestically, while also expanding our sales capabilities and initiatives internationally. 2013.
We have worked to buildadopted our domestic2012 Plan and international direct sales force, while solidifying distributors and local business partners opportunistically.our 2006 Plan. We have entered into monitoring agreements with approximately 450 law enforcement, judiciariesalso granted individual plans to certain executives and bail bond agencies throughoutdirectors in the United States. We continue to hold either full or majority interestform of stock purchase warrants, which are included in two related businesses to further our efforts to increase our revenues and market development, and we now maintain 12 expanded distributorships. Although there can be no guarantee that we will be able to continue these efforts or be able to implement our business plan as anticipated, management believes that we are in a good position to move forward and to continue the growth of the business and to take advantage of the market opportunities open to us.table above. Our Strategy Our global growth strategy is to continue to expand offerings which empower professionals in security, law enforcement, corrections and rehabilitation professionalsorganizations worldwide with sole-sourcedsingle-sourced offender management solutions that integrate reliable interactionintervention technologies into support of interventionre-socialization and re-socializationmonitoring initiatives. We will grant offenders opportunity for accountable, monitored “freedom”, while providing for greater public safety atTo accomplish this objective, we are implementing a lower cost to incarceration or other service offerings. We will accomplish our strategy through the “value-driven”, yet profitable deployment of agrowing portfolio of proprietary and non-proprietary GPS/RF and/or alcohol and/or drug tracking, real-time monitoring and intervention products and services toservices. These include GPS, RF, drug and alcohol testing for defendants and offenders as well other individuals and assets in the corrections, probation, law enforcement and rehabilitation personnel worldwide, all in support of offender reformation and re-socialization initiatives.arena.
Our exclusiveIn addition, our product and service offerings will expand upon our exception-based reporting, analytical capabilities and behavioral-monitoring knowledge. These customizable solutions will be available through Web portals and mobile device platforms, in addition to traditional desktops, to leverage our real-time monitoring data, best-practice monitoring, and interaction protocols and analytics capabilities. Customer insights will be increased further by aggregating real-time data from additional monitoring device types and technologies, regardless of manufacturer, as well as other critical data sources.
In summary, we are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services balancefor the need to dynamically track and monitor offenders with the opportunity to positively encourage and transform offenders, thus reducing recidivism rates through our proprietary C.A.R.E.™ (Correction, Accountability, Rehabilitation, Empowerment) programs and client-adapted initiatives.global offender management marketplace. We will continue to developwork with agencies to increase public safety and deploy adaptive,officer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and interactive technology productsimprove monitoring program success rates, all while offering defendants and services, which meet the ever-changing needsoffenders opportunities for accountable freedom instead of our clients, while providing value-driven and enhanced public safety. While there are no ongoing warranties of our business model and no assurances of our capabilities to continue to raise necessary expansion capital, we will endeavor to ensure our ongoing viability through diligent, margin-centric imperatives and operational efficiency gains through prioritized management initiatives.
Background
SecureAlert was originally formed to manufacture and market medical diagnostic stains, solutions and related equipment. Through the acquisition of SecureAlert Monitoring, Inc. (“SecureAlert Monitoring”) in July 2001, we expanded our product sales and monitoring services related to Personal Emergency Response Systems (“PERS”).
In 2006, we developed the GPS tracking technology and monitoring business currently conducted by our subsidiary, SecureAlert Monitoring. Our business now involves manufacturing, distributing, and monitoring mobile emergency and interactive GPS tracking products, worn on the body, that focus on the defendant and offender tracking, monitoring and intervention marketplace.
To complement our own offerings and to drive additional means of capturing a growth position in the offender management market, in December 2007 we acquired a majority interest in Court Programs, headquartered in Gulfport, Mississippi, and Midwest Monitoring, based in Fairmont, Minnesota. We finalized the acquisition of Court Programs in March 2010. We hold an option to acquire the remaining capital stock of Midwest Monitoring. These acquisitions brought us solid business relationships with ongoing revenue streams, as well as the possibility of expanding our presence into the existing accounts of these acquired companies. Furthermore, they brought business processes and practices in the area of case management, offender pay programs and attendant services that could be lev eraged and integrated into our existing operations.incarceration.
Marketing TheOur strategic purpose is to produce or acquire and globally deploy leading edge tracking technology and monitoring services in the criminal justice arena. During fiscal year 2013, we worked to meet this objective by expanding sales momentum which started withand marketing activities domestically and internationally through the releaseaddition of TrackerPAL™sales resources and increase of marketing efforts such as trade show participation. As in fiscal 2012, new account acquisition was aided by the e-Arrest Beacon in 2008 continued in 2009. As anticipated, the numberlack of public funding for enforcement and corrections agencies, facing budget constraints, while at the same time being required to take on increased case loads, grew. These conflicting demands fueled the need to reduce jail operating and expansion expenses, and a desire for greater control of many agenciesmonitoring of high risk and high flight risk device wearers. Also, the view continues to widen that society needs to look at alternative ways of sentencing offenders, as well as keeping track of certain types of offenders, such as those convicted of sexual or domestic violence offenses who have been released from custody. Several countries including the United States began or continued the process of evaluating sentencing laws which would release sentenced felons to GPS monitoring, as a solution.after partially serving their incarceration sentences. We foresee that these views and the harsh economic and funding realities will continue to fuel wider implementation of electronic monitoring programs globally, increasing demand for our products and monitoring services.
A particularly strong sector was juvenile corrections,Our products’ unique and patented functionality make us a good match for these opportunities. In particular, our customers have expressed interest for the patented two- and three-way voice communication technology on our ReliAlert device, and our SecureCuff steel reinforced band. Other SecureAlert features, including juvenile probation departmentsour 95 decibel siren, the real-time posting of location traces and juvenile detention centers. It is widely recognized that incarcerating juveniles can start a life-long pattern of recidivism. This is created by first time and minor crime offenders’ affiliation with more seasoned offenders who have the means and contacts to encourage and enable repeat crimes. Thoseflexible mapping, are also instrumental in charge of juvenile law enforcement and corrections recognize that in many cases, keeping youth at home and in school is a better option. However, with reduced staff and increased case loads, probation officers and other support staff find it harder, if not impossible, to be effective. Many are recognizing that the visibility that GPS monitoring provides can be a powerful solution. Moreover, TrackerPAL’s unique two and three way on-device calling feature takes that visibility to the next level by enabling supervisory staff to communicate with the user wearing the device, any place, any time. For many offenders, this feature is the only phone communication available to them, not being able to afford either land or cell phones, and without the TrackerPAL™, officers would have far less contact with their offenders. Also, the incarceration of juveniles costs considerably more than adult incarceration – exceeding $500 per day in some areas – so putting offenders on GPS monitoring instead of incarceration makes financial sense as well. During the fiscal year ended September 30, 2009, we acquired several new juvenile corrections clients.winning accounts.
As critical asDuring fiscal year 2013, we continued our Intervention Active Monitoring is forcommitment to ongoing enhancements to the ReliAlert device line and our TrackerPAL tracking and monitoring high risksoftware. Device enhancements centered on the continuation of integrating componentry designed to expand the life span and other offenders that require intensive monitoring, less intense monitoring levels may be more appropriate to address lower risk offendersrobustness of the devices, enhance GPS sensitivity, and budget constraints. To address this, we introduced two new service offerings. These offerings, Passive Monitoring and Standard Active Monitoring, utilize the same TrackerPAL™ devices as the flagship Intervention Active Monitoring. Intervention Monitoring utilizesincrease battery operation time. We also enhanced our SecureAlert Monitoring Center to communicate with offenders and offi cers on a real-time basis when an offender has a violation such as entering an exclusion zone (a designated restricted area the offender is prohibited to enter under the terms of his sentence). Like most other active monitoring offerings, the Standard Active level still provides real-time communications to officers, but only through emails and texts. No live operators call offenders or officers. The Passive level captures locations and alarms on a real-time basis, and like other passive offerings, sends a report of them each night. However, unlike competitors’ passive and basic active monitoring products which only post location traces every few hours, all of our monitoring options utilize the GPS technologyTrackerPAL software in the TrackerPAL™ II device to continuously track offenders’ movementsareas of selection and post them real time for viewing anytime through the TrackerPAL™ II software. The e-Arrest Beacon option is also available for all service levels. ;In addition, unlike some competitive systems, no docking stations or landlines are required for any of the levels. Conveniently, officers can transition offenders to different monitoring levels via the TrackerPAL™ software; no equipment change is required. This is a significant advantage as it dramatically reduces the number of devices an agency has to keep on hand to be proficient. Several existing as well as new customers have signed up for the new service offerings.reporting features.
Fiscal year 2009 also saw many enhancements to our production and distribution capabilities. In January 2009, we moved our final assembly and distribution activities to a 6,152 foot warehouse and distribution center. The new facility allowed us to bring all device refurbishment activities in-house, saving not only time, but money in processing devices that come back for stock rotation or refurbishment. The facility also positions us for the growth we have planned over the next several years.
We also moved our manufacturing from Canada to contract manufacturer, Inovar Inc. (“Inovar”), in Logan, Utah. Inovar is a provider of quality electronic manufacturing services for the electronics, medical, military and aerospace industries. In addition to facilitating design and testing collaboration with us due to its proximity, Inovar provides other value added services from which we will benefit. Inovar’s services include materials procurement, printed circuit assembly, test and system build. This complete offering of services will enable us to receive high quality at reduced costs. Inovar’s location near the campus of Utah State University also provides significant benefits. Inovar’s relationship with the University provides it with a steady stream of labor, as well as access to one of the most respected engineering schools in the world. Inovar is ISO 9001:2000 and ISO 13485:2003 certified.
Research and Development Program GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense. These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times. Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz.
A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level. The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.
During the fiscal year ended September 30, 2009,2013, we spent $1,777,873$987,934 on research and development, compared to research and development expenditures of $4,811,128$1,248,654 in the fiscal year ended September 30, 2008.2012. These costs of $1,777,873$987,934 were to further develop our TrackerPAL™TrackerPAL and ReliAlert portfolio of products.products and services. Monitoring Center AsDuring fiscal year 2013, we developed prior product lines, we simultaneously workedcontinued to create the SecureAlertrealize productivity enhancements and additions to our key core competency and differentiator, our Intervention Monitoring Center. In contrast to a typicalProductivity gains were achieved through monitoring center, our Monitoring Center is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS technology. This capability is referred to as telematic. The operator’s computer screen can identify the callerenhancements as well as locate, in real time, the caller’s precise location on a detailed map. We believe the monitoring center is the cornerstonecontinuous optimization of our business. An operator goes through extensive training to insure professional service is provided to the supervising parole officerprocesses and individuals wearing the TrackerPAL™.
In order to prepare for an increase in the number of TrackerPAL™ devices to be monitored, we are continuing to build up theprocedures and ongoing training. The Intervention Monitoring Center to effectively manage these devices. To increaseemploys bilingual Spanish-speaking staff who provide 24/7 coverage. The bilingual staff addresses the efficiencies in the Monitoring Center, we are developing software to further expand service automation in the processingneeds of alarmsboth domestic and operational events resulting in increased operator efficiency and ability to manage more devices. The automation of alarms includes pre-recorded responses to inform the offender of the alarm and to resolve the issue. If the issue is not timely resolved, an operator will become involved and take the additional necessary actions according to protocols set up by the customer. We anticipate one operator will be able to manage over 230 active devices aft er the software is fully developed.
Strategic Relationships
We believe one of our strengths is the high quality of our strategic alliances. Our two primary alliances are described below.
Inovar, Inc.
Inovar, located in Logan Utah, is a leading contract electronics manufacturer dedicated to providing flexible solutions to OEMs (original equipment manufacturers) in the fastest growing segments of the electronics, medical, and aerospace industries and the military. Inovar is ISO 9001-:2000 and ISO 13485:2003 certified to provide the most comprehensive and value-added services to itsinternational customers. Inovar currently manufactures our TrackerPAL™ product.
euromicron AG
euromicron AG is an all-around solution provider for communications, data and security networks. Its network infrastructures integrate voice, video and data transport wirelessly, via copper cable and by means of fiber-optic technologies. euromicron AG builds its leading applications, such as e-health, security, control or surveillance systems, on the basis of these network infrastructures. Founded on its expertise as a developer and producer of fiber-optic components, euromicron AG is a strongly growing, profitable group that is listed on the XETRA and Frankfurt, Germany (FRA) stock markets and focuses on operational growth, integration and further market penetration, internationalization and expansion.
Competition InDuring fiscal year 2009,2013, as in past years, we encountered various levels of GPS, house arrest and case managementcontinued to encounter electronic offender monitoring competition from traditional competitors, a few of which had consolidated in 2011 and 2012. We also saw a couple of major new entrants come into the following traditional and evolving competitors:United States market. Traditional competition includes:
| · | Pro Tech MonitoringBI Incorporated, Denver, Colorado, a subsidiary of GEO Care, Inc., Odessa, FLBoca Raton, Florida – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks. |
| · | iSECUREtrac Corp., Omaha, NE – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release. |
| · | Sentinel Offender Services, LLC, Augusta GA – This company supplies monitoring and supervision solutions for the offender population. |
| · | Omnilink Systems, Inc., Alpharetta, GA – Thisinternational company provides a one-piece device combined with GPSwide variety of private correctional services from facilities operation and Sprint cellular networksmanagement to electronically track an individual. |
| · | correctional health care services. BI Incorporated, Boulder, CO – This companywhich was purchased by GEO Care, Inc. in 2011, has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States. |
| | | | · | G4S plc – Crawley, Sussex, EnglandOmnilink Systems, Inc., Alpharetta, Georgia – This international company is the world’s leading international security solutions group.provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. In thefiscal year 2013, Omnilink completed an agreement with Alcohol Monitoring Systems, Inc. (AMS) for AMS to distribute Omnilink GPS devices as “SCRAM One-Piece GPS™”, to extend AMS’ product line for those agencies looking for a one-stop shop for their monitoring needs. | | | | · | 3M Electronic Monitoring, Odessa, Florida (purchased and consolidated Attenti Group, (ElmoTech and ProTech) in 2011) – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks. | | | | · | Satellite Tracking of People, LLC, Houston, Texas – This company provides a broad line of GPS tracking systems and services to government agencies. | | | | · | Sentinel Offender Services, LLC, Augusta, Georgia (purchased and consolidated G4S’ United States Offender Monitoring operation in 2012) – This company supplies monitoring and supervision solutions for the offender population. Through their acquisition and consolidation of G4S’ United States Offender Monitoring operation, they expanded their customer base to which they provide electronic monitoring of offenders, prison and detention center management and transitional support services. Currently, G4S resellsThrough this acquisition, they also resell Omnilink’s active GPS device.device, in addition to their own. |
The following companies entered the United States market in fiscal year 2013: | · | Satellite Tracking of People, LLC – Houston, TXBuddi, Ltd., Aylesbury, Binkghamshire, United Kingdom – This company provides GPSwas started in 2005 to provide consumer tracking systemsfor the elderly and services to government agencies.for Alzheimer’s sufferers. Buddi has recently entered offender monitoring and are pursuing business within the United States. | | | | · | Corrisoft, LLC, Lexington, Kentucky – This company produces offerings for the monitoring of low and medium risk offenders, and distributes other companies’ products for higher risk offenders. They have announced that they will be developing additional products for the monitoring of all offender types. |
We also continue to face competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services. Some of these entities utilize less well-known technologies or are resellers of the above competitors’ products. We observed an increase in these types of businesses in 2009. We do not believe there is reliable publicly available information to indicate our relative market share or that of our competitors. Dependence on Major Customers Two customers each represented more than 10% of gross revenues for the years ended September 30, 2013 and 2012 as follows: | | 2013 | | | % | | 2012 | | | % | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 5,252,959 | | | | 34 | % | | $ | 2,450,984 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 1,622,326 | | | | 10 | % | | $ | 1,876,285 | | | | 12 | % |
No other customer represented more than 10% of our total revenues for the fiscal years ended September 30, 2013 or 2012. Our contract with Secretaría de Gobernación de México was completed during fiscal year 2013. The Ministry of National Security in the Bahamas arrangement involved a three-year contract which concluded in November 2013, and services have continued on a month-to-month basis since that time. This arrangement could be terminated at anytime with a 30-day notice. Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, is shown in the table below: | | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | | | La Oficina de Servicios con Antelación al Juicio de Puerto Rico | | $ | 887,233 | | | | 24 | % | | $ | 681,781 | | | | 24 | % | | | | | | | | | | | | | | | | | | | | The Ministry of National Security in the Bahamas | | $ | 732,163 | | | | 20 | % | | $ | 475,800 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | Secretaría de Gobernación de México | | $ | 892,897 | | | | 24 | % | | $ | - | | | | 0 | % |
Subsequent to the fiscal year ended September 30, 2009. One non-repeat customer represented 16%2013, we received $387,483 from la Oficina de Servicios con Antelación al Juicio de Puerto Rico and $518,137 from The Ministry of our total revenues forNational Security in the fiscal year ended September 30, 2008.Bahamas. Dependence on Major Suppliers We purchase cellular services from a variety of providers.several suppliers. The cost to us for these services during the fiscal years ended September 30, 20092013 and 20082012, was approximately $2,422,541$974,709 and $2,939,790,$961,994, respectively. We reducedOur cellular costs increased by successfully negotiating new or existing provider contracts, while increasing revenues fromapproximately 1% in 2013 compared to 2012, due to the increase in the number of monitoring services.devices assigned to customers. During the fiscal year ended September 30, 2009, we switched manufacturing of the TrackerPAL™ devices from Dynamic Source Manufacturing to Inovar. The change in manufacturers was made to increase the reliability of the TrackerPAL™ and reduce our cost per device. Should the relationship with Inovar cease, we would need to find another vendor to manufacture the device, which could limit our ability to lease additional monitoring equipment.
Product Returns During the fiscal year ended September 30, 2009,2013, we replacedmade improvements to the majority of TrackerPAL™ I devices with our next generation TrackerPAL™ IIReliAlert device as well as internal processes to remedy problems incurred withimprove product reliability and reduce product returns. These improvements include the first generation product. These problems included:following: | · | low battery and charger life and functionality,We redesigned the shell of the ReliAlert device addressing several issues related to devices that were returned to us by our customers. |
| | | | · | weak GPS signal strength,We refined our assembly and inspection processes (outgoing and incoming inspections) to ensure continued quality improvements. |
| | | | · | water ingression,We instituted a formal change control process to ensure that we have a structured, strategic, and documented approach to addressing and implementing changes. This also includes improvements in our internal communications processes to ensure that different groups within the Company have visibility into current issues, and everyone has input into the process of continual improvement of our processes and design. |
| | | | · | scratchingWe cross-trained technical support staff and other aesthetic damage whenreturns analysis staff to enable them to have improved visibility of the device was removed from an offender.customer experience. This has helped our staff to quickly and correctly diagnose issues in the field. |
Subsequent to September 30, 2009, we began manufacturing an improved TrackerPAL™ device dubbed the “TrackerPAL™ II(e)” (for “enhanced”) to further improve the performance and functionality of the product. We achieved significant improvement in GPS signal strength by incorporating the latest available GPS technology into the enhanced device. Additionally, the battery life has improved, realizing over 30 hours of life on a single two hour daily charge.
Intellectual Property Trademarks . We have developed and use registered trademarks in our business, particularly relating to our corporate and product names. We own eightsix trademarks that are registered with the United States Patent and Trademark Office andplus one trademark registered in Mexico.Mexico and one in Canada. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have one application for registration pending approval in the state of California and one application in the United States that has been approved and is awaiting the filing of a stat ement of use. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States. The following table summarizes our trademark registrations and applications: MarkTrademark | | Application Number | | Registration Number | | Status/Next Action | MOBILE911Mobile911 Siren with 2-Way Voice Communication & Design® | 75/615,118 | 2,437,67376/013,886 | | 2,595,328 | | Registered | PAL Services® | | 78/514,514 | | MOBILE911 SIREN WITH 2-WAY VOICE
COMMUNICATION & DESIGN
3,100,192 | 76/013,886 | 2,595,328 | Registered | TrackerPAL® | | 78/843,035 | | WHEN EVERY SECOND MATTERS3,345,878 | 76/319,759 | 2,582,183 | Registered | Mobile911® | | 78/851,384 | | MOBILEPAL3,212,937 | 78/514,031 | 3,035,577 | Registered | TrackerPAL® | | CA 1,315,487 | | 749,417 | | HOMEPAL | 78/514,093 | 3,041,055 | Registered | TrackerPAL® | | MX 805,365 | | PAL SERVICES960954 | 78/514,514 | 3,100,192 | Registered | Foresight® | | | | REMOTEMDX | 78/561,796 | pending | Allowed-Awaiting Statement of Use | | 77/137/822 | | 3481509 | | TRACKERPAL™ | 78/843,035 | 3,345,878 | Registered | Bishop Rock Software® | | 77/132,255 | | MOBILE9113481474 | 78/851,384 | 3,212,937 | Registered | | ReliAlert™ | | 85/238,049 | | TRACKERPAL™In process | CA 1,315,487 | pending | Pending | | HomeAware™ | | 85/238,064 | | In process | | Pending | TRACKERPAL™SecureCuff™ | MX 805,365 | 96095485/238,058 | Registered | In process | | Pending | | TrueDetect™ | | 85/237,202 | | In process | | Pending | | SecureAlert™ | | 86/031,550 | | In process | | Pending |
Patents
Patents.We have five15 patents in the United Statesissued and one patent in China. In addition, we have seventwo patents pending in the United StatesStates. At foreign patent offices we have three patents issued and ten pending internationally.12 patents pending. We are also preparing patents that will be filed in other countries in the coming year. The following tables containsummarize information regarding our patents and patent applications. There can beis no assurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included. included in the applications. Domestic Patents: | | | | | | | | | | | Patent TitleDomestic Patents | Application/Patent
Number
| Filing/Issue DatesApplication# | | Date Filed | | Patent# | | Issued | | Status | Remote Tracking and Communication Device | 7,330,122 | 2/12/08 | | | | | | | | | Emergency Phone for Automatically Summoning Multiple Emergency Response Services | | 09/173645 | | 16-Oct-98 | | 6226510 | | 1-May-01 | | Issued | | | | | | | | | | | | | Remotely Controllable ThermostatCombination Emergency Phone and Personal Audio Device | 6,260,765 | 7/17/0109/185191 | | 3-Nov-98 | | 6285867 | | 4-Sep-01 | | Issued | | | | | | | | | | | | | Interference Structure for Emergency Response System WristwatchPanic Button Phone | 6,366,538 | 4/2/0209/044497 | | 19-Mar-98 | | 6044257 | | 28-Mar-00 | | Issued | | | | | | | | | | | | | MultipleInterference Structure for Emergency Response Services Combination Emergency Phone and Personal Audio DeviceSystem Wristwatch | 6,285,867 | 9/4/0109/651523 | | 29-Aug-00 | | 6366538 | | 2-Apr-02 | | Issued | | | | | | | | | | | | | Remote Tracking System and Device with Variable SamplingEmergency Phone With Alternate Number Calling Capability | 11/486,991 | 6/9/0909/684831 | | 10-Oct-00 | | 7092695 | | 15-Aug-06 | | 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 | 8/4/0611/202427 | Pending | 10-Aug-05 | | 7330122 | | 12-Feb-08 | | Issued | | | | | | | | | | | | Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors | | 11/486991 | | 14-Jul-06 | | 7545318 | | 9-Jun-09 | | Issued | | | | | | | | | | | | Alarm and Alarm Management System for Remote Tracking Devices | | 11/486992 | | 14-Jul-06 | | 7737841 | | 15-Jun-10 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | Canada 2617923 | 8/4/0612/028088 | Pending | 8-Feb-08 | | 7804412 | | 28-Sep-10 | | Issued | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center | | 11/486976 | | 14-Jul-06 | | 7936262 | | 3-May-11 | | Issued | Alarm and Alarm Management System for Remote Tracking Devices | | 12/792572 | | 2-Jun-10 | | 8013736 | | 6-Sep-11 | | Issued | | | | | | | | | | | | | Remote Tracking and Communication Device | Europe 06836098.1 | 8/4/0612/875988 | Pending | 3-Sep-10 | | 8031077 | | 4-Oct-11 | | Issued | | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 12/818,453 | | 18-Jun-10 | | 8514070 | | 20-Aug-13 | | Issued | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking and Communication Device | Mexico a/2008/001932 | 8/4/0612/399151 | Pending | 6-Mar-09 | | 8232876 | | 31-Jul-12 | | Issued | | | | | | | | | | | | | Emergency Phone with Single-Button Activation | EP 01924386.4 | 3/28/0111/174191 | | 30-Jun-05 | | 7251471 | | 7/31/2007 | | Issued | | | | | | | | | | | | Tracking Device Incorporating Enhanced Security Mounting Strap | | 13/970,007 | | 19-Aug-13 | | - | | - | | 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 Voice Communication Between the Device and a Monitoring Center | PCT/US2007/072740 | 7/3/0711/486989 | Pending | | 14-Jul-06 | | | | 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.
| International Patents | | Application# | | Date Filed | | Patent# | | Issued | | Status | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - EPO | | 9716860.3 | | 6-Oct-10 | | 2260482 | | 1/9/2013 | | Issued | | | | | | | | | | | | | | Remote Tracking and Communication Device - | | MX/a/2008/ | | | | | | | | | | Mexico | | 1932 | | 4-Aug-06 | | 278405 | | 24-Aug-10 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking | | MX/a/2010/ | | | | | | | | | | Device - Mexico | | 9680 | | 2-Sep-10 | | 306920 | | 1/22/2013 | | Issued | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Canada | | 2717866 | | 3-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | | Remote Tracking and Communication Device - EPO | | 6836098.1 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Brazil | | PI0614742.9 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | Remote Tracking and Communication Device - Canada | | 2617923 | | 4-Aug-06 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - EPO | | 7812596 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | A Remote Tracking System with a Dedicated Monitoring Center - Brazil | | PI0714367.2 | | 3-Jul-07 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - EPO | | 10 009 091.9 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Brazil | | PI11001593 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico | | MX/a/2011/002283 | | 28-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Canada | | 2732654 | | 23-Feb-11 | | - | | - | | Pending | | | | | | | | | | | | | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Brazil | | PI0909172-6 | | 1-Sep-10 | | - | | - | | Pending | | | | | | | | | | | | | Secure Strap Mounting System For an Offender Tracking Device - Mexico - DIV | | MX/a/2013/12524 | | 25-Oct-13 | | - | | - | | Pending |
We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently,Royalty Agreement. On August 4, 2011, with an effective date of July 1, 2011, we may become involved from time to time in litigation to determineentered into an agreement (the “Royalty Agreement”) with Borinquen Container Corp., a corporation organized under the enforceability, scope, and validity of anylaws of the foregoing proprietary rights. Any patent litigation could resultCommonwealth of Puerto Rico (“Borinquen”) to purchase Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a Puerto Rico corporation (“ISS”) in substantial costconsideration of 310,000 shares of our Common Stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. We also agreed to pay to Borinquen quarterly royalty payments in an amount equal to 20% of our net revenues from the sale or lease of our monitoring devices and divertmonitoring services within a territory comprised of South and Central America, the effortsCaribbean, Spain and Portugal, for a term of management20 years. We redeemed and technical personnel.terminated this royalty obligation in February 2013 using the proceeds of a loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). The obligation to Sapinda Asia was converted to Common Stock and satisfied in full in September 2013.
Trade Secrets.Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel. Seasonality Given the continued and steady increaseconsistency in recurring domestic monitoring revenues by customer throughout 2010,2013, we detected no apparent seasonality if it existed, could be detected.in our business. However, as in previous years, incremental domestic deployment opportunities were found to be slowerslow down in the months of July and August. This wasWe believe that this is due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season.season during these two months. BacklogProperties
With the transformationOur headquarters and monitoring facility are housed in approximately 7,500 square feet of our supply chain operationscommercial office space located at 150 West Civic Center Drive, Suite 400, Sandy, Utah. Lease payments are approximately $18,000 per month. This lease expires on May 31, 2014. In addition, we lease 6,152 square feet of warehousing and manufacturing capabilities during July through December 2009, the commercial availability of our newly modifiedpallet shipping functions 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 capabilitiesa facility located at Inovar.9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $6,500; the lease expires on August 31, 2014.
We view backlogs as undesirable, as they impair deployments, which necessarily reduces revenue. We continueGPS Global’ s operations are housed in approximately 350 square meters of commercial office space located at 23 Htaas St Kfar-Saba, Israel. The monthly lease is approximately $5,100. The lease expires on May 31, 2014 and the operations will likely be relocated to work on mitigating backlogs, maximizing demand fulfillment, and capitalizing on all available opportunities to secure recurring revenue streams. In a significant development after September 30, 2009, we authorizedcomparable space in 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.same commercial area.
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 September 30, 2010,March 31, 2014, we had 18394 full-time employees and 22four part-time employees.employees in the United States. None of thethese 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. PropertiesWe acquired eight employees and two independent contractors in Israel in connection with the acquisition of GPS Global. Israeli labor laws and regulations apply to all employees based in Israel. The laws principally cover matters such as paid vacation, paid sick days, length of the workday, payment for overtime and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance payments may be funded, in whole or in part, through a managers’ insurance fund or a pension fund. The payments to the managers’ insurance fund or pension fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute of Israel, which also include payments for health insurance. The payments to the National Insurance Institute amount to approximately 14.5% of wages, of which the employee contributes 66% and the employer contributes 34%.
Additional Available Information Our headquartersWe maintain our principal executive offices and monitoring facility are housed in 8,106 square feet of space locatedfacilities 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,Suite 400, Sandy, Utah 84070. Monthly lease payments are approximately $5,300. Management believes thatOur telephone number is (801) 451-6141. We maintain a World Wide Web site at www.securealert.com. The information found on, or otherwise accessible through, our website, is not incorporated into and does not form a part of this prospectus. We make available, free of charge at our corporate website copies of our annual reports filed with the SEC on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these facilities are sufficientreports, as soon as reasonably practicable after such material is electronically filed with or furnished to meetthe SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our needs for the foreseeable future.Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request. All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Legal Proceedings RACO Wireless LLC vLazar Leybovich et al v. SecureAlert, IncInc.. On October 12, 2010, RACO WirelessMarch 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint alleging that the Company breached a contract by failing to place a sufficient number of RACO SIM chips in the SecureAlert monitoring devices.11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The Company deniescomplaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. We believe these allegations are inaccurate and intendsintend to vigorously defend against this complaint.the case vigorously. 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. SecureAlert,Larry C. Duggan v. David Ezell, et al. We have filed a claim against David EzellCourt Programs of Florida, Inc. 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.On March 26, 2012, Mr. Duggan filed a complaint against us in the Fourth District9th Circuit Court in and for UtahOrange County, Utah, on June 7, 2010,Florida alleging breachmalicious prosecution, abuse of contract, unjust enrichment,process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of 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 Changeformer agent 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.our former subsidiary. We intend to vigorously defend our interests and to pursue appropriate counterclaims against Aculis.this matter. 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.
CAPITALIZATION
The following table sets forth our cashIntegratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming we had breached a contract for computer services and cash equivalentsintentionally interfered with its economic relations. We reached a settlement with Integratechs in March 2014, 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 OPERATIONS” and our consolidated financial statementsagreed to pay $20,000 to Integratechs; neither party admitted any wrongdoing or liability and the related notes thereto:lawsuit was dismissed with prejudice.
| | 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 | |
MARKET PRICE FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock trades onChristopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against us in the OTC Bulletin Board underThird Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that we breached a 2006 consulting agreement with him and claims damages of not less than $210,000. We dispute the symbol “SCRA”. The following table sets forthplaintiff’s claims and will defend the rangecase vigorously. No accrual for a potential loss has been made as we believe the probability of high and low bid prices of our Common Stock as reported on the OTC Bulletin Board for the periods indicated. The sales informationincurring a material loss is available online at http://otcbb.com.remote.
| | | 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 | |
HoldersSecureAlert, Inc. v. STOP, LLC. On December 17, 2013, we filed a complaint in the United States District Court, District of Utah, Central Division against Satellite Tracking of People, LLC (a.k.a. STOP, LLC) asserting claims for declaratory relief, reimbursement for overpayment and unjust enrichment related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. On February 14, 2014, STOP filed an answer denying our claims and asserted counterclaims for breach of contract against us related to the same Settlement Agreement. On March 1, 2014, we entered into a Supplemental Settlement Agreement that included a stipulation and dismissal of all claims and counterclaims in this litigation. Under the terms of the settlement, both parties restructured their relationship and provided reciprocal licenses for all patents listed in the Settlement Agreement effective January 29, 2010. In addition both parties provided the other with reciprocal license for future patents awarded the respective parties, but excluding patents held by or acquired by SecureAlert related to: (i) GPS or cellular tracking by a device not attached to a person’s limb, (ii) related to alcohol/drug monitoring, (iii) any patent held by an entity acquired by SecureAlert for so long as that entity is paying or owes STOP a royalty or fee until such time as any royalty or fee is no longer owed to STOP, unless STOP already has a right to those patents, and (iv) any patent not used in the electronic monitoring and tracking services, using cellular and/or GPS technologies, for governmental law enforcement agencies (e.g. offender tracking). In addition, we agreed to pay to STOP a total of $4,500,000 in 24 equal monthly installments of $187,500 in exchange for a release of all royalty and other payment obligations called for under the Settlement Agreement dated January 29, 2010.
AsSecureAlert, Inc. v. Derrick Brooks and STOP, LLC. On February 21, 2014, we filed a complaint in the Third Judicial District Court, Salt Lake County, State of September 30, 2010, there were approximately 3,500 holdersUtah, against Derrick Brooks and STOP, asserting claims for declaratory relief, breach of recordcontract, tortious interference with prospective economic relations, tortious interference with contract, misappropriation of trade secrets, injurious falsehood/trade libel/business disparagement, defamation, respondeat superior, injunctive relief and punitive damages. On March 20, 2014, we entered into a settlement agreement with STOP and all of the claims between us and STOP in the litigation have been dismissed with prejudice. On April 9, 2014, Mr. Brooks filed an answer denying our Common Stockclaims and 280,023,255 sharesasserted counterclaims for constructive discharge, interference with contract/interference with prospective economic relations and blacklisting. In his counterclaim Mr. Brooks seeks to recover “not less than $150,000” on each of Common Stock outstanding. We also have granted options and warrants for the purchase of 51,740,451 shares of Common Stock.his claims. We have also issued 35,407 shares of Series D Preferred, which are convertible into 212,442,000 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.not yet responded to Mr. Brooks’ counterclaims, but believe them to be without merit and we intend to vigorously defend against them.
DividendsMANAGEMENT
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, 2009Directors 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 PlansExecutive Officers
The following table sets forth information about the members of our Board of Directors 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.April 1, 2014: Equity Compensation Plan Information| Name | | Age | | Position | | David S. Boone | | 53 | | Director | | Guy Dubois | | 55 | | Director | | Rene Klinkhammer | | 34 | | Director | | Winfried Kunz | | 48 | | Director | | Dan L. Mabey | | 62 | | Director | | George F. Schmitt | | 70 | | Director |
| 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 |
USE OF PROCEEDSGuy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director at Singapore-based Tetra House Pte. Ltd., that provides consulting and advisory services worldwide. Mr. Dubois was Chief Executive Officer of gategroup AG from September 2008 until April 2011. He previously held the positions of President, Executive Vice President Finance and Administration, Chief Administrative Officer and Chief Financial Officer of Gate Gourmet Holding LLC. He served as a manager of the Board of Managers of Gate Gourmet Holding LLC from March 2007 until April 2011, and as a member of the Board of gategroup AG from February 2008 until April 2011. Prior to joining Gate Gourmet in July 2003, Mr. Dubois was Vice President Finance, Administration, Demand and Supply Chain for Roche’s Vitamins Inc. in New Jersey from 2000 to 2003. He was Area Manager, Finance and Administration for Roche’s Vitamins Asia-Pacific Pte. Ltd. in Singapore from 1997 to 1999, and Finance Manager from 1995 to 1997. Mr. Dubois worked in corporate finance for Hoffman-La Roche in 1994. Mr. Dubois also served on the European Organization for Nuclear Research (CERN) team in Switzerland in various roles, including Treasurer and Chief Accountant, Manager General Accounting and Financial Accountant from 1989 to 1994. He also worked with IBM in Sweden from 1984 to 1988 as Product Support Specialist for Financial Applications. He attended the Limburg Business School in Diepenbeek, Belgium, and has a degree in Financial Science and Accountancy. Mr. Dubois’ appointment to the Board of Directors was a requirement of a financing arrangement as part of the terms of a loan agreement with Sapinda Asia.Rene Klinkhammer became a director in January 2010. He graduated from European Business School, Oestrich-Winkel, Germany, in 2004, with an MBA-equivalent degree in business administration. His majors were Banking, Finance and International Management. After graduating, Mr. Klinkhammer joined Deutsche Bank’s Investment Banking Division as an analyst in the Corporate Finance Advisory Group, specializing in mergers and acquisitions, along with debt and equity financing transactions for larger German clients of the bank. From 2007 to June 2013, Mr. Klinkhammer worked for Sapinda Holding B.V. and its subsidiaries, a group of privately-owned investment companies with offices in Amsterdam, Berlin, London and other major cities around the world. Since July 2013, Mr. Klinkhammer works for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. Winfried Kunz became a director on December 21, 2011. He studied Business Administration and Economics from 1984 -1989 at the Universities in Munich and Cologne. In 1985 he started working as a system analyst and from 1987 – 1998 as a management consultant for German, British and American companies in the information technology industry, where he served in executive positions. Mr. Kunz worked as an executive at Precision Software Ltd., Contact Software International Inc., and Symantec Corp. For more than 15 years, Mr. Kunz has worked as an independent consultant and managing partner of Asecon GmbH, a company he founded in 1997, developing and implementing investor innovative business models for residential properties with a focus in Munich for his own portfolio and for third parties. For more than 10 years he has been a consultant to JK Wohnbau GmbH, a Munich-based real estate developer, where he served as COO from 2009 until the company’s initial public offering in 2010. From 2009 to 2011, Mr. Kunz has also worked with us as an investor. Dan L. Mabey became a director on December 21, 2011. He is the CEO of BigHorn Oil and Gas, an energy development company (Casper, Wyoming), and he has served in both public and private company leadership positions in the high-tech industry including President of 1-2-1 View digital signage company (Singapore), Chief Operating Officer and Director of In Media Corporation IPTV service company (California), President of Interactive Devices, Inc. a video compression company (Folsom, California) and Vice President of Broadcast International, a satellite broadcast company ( Salt Lake City, Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development Office, growing Utah exports from $700 million to $3.6 billion a year. He helped recruit the 2002 Winter Olympics to Salt Lake City, Utah, and managed international business development for the games. Throughout his career, Mr. Mabey has been active in civic and community organizations and is the recipient of numerous service awards. He is also the co-inventor or lead inventor on six patents and the sole inventor of a seventh. Mr. Mabey received a Masters of Public Administration (MPA) degree from Idaho State University in 1978 and a B.A. degree from Boise State University in 1974. George F. Schmitt became a director on December 21, 2011. He is a director and CEO of MBTH Technology Holdings. He has held this position since December, 2010. Mr. Schmitt is also a director of XG Technology, Inc. a publicly traded company, Kentrox and Calient. Mr. Schmitt previously served as a director of TeleAtlas, Objective Systems Integrators, Omnipoint and LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and is a former Trustee of Saint Mary’s College of California. In addition, Mr. Schmitt has served as a director of many privately held companies including Voice Objects, Knowledge Adventure, Jungo and Cybergate, among others. Mr. Schmitt has also served as Financial Vice President of Pacific Telesis and chaired the audit committee of Objective Systems Integrations and TeleATLAS. Mr. Schmitt received an M.S. in Management from Stanford University, where he was a Sloan Fellow, and a B.A. in Political Science from Saint Mary’s College. Board of Directors Election and Meetings Directors hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are appointed by the Board of Directors and hold office until their successors are appointed and duly qualified. Vacancies on the Board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the Board, with such new director serving the remainder of the term or until his/her successor shall be elected and qualify. The Board of Directors is elected by and is accountable to our shareholders. The Board establishes policy and provides strategic direction, oversight, and control. The Board met 18 times during fiscal year 2013. All directors attended at least 80% of the meetings of the Board and of the committees of the Board of Directors of which they are members. Director Independence The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15). The Board determined the independence of all directors based on the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer and Dan L. Mabey meet the standards to be considered independent. The Board has not appointed a lead independent director. Shareholder Communications with Directors If we receive correspondence from our shareholders that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o SecureAlert, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Committees of the Board of Directors The Board of Directors has three standing committees: the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. These committees assist the Board of Directors to perform its responsibilities and make informed decisions. Audit Committee. The primary duties of the Audit Committee are to oversee (i) management’s conduct of our financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing our systems of internal accounting and financial controls, (ii) our independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of our independent auditors. The Audit Committee assists the Board in providing oversight of our financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on our website at www.securealert.com. The Selling Stockholders will receiveAudit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm, and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm. The Audit Committee met four times during both fiscal years 2012 and 2013 and all members of the proceedsAudit Committee attended at least 75% of the committee’s meetings. Members of the Audit Committee as of March 31, 2014, are Messrs. Boone, Schmitt and Kunz. In the opinion of the Board of Directors, each member of the Audit Committee satisfies the definition of independent director established in the NASDAQ Listing Standards. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors has designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the SEC. The Audit Committee reviewed and discussed the matters required by United States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 2013 with management and our independent registered public accounting firm. The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the sale of any Resale Shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales.Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence. SELLING STOCKHOLDERSCompensation Committee. Members of the Compensation Committee are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee met two times during fiscal year 2013. Members of the Compensation Committee are appointed by the Board of Directors. Messrs. Mabey, Boone, and Schmitt are independent directors, as determined by the Board of Directors in accordance with the NASDAQ listing standards. The Compensation Committee is governed by a charter approved by the Board of Directors, a copy of which is available on the Company’s website www.securealert.com. The Selling Stockholders identified in this prospectus are offering upCompensation Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to 47,100,000 sharesshareholders. The Committee monitors the results of such policy to assure that the compensation payable to our Common Stock in this prospectus (the Resale Shares).executive officers provides overall competitive pay levels, creates proper incentives to enhance shareholder value, rewards superior performance, and is justified by the returns available to shareholders. The Resale Shares being offeredCompensation Committee also acts on behalf of the Board of Directors in administering compensation plans approved by the Selling StockholdersBoard, in this prospectus are issued or issuablea manner consistent with the terms of such plans (including, as applicable, the granting of stock options, restricted stock, stock units and other awards, the review of performance goals established before the start of the relevant plan year, and the determination of performance compared to the Selling Stockholders upon conversiongoals at the end of a totalthe plan year). The Committee reviews and makes recommendations to the Board with respect to new compensation incentive plans and equity-based plans; reviews and recommends the compensation of 7,850 sharesthe Company’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of our Series D Preferred acquired byexecutive officers of the Selling Stockholders in a private placement.Company. Nominating and Corporate Governance Committee. Mr. Schmitt serves as the chair of the Nominating and Corporate Governance Committee. Messrs. Kunz and Klinkhammer also currently serve as members of this committee. The Nominating and Corporate Governance Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created Board positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for senior management succession. The Selling Stockholders may offerNominating and Corporate Governance Committee is required to review the Resale Shares for resale from time to time pursuant to this prospectus. The Selling Stockholders may also sell, transfer or otherwise disposequalifications and backgrounds of all ordirectors and nominees (without regard to whether a portion of their Resale Shares in transactions exempt fromnominee has been recommended by shareholders), as well as the registration requirementsoverall composition of the Securities ActBoard of Directors, and recommend a slate of directors to be nominated for election at the annual meeting of shareholders, or, pursuantin the case of a vacancy on the Board of Directors, recommend a director to another effective registration statement covering those shares. We may from timebe elected by the Board to time include additional Selling Stockholders in amendments to this prospectus.fill such vacancy. The Nominating and Corporate Governance Committee held one meeting during fiscal 2013. The Nominating and Corporate Governance Committee’s charter is available on our website, www.securealert.com. Code of Ethics. We have established a Code of Business Ethics that applies to our officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. We will post on our website www.securealert.com any amendments to or waivers from a provision of our Code of Business Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions and that relates to any element of the Code of Business Ethics. Involvement in Certain Legal Proceedings There are no material proceedings to which any director or executive officer or any associate of any such director or officer is a party adverse to us or has a material interest adverse to our Company. Except as discussed below, no director or executive officer has been involved in any of the following events during the past ten years: | · | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | | | | · | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | | | | · | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | | | | · | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | | | | · | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and- desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | | | | · | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
An executive of gategroup holdings AG, an airline catering company headquartered in Switzerland was convicted in a Danish court in September 2012 of fraud and embezzlement involving that company’s assets. Guy Dubois, a director of the Company since December 2012, was Chief Executive Officer of gategroup holdings AG at the time the executive committed the acts leading to her conviction, voluntarily resigned from gategroup holdings AG in 2011. The Zurich State Prosecutor initiated an investigation in 2011 focused on whether other individuals, including Mr. Dubois were aware of or benefitted personally from the fraud and embezzlement that occurred. Mr. Dubois, who has indicated he was unaware of any of these activities at the time they were being committed, has been cooperating with that investigation. Executive Officers The following table sets forth certain information regarding our principal executive officer and principal financial and accounting officer as of November 22, 2010, with respectMarch 31, 2014: | Name | | Age | | Position | | | | | | | Executive Committee of Board of Directors | | | | Principal Executive Officer | | John R. Merrill | | 44 | | Chief Financial Officer |
The Executive Committee of the Board of Directors was established to act temporarily in the Selling Stockholders,principal executive officer function following the resignation of our Chief Executive Officer in October 2012. Current members of the Executive Committee are Guy Dubois and David S. Boone. On April 16, 2013, Mr. Dubois was granted warrants valued at $300,000 for his additional work as a director and member of the Board’s Executive Committee. This grant is of warrants to purchase 64,665 shares of Common Stock at an exercise price of $9.00 per share. These warrants vest in equal monthly increments over a period of one year or immediately upon the hiring of a new Chief Executive Officer. These warrants were valued at the date of grant using the Black-Scholes option-pricing model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer. John R. Merrill Mr. Merrill joined the Company on April 21, 2014 and Series D Preferred ownedofficially assumed the duties as Chief Financial Officer on April 24, 2014. Mr. Merrill is also the Chief Financial Officer for TenXNetworks and IPVidTech.com, a network intelligence provider of both hardware and services. From 2010 to 2013, Mr. Merrill worked as an advisor in the healthcare technology industry facilitating both due diligence and integration of certain acquired companies. Prior to 2010, Mr. Merrill was the Chief Financial Officer of Park City Group, Inc. (Nasdaq: PCYG) and Prescient Applied Intelligence, Inc. (OTC: PPID), software-as-a-service providers of supply chain solutions for both retailers and their suppliers. Throughout his career, Mr. Merrill has held various financial roles within broadcasting, sports marketing, and the retail industry. He began his career with KPMG and holds a BS and a Masters of Accounting from the University of South Florida. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10% of our Common Stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file. Based solely upon a review of these forms that were furnished to us, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2013 and that such filings were timely except the following: | · | Mr. Klinkhammer, a director, filed two late reports on Form 4 reporting two transactions; and | | | | · | Mr. Schmitt, a director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Dubois, a director, filed two late reports on Form 4 reporting two transactions. | | | | · | Mr. Boone, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Mabey, a director, filed one late report on Form 4 reporting one transaction. | | | | · | Mr. Kunz, a director, filed one late report on Form 4 reporting one transaction. |
Compensation of Directors The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2013, who are serving as directors as of March 31, 2014: | (a) | | (b) | | | (c) | | | (d) | | | (e) | | | | | Fees earned | | | Stock awards | | | Option awards | | | Total | | | Name | | ($) | | | ($) | | | ($) | | | ($) | | | David S. Boone | | $ | - | | | $ | - | | | $ | 76,385 | | | $ | 76,385 | | | Guy Dubois | | $ | - | | | $ | - | | | $ | 335,322 | | | $ | 335,322 | | | Rene Klinkhammer | | $ | - | | | $ | 7,500 | | | $ | 46,859 | | | $ | 54,359 | | | Winfried Kunz | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | | | Dan L. Mabey | | $ | - | | | $ | 15,000 | | | $ | 35,047 | | | $ | 50,047 | | | George F. Schmitt | | $ | - | | | $ | - | | | $ | 55,706 | | | $ | 55,706 | |
Effective January 1, 2012, we began to accrue $2,500 per month for each Selling Stockholder, anddirector, to be issued in shares of Common Stock valued on the last date of the quarter; provided, that in the alternative, the director may elect to receive stock purchase warrants for the purchase of three times the number of Resale Shares that may be offered pursuantshares otherwise issuable to this prospectus. Unless otherwisethe director, valued at the date of grant using the Black-Scholes valuation method. Additionally, the Chairman of the Audit Committee is paid $5,000 per month, rather than $2,500 paid to the other directors. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013. Amounts indicated in the table include the fair market value on the date of grant of warrants to purchase 73,413 shares of Common Stock granted to Mr. Dubois with exercise prices ranging from $9.00 to $19.46; these warrants expire at different dates from March 2015 to September 2015. The values of all shares and warrants listed above were determined using the Black-Scholes option-pricing model as of the date of grant or issuance. The table below summarizes outstanding warrants previously issued for compensation to our knowledgecurrent non-employee directors as of September 30, 2013: | | Grant | Expiration | | Exercise | | | Number of | | | Compensation | | | Name | Date | Date | | Price | | | Options | | | Expense | | | | | | | | | | | | | | | | Winfried Kunz | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | George F. Schmitt | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 1,140 | | | $ | 8,848 | | | | | | | | | | | | | | | | | | | Rene Klinkhammer | 1/20/10 | 1/19/15 | | $ | 26.00 | | | | 1,000 | | | $ | 21,036 | | | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | | | | | | | | | | | | | | | | | David S. Boone | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | | | 10/1/13 | 9/30/15 | | $ | 19.46 | | | | 2,280 | | | $ | 17,698 | | | | | | | | | | | | | | | | | | | Dan L. Mabey | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | | | | | | | | | | | | | | | | | Guy Dubois | 3/22/13 | 3/21/15 | | $ | 12.58 | | | | 2,385 | | | $ | 11,682 | | | 4/16/13 | 4/15/15 | | $ | 9.00 | | | | 64,665 | | | $ | 300,000 | | | 7/1/13 | 6/30/15 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | |
Reimbursement of Expenses We reimburse travel expenses of members of the Board of Directors for their attendance at Board meetings and other necessary business travel. Compensation Risks Assessment As required by rules adopted by the SEC, management has made an assessment of our compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, we have determined that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. EXECUTIVE COMPENSATION Summary Compensation Set out in the following summary compensation table are the particulars of compensation paid to the following persons for our fiscal years ended September 30, 2013 and 2012: | (a) | our principal executive officer (note, we currently have no principal executive officer, rather the executive committee of the Board of Directors acts as our principal executive officer and compensation paid to members of this committee is included in the Director Compensation table above); and | | | | (b) | our most highly compensated executive officer who was serving as an executive officer at the end of the fiscal year ended September 30, 2013 who had total compensation exceeding $100,000 (with the principal executive officer, the Named Executive Officers); and | | | | (c) | an additional individual for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer at the end of the most recently completed financial year. |
| Name and | | | | | | | | | | | | | | | | | | | | | Principal | | | | | | | | | Stock | | | Option | | | All Other | | | | | | Position | Year | | Salary | | | Bonus | | | Awards | | | Awards | | | Compensation | | | Total | | | ( a ) | ( b ) | | ( c ) | | | ( d ) | | | ( e ) | | | ( f ) | | | ( g ) | | | ( h ) | | Chad D. Olsen (1) | 2013 | | $ | 192,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,740 | | | $ | 200,740 | | | Chief Financial Officer | 2012 | | $ | 192,000 | | | $ | 35,000 | | | $ | 124,000 | | | $ | 432,352 | | | $ | 42,195 | | | $ | 825,547 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel (2) | 2013 | | $ | 168,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,061 | | | $ | 176,061 | | | Managing Director Global Customer Service | 2012 | | $ | 168,000 | | | $ | 35,000 | | | $ | 77,500 | | | $ | 270,219 | | | $ | 7,950 | | | $ | 558,669 | | | (1) | Mr. Olsen served as our Chief Financial Officer from January 2010 to April 2014. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller. Column (g) includes additional compensation for paid time off, health, dental, life and vision insurance. | | (2) | Mrs. Suckel has served as Managing Director of Global Customer Service and Account Management of the Company since June 2008. Column (g) includes additional compensation for health, dental, life and vision insurance. |
Outstanding Equity Awards The table below summarizes outstanding equity awards held by our Named Executive Officers and Mrs. Suckel as of September 30, 2013: | Outstanding Equity Awards at Fiscal Year-End 2013 |
| Name | | Number of securities underlying unexercised options (#) exercisable | | | Number of securities underlying unexercised options (#) unexercisable | | | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad D. Olsen | | | 1,000 | | | | - | | | | - | | | $ | 15.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 125 | | | | - | | | | - | | | $ | 15.00 | | 3/14/14 | | | - | | | | - | | | | - | | | | | | 3,590 | | | | - | | | | - | | | $ | 15.00 | | 9/29/15 | | | - | | | | - | | | | - | | | | | | 30,000 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel | | | 1,000 | | | | - | | | | - | | | $ | 60.00 | | 1/15/14 | | | - | | | | - | | | | - | | | | | | 18,750 | | | | - | | | | - | | | $ | 16.66 | | 9/29/14 | | | - | | | | - | | | | - | | | | | | 3,500 | | | | - | | | | - | | | $ | 30.00 | | 9/29/15 | | | - | | | | - | | | | - | |
No options held by the Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2013. We have adopted our 2012 Plan and our 2006 Plan. We have also granted individual plans to certain executives and directors in the form of stock purchase warrants, which are included in the table above. Employment Agreements On November 14, 2013, we entered into an Employment Agreement with our former Chief Financial Officer, Chad Olsen. The term of this agreement ended 30 days following the closing of an acquisition by the Company and Mr. Olsen resigned at that time. Mr. Olsen will receive separation benefits, which include payment of salary of $192,000 over a 120-day period and other benefits as outlined in the agreement. Retirement or Similar Benefit Plans There are no arrangements or plans in which we provide retirement or similar benefits for our directors or executive officers. Compensation Risks Assessment As required by rules adopted by the SEC, our management has made an assessment of our compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, management has determined that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners We have two classes of voting securities issued and outstanding: our Common Stock and our Series D Preferred. The following table presents information regarding beneficial ownership as of April 28, 2014 (the “Table Date”), of all classes of our voting securities by (1) each Selling Stockholdershareholder known to us to be the beneficial owner of more than 5% of any class of our voting securities; (2) each of our Named Executive Officers serving as of the Table Date; (3) each of our directors serving as of the Table Date; and (4) all of our executive officers and directors as a group. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table hasbelow have sole voting and investmentdispositive power with respect to all securities they beneficially own. As of the Table Date, the applicable percentage ownership is based on 10,069,876 shares of Common Stock issued and outstanding. In computing the number of shares of Common Stock beneficially owned by it. As used in this prospectus,a person and the term “Selling Stockholders” has the meaning set forth in the “PLAN OF DISTRIBUTION” sectionapplicable percentage ownership of this prospectus beginning on page 46. The information is based on information providedthat person, we deemed outstanding shares of Common Stock subject to warrants, options and convertible debt or other securities held by that person that are currently exercisable or on behalfexercisable within 60 days of the Selling Sto ckholders.Table Date. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. We do not know when or in what amounts any Selling Stockholder may offer Resale Shares for sale. Because (i) the Selling Stockholders may offer all or someBeneficial ownership representing less than 1% of the Resale Sharesissued and outstanding shares of a class is denoted with an asterisk (“*”). Holders of Common Stock are entitled to one vote per share.
| | | Title or Class of Securities: | | | Name and Address of | | Common Stock | | | Beneficial Owner (1) | | Shares | | | Percent | | | | | | | | | | | 5% Beneficial Owners: | | | | | | | | Sapinda Asia Limited (2) | | | 4,534,168 | | | | 45.0 | % | | Safety Invest S.A., Compartment Secure I (3) | | | 1,890,697 | | | | 18.8 | % | | Eli Sabag (4) | | | 84,078 | | | | * | | | | | | | | | | | | | Directors and Named Executive Officers: | | | | | | | | | | David S. Boone (5) | | | 18,055 | | | | * | | | Guy Dubois (6) | | | 78,189 | | | | * | | | Rene Klinkhammer (7) | | | 13,293 | | | | * | | | Winfried Kunz (8) | | | 13,700 | | | | * | | | Dan L. Mabey (9) | | | 10,799 | | | | * | | | George F. Schmitt (10) | | | 12,919 | | | | * | | | John Merrill (11) | | | - | | | | * | | | | | | | | | | | | All directors and executive officers as a group (7 persons) | | | 146,955 | | | | 1.4 | % |
____________ | (1) | Except as otherwise indicated, the business address for these beneficial owners is c/o the Company, 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. |
| (2) | Address is Rooms 803-4, 8F, Hang Seng Bank Building, 200 Hennessy Road, Wanchai, Hong Kong. Based on a Form 4 filed by Sapinda Asia Limited on November 5, 2013. |
| (3) | Secure I is a compartment of Safety Invest S.A. (“Safety”), a company established under the Luxembourg Securitization Law and incorporated as a “société anonyme” under the laws of the Grand Duchy of Luxembourg whose principal business is to enter into one or more securitization transactions. A compartment under Luxembourg law represents a distinct part of the assets and liabilities of a company but is itself not a legal entity. Compartmentalization allows for the segregation of assets and liabilities between compartments where the rights of recourse of investors and creditors are limited to the assets of the relevant compartment. Secure I’s principal business address is 19 rue de Bitbourg, L-1273 Luxembourg. The owner of Safety is the SECULUX Trust, an Irish charitable trust for which Constitutional Trustees Limited (“Constitutional”) acts as trustee. The total share capital of Safety is held by Constitutional for the SECULUX Trust. The SECULUX Trust is a charitable trust with no named beneficiaries where any dividend or other distribution received by Constitutional will be distributed in its entirety to charity. Constitutional is a company limited by shares incorporated under the laws of Ireland whose principal business is the provision of share trustee and related services. Constitutional’s principal business address is 22, Clanwilliam Square, Dublin 2, Ireland. Constitutional is owned by Mr. Rory Williams and Ms. Wendy Merrigan, each of whom is a director and 50% shareholder of Constitutional. Information based on Schedule 13D filed February 5, 2014. | | | | (4) | Eli Sabag is the Selling Shareholder under this prospectus. Includes 84,078 shares of Common Stock owned of record. The 152,291 shares held in escrow which are deliverable to Mr. Sabag on or about October 1, 2014 (six months following the closing of the Transaction) are not included in the table above. Mr. Sabag’s address is Hamaapilim 14, Kfar Saba, Israel. | | | | (5) | Mr. Boone is a director and a member of the Board of Directors’ executive committee. Includes 405 shares of Common Stock owned of record and 17,650 shares of Common Stock issuable upon exercise of stock purchase warrants. |
| (6) | Mr. Dubois is a director and Chairman of the Board of Directors; he is also a member of the executive committee of the Board of Directors. Includes 78,189 shares of Common Stock issuable upon exercise of stock purchase warrants. |
| (7) | Mr. Klinkhammer is a director. Includes 1,310 shares of Common Stock owned of record and 11,983 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | | (8) | Mr. Kunz is a director. Includes 405 shares of Common Stock owned of record and 13,295 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | | (9) | Mr. Mabey is a director. Includes 1,856 shares of Common Stock owned of record and 8,943 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | | (10) | Mr. Schmitt is a director. Includes 796 shares of Common Stock owned of record and 12,123 shares of Common Stock issuable upon exercise of stock purchase warrants. |
| (11) | Mr. Merrill is our Chief Financial Officer beginning on April 24, 2014. |
Changes in Control We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our Company. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Transactions We have entered into certain transactions with related parties during the fiscal year ended September 30, 2013. These transactions consisted mainly of financing transactions and service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors. Royalty Agreement On August 4, 2011, with an effective date of July 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to purchase its wholly-owned subsidiary ISS for 310,000 shares of our Common Stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. As additional consideration, we also granted Borinquen a royalty in the amount of 20% of our net revenues from the sale or lease of monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, payable quarterly for a term of 20 years. On February 1, 2013, we entered into an agreement with Sapinda Asia and Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the repurchase and termination of the royalty obligation (at a cost of $11,616,984) and to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance these expenditures, we borrowed $16,700,000 from Sapinda Asia (the “Loan”). In addition to the payments to Borinquen totaling $13,000,000, we used $3,700,000 of the Loan for operating capital. During the fiscal year ended September 30, 2013, we recorded a debt discount of $14,290,269 as interest expense to account for a beneficial conversion feature in connection with the Loan. Additionally, we recorded $611,308 of interest expense during the fiscal year ended 2013 relating to accretion of a debt discount associated with the Loan. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in connection with the Loan totaling $17,576,627 into 3,905,917 shares of Common Stock at a rate of $4.50 per share pursuant to a right of conversion granted as part of the Loan agreement. Revolving Loan Agreement On February 1, 2013, we entered into a revolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this offering, (ii) therearrangement, we had the right to borrow up to $1,200,000; interest was payable at a rate of 3% per annum for unused funds and 10% per annum for borrowed funds. On October 24, 2013, we drew down the full $1,200,000 for use in a performance bond as required under a contract with an international customer. Related-Party Service Agreement During the quarter ended September 30, 2013, we entered into an agreement with Paranet Solutions, LLC to provide the following services for a monthly fee of $4,500: (1) procurement of hardware and software necessary to ensure that vital databases are currently no agreements, arrangements or understandings with respectavailable to us in the event of a disaster (backup and disaster recovery system); and (2) the security of all data and the integrity of such data against all loss of data, including misappropriation of data by Paranet, its employees and affiliates. We subsequently amended the agreement to expand the services offered to the saleCompany and it subsidiaries. The additional services are at a monthly rate of $2,700.00 David S. Boone, a director and member of our Executive Committee, is the Chief Executive Officer of Paranet. The arrangement can be terminated by either party for any reason upon 90 days written notice to the other party. Related-Party Loan During fiscal year 2012, we borrowed $500,000 from David Derrick, who was then an executive officer and director of the Resale Shares,Company. During the fiscal year ended September 30, 2013, we established terms for this loan which created a debt discount of $500,000 which was immediately recorded as interest expense to account for a beneficial conversion feature and (iii) the Selling Stockholder may acquire additional shares from us orreflected an adjustment in the open marketconversion rate from $11.00 to $4.50 to equal the conversion rate of the Loan described above. During fiscal year 2013, this debt was converted into 111,112 shares of Common Stock. Related-Party Convertible Debenture #1 During fiscal year 2012, we borrowed $500,000 from George F. Schmitt, a director of the Company, with an interest rate of 8% per annum. The debenture was to mature on December 17, 2012 and was secured by our domestic patents. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion feature expense of $110,556 which was to be amortized over the term of the debenture, but which was accelerated upon the conversion of the debenture into 117,784 shares of Common Stock on March 13, 2013. Related-Party Convertible Debenture #2 During fiscal year 2012, we borrowed $2,000,000 from Sapinda Asia with an interest rate of 8% per annum. The debenture was to mature on December 17, 2012 and was secured by our domestic patents. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion feature of $442,222 which was to be amortized over the term of the debenture, but which was accelerated upon the conversion of the debenture into 472,548 shares of Common Stock on February 4, 2013. Facility Agreement On January 3, 2014, we entered into a loan agreement (“Facility Agreement”) with Tetra-House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Republic of Singapore and is controlled by Mr. Guy Dubois who is chairman of our Board of Directors. Under this agreement, we may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8% per annum payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due and payable on January 3, 2016. We may prepay borrowed amounts without penalty in minimum amounts of $1,000,000. In consideration of the Facility Agreement, we paid Tetra House an arrangement fee in the future, no definitive estimate asamount of $750,000 (3% of the aggregate maximum amount available under the Facility Agreement). We may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House, who then has 10 business days in which to fund the numberUtilization Request. Since January 3, 2014, we have borrowed $10,000,000 under the Facility Agreement. Tetra House has transferred and assigned its obligations and rights under the Facility Agreement to Conrent Invest S.A through its compartment “Safety II”. The Facility Agreement was reviewed and approved by disinterested and independent members of shares that will be held by each Selling Stockholder after the offering can be provided. Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. Additional Related Party Transactions and Summary of All Related-Party Obligations The column captioned “Shares Beneficially Owned After this Offering” infollowing table summarizes all related-party obligations, including those described above: | | | 2013 | | | 2012 | | | | | | | | | | | | | Note payable to a shareholder in connection with the redemption of a royalty obligation for $10,768,555. The note was paid in full. | | $ | - | | | $ | 10,050,027 | | | | | | | | | | | | | Note payable in connection with the divestiture of Court Programs, Inc., interest at 12% per annum, with monthly payments of $10,000. This note was assumed through the sale of Court Programs, Inc. | | | - | | | | 46,693 | | | | | | | | | | | | | We received $500,000 from a shareholder and former officer. This was satisfied upon conversion of the amounts owed into 111,112 shares of Common Stock. | | | - | | | | 500,000 | | | | | | Convertible debenture payable to a director at 8% interest per annum. The debenture matured December 17, 2012 and was secured by our domestic patents. The debenture and accrued interest was satisfied upon conversion into 117,784 shares of Common Stock. | | | - | | | | 500,000 | | | | | | | | | | | | | Convertible debenture payable to a significant shareholder with an interest rate of 8% per annum. The debenture matured December 17, 2012 and was secured by our domestic patents. The debenture and accrued interest was converted into 472,548 shares of Common Stock. | | | - | | | | 2,000,000 | | | | | | | | | | | | | Convertible debenture of $16,700,000 payable to a shareholder at 8% interest per annum. The debenture matured on August 14, 2014. On September 30, 2013, $16,640,000 plus accrued interest of $936,627 was converted into 3,905,917 shares of Common Stock. The remaining balance of $60,000 plus accrued interest of $3,143 was paid in cash on October 3, 2013. | | | 60,000 | | | | 1,288,693 | | | | | | | | | | | | | Total related-party debt obligations | | $ | 60,000 | | | | 14,385,413 | | | Less current portion | | | (60,000 | ) | | | (12,654,701 | ) | | Long-term debt, net of current portion | | $ | - | | | $ | 1,730,712 | |
Recent Transactions We evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2013, 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 Sel ling Stockholders.events occurred: The Selling 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 Owners and Management” on page 27. To our knowledge, based on information provided to us by the Selling Stockholders, none of the Selling Stockholders is a broker-dealer or an affiliate of a broker-dealer.
| | | 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 | * | | ______________ | | | | | | | | |
*· | Represents beneficial ownership of less than one percent of outstandingWe granted warrants to purchase 6,840 shares of Common Stock with an exercise price of $19.46 per share, valued at the classdate of voting securities. Asgrant at $53,091 using the Black-Scholes model, for services of our directors during the quarter ended September 30, 2013. | | | | · | We issued 483 shares of Common Stock as payment of Series D Preferred stock dividends for the quarter ended September 30, 2013, valued at $5,650 as of the date of issuance. | | | | · | We issued a total of 760 shares of Common Stock to directors for services rendered, valued at $15,000 as of the date of issuance. | | | | · | We issued 500 shares of Common Stock for cash proceeds of $8,000 ($16.00 per share) upon the exercise of warrants by a consultant. | | | | · | We issued 4,700 shares of Common Stock upon the cashless exercise of warrants by an executive officer at exercise prices ranging from $15.00 to $16.66 per share. | | | | · | On November 22, 2010, there15, 2013, we entered into a 41-month agreement with the Gendarmeria de Chile (the Republic of Chile’s uniformed prison service) to provide electronic (GPS and residential) monitoring of offenders and other services to the Chilean government. The agreement anticipates that we will put into service up to 9,400 electronic monitoring (GPS) devices over the contract term. We were 34,124required to post a performance bond in the amount of $3,382,082. In addition, we agreed to design and construct a real-time monitoring and data center to be staffed by Chilean government employees and to train the monitoring center personnel. The maximum sum to be paid for the services provided by us under the agreement is approximately $70,000,000, at current exchange rates. While devices are not yet being monitored, we have completed construction of the real-time monitoring center in Santiago and training of government personnel, and we continue working with the Chilean government on implementation of the project. | | | | · | We borrowed $1,200,000 from a shareholder to be used with other available cash on hand to post the performance bond under our agreement with the Gendarmeria de Chile described above. | | | | · | We borrowed $1,500,000 from a shareholder for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014. | | | | · | On January 3, 2014, we entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by our Chairman, Guy Dubois. Under this agreement, we may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on January 3, 2016. In addition, we agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the loan. After the loan was executed, Tetra House assigned the Facility Agreement to Conrent Invest S.A. Since January 3, 2014, we borrowed $10,000,000 under the Facility Agreement. | | | | · | On January 16, 2014, we sent notices of redemption to holders of 261 shares of Series D Preferred Stock issued and outstanding. |
| (1) | Beneficial ownership is determined in accordance with the rulesstock of the SECCompany. Pursuant to Section 10(c) of the Designation of Rights and generally includes voting or investment power with respectPreferences we have the right to securities. Sharesredeem Series D Preferred shares for cash at 120 percent of Common Stock issuable upon conversionthe original issue price at any time after December 1, 2010. The date of redemption was February 13, 2014, subject to the right of the Series D shareholders to convert their shares of Series D Preferred stock into common stock by giving notice of conversion prior to the date of redemption. On February 16, we redeemed 261 shares of Series D Preferred stock . |
Director Independence The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15). The Board determined based on the NASDAQ standards that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer, and Dan L. Mabey meet the NASDAQ standards to be considered independent. The Board has not appointed a lead independent director. Specifically, none of these directors: | · | has been at any time during the past three years employed by us or subjectby any parent or subsidiary of the Company; | | | | · | has accepted or has a family member who accepted any compensation from us in excess of $120,000 during any period of 12 consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service; | | | | · | is a family member of an individual who is, or at any time during the past three years was, employed by us as an executive officer; | | | | · | is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to optionswhich we made, or warrantsfrom which we received, payments for property or services in the current or any of the past three fiscal years that are currently convertible/exercisableexceed the greater of 5% of the recipient’s consolidated gross revenues for that year or convertible/exercisable$200,000; | | | | · | is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of our executive officers serve on the compensation committee of such other entity; or | | | | · | is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years. |
THE TRANSACTION On March 12, 2014, we entered into the Purchase Agreement to acquire all of the issued and outstanding shares of GPS Global from the Selling Shareholder for a purchase price of $7,811,404 payable in cash and shares of our Common Stock. The Transaction closed on April 1, 2014. The cash portion of the purchase price was paid by offsetting amounts owed to us totaling $311,404, that were loaned to the Selling Shareholder and to GPS Global on or about March 14, 2014, under a Loan Agreement and Loan and Funding Agreement, respectively. Under the Loan and Funding Agreement, we also agreed to provide to GPS Global up to $3,000,000 to fund corporate operations. The initial advances under the Loan and Funding Agreement totaled NIS 2,000,000 (approximately $577,000), and liabilities to be paid were approximately NIS 1,687,000 (approximately $500,000). An additional advance was made in the amount of approximately $188,600 for payment of certain liabilities owed to LineBit Systems Ltd. and Eytanim Building and Infrastructure Ltd., entities owned or controlled by the Selling Shareholder: The Common Stock issuable as part of the purchase price in the Transaction is valued at $7,500,000 and is payable to Selling Shareholder as follows: | · | $1,600,000 (84,078 shares of Common Stock) delivered to the Selling Shareholder at the closing of the Transaction; | | | | · | $2,900,000 (152,291 shares of Common Stock) delivered to Escrow Agent to be held and released to Selling Shareholder under the terms of the Escrow Agreement at the end of six months following the date of closing (the “Escrow Period”); and | | | | · | $3,000,000, or approximately 157,646 shares of Common Stock (the “Contingent Shares”) to be issued to the Selling Shareholder, if at all, upon the achievement of certain milestones as follows: | | | | o | $1,000,000 (valued at the time of issuance) within 6030 days of the date GPS Global sells or leases a minimum of 1,500 units of its offender GPS tracking device under revenue-generating contracts as defined in the table, are deemed to be beneficially owned by the person holding those securities or rights. Beneficial ownership after the offering assumes that all Resale Shares offered under this prospectus will be sold to parties unaffiliated with the 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. Each share of Series D Preferred is convertible into 6,000 shares of Common Stock.Purchase Agreement; and | | | | | | | (2)o | Assumes$2,000,000 (valued at the conversion and saletime of allissuance) within 30 days of the Registered Shares. |
| (3) | 19,980,000 shares issuable upon conversiondate GPS Global sells or leases a minimum of 3,330 shares2,500 units of Series D Preferred and 1,060,304 shares of Common Stock previously issued as Series D Preferred stock dividends. |
| (4) | 13,320,000 shares issuable upon conversion of 2,220 shares of Series D Preferred 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. The Resale Shares are issuable to the Selling Stockholders upon conversion of the shares of Series D Preferred held by them. As used in this prospectus, the term “Selling Stockholders” includes donees, pledgees, transferees or other successors-in-interest selling shares received from a named Selling Stockholder as a gift, distribution, foreclosure on a pledge, or other non-sale related transfer after the date of this prospectus. The Selling 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 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. Inits offender GPS tracking device (in addition the Selling 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 writing1,500 units described above, or a minimum 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.4,000 units) under revenue-generating contracts. |
The Selling Stockholders may distribute the securities from timeWe also agreed 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 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 fromenter into an employment agreement with the Selling Stockholders and/orShareholder to continue his involvement with GPS Global in an executive capacity and we granted Selling Shareholder the purchasersright to appoint his nominee as a member of the securitiesboards of directors of SecureAlert and of GPS Global until the third anniversary of the closing date of the Transaction. We also agreed to file the registration statement of which this prospectus is a part, for whom such persons may actthe purpose of registering the shares issued to Selling Shareholder as agents orpart of the purchase price of the Transaction (excluding the Contingent Shares). The shares covered by this prospectus are referred to whom they sellin this prospectus as principals, or both (which compensation as to a particular broke r-dealer might be in excess of customary 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 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.“Shares.”
The shares may be sold accordingPurchase Agreement also contains customary representations, warranties, covenants and conditions to any one or morethe performance of the methods described above. In addition, subject to compliance with applicable law and Company policy, the Selling Stockholder may enter into option, derivative or hedging transactions with respectparties to the shares, and any related offers or sales of shares may be made under this prospectus. In some circumstances, for example, the Selling 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 deliveryagreement. A copy of the shares. These option, derivativePurchase Agreement, the Loan and hedging transactions may requireFunding Agreement, the delivery to a broker, dealer or other financial institution of shares offered under this prospectus, and that broker, dealer or other finan cial institution may resell those shares under this prospectus. A Selling 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. The Selling 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 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 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 Stockholder to be underwriting discounts or commissions under the Securities Act. Because a Selling Stockholder may be deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, a Selling Stockholder will be subject to the prospectus delivery requirements of the Securities Act and also may be subject to liabilities under the secu 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 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 Stockholder and any person participating in the distribution of the 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 Stockholders that the anti-manipulative provisions of Regulation M promulgated under the Exchange Act may apply to their sale s in the market. These restrictions may affect the marketability of our Common StockLoan Agreement and the ability of any person or entityEscrow Agreement are filed as exhibits 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 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 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 Stockholders against particular liabilities, including liabilities under the Securities Act, incurred in connection with the offering of the Resale Shares. We and the Selling 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,part. The foregoing description of the Transaction and summary of the terms of these agreements are qualified in their entirety by the terms of the agreements.
SELLING SHAREHOLDER This prospectus relates to the possible resale by Eli Sabag as the Selling Shareholder of the Shares, which were issued to the Selling Shareholder pursuant to the Purchase Agreement. The Selling Shareholder, may, from time to time, offer and sell pursuant to this prospectus any or all of the Shares. The Selling Shareholder may sell some, all or none of his Shares. We do not know how long the Selling Shareholder will hold the Shares before selling them, and we currently have no agreements, arrangements or understandings with the Selling Shareholder regarding the resale of any of the Shares. The following table presents information regarding the Selling Shareholder and the Shares that he may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by the Selling Shareholder, and reflects his holdings of our equity securities as of April 1, 2014. The Selling Shareholder has represented to us that neither the Selling Shareholder nor any of his affiliates have held a position or office, or had any other material relationship, with us or any of our predecessors or affiliates. Selling Shareholder is the chief executive officer of our wholly-owned subsidiary, GPS Global, and he has the right to appoint a nominee to our Board of Directors. This position and right of appointment make Selling Shareholder an affiliate of the Company. As used in this prospectus, the term “Selling Shareholder” includes Eli Sabag and any of his donees, pledgees, transferees or other successors in interest selling Shares received after the date of this prospectus from Selling Shareholder as a gift, pledge or other non-sale related transfer. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act. The percentage of shares beneficially owned prior to the offering is based on 9,833,407 shares of our Common Stock will be freely tradable in the handsactually outstanding as of persons other than our affiliates.April 28, 2014. | | Shares Beneficially Owned Before this Offering (1) | | | Percentage of Outstanding Shares Beneficially Owned Before this Offering | | | Shares to be Sold in this Offering (2) | | | Shares Beneficially Owned After this Offering (2) | | | Percentage of Outstanding Shares Beneficially Owned After this Offering | | | | | | | | | | | | | | | | | | | | Eli Sabag | | | 236,469 | | | | * | | | | 236,469 | | | | * | | | | * | |
* Less than 1%.
Footnotes: | (1) | Includes the Shares offered hereby. | | | | (2) | Assumes the sale of all of the Shares offered hereby. |
DESCRIPTION OF SECURITIES Common Stock Authorized and Outstanding We are authorized to issue up to 600,000,00015,000,000 shares of Common Stock, par value $0.0001 per share, of which 294,309,45210,069,876 shares are outstanding as of November 22, 2010.April 28, 2014. 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 stockholdersshareholders will be entitled to receive pro rata all assets remaining available for distribution to stockholdersshareholders 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 Stockholderscommon shareholders 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.outstanding as described below. Series D Preferred During the first quarter of fiscal year 2010, ourOur 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 load of the Company, both obliga 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 issuancehas designated 85,000 shares of Preferred Stock while continuing to expand the market foras 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 Convertible Preferred Stock (the “Series D Preferred”), and establishestablished the designations, rights and preferences for the Series D Preferred. The BoardAs 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 the 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 Direct ors took this actionApril 28, 2014, 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 50,000no outstanding 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 Rights in seeking approv al of the amendment.stock.
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 Board 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 toAs amended, the Certificate as amendedof Designation of Rights and restated,Preferences, or Certificate, provides that the holders of the Series D Preferred are entitled to the following preferences and other rights.rights described below.
Rank. The Series D Preferred ranks senior as to liquidation rights to the Company’s Common Stock, and all as to 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 CompanyBoard of Directors are payable on the Series D Preferred on a pro rata basis with the Common Stock and all of our 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 iswe are prohibited from declaring, paying or setting apart for payment any dividend or making any distribution on Junior Stock (other than dividends or distributions pay ablepayable in shares of the Junior Stock) unless, at the time of such dividend or distribution, the Company shallwe have paid all unpaid dividends on the outstanding shares of Series D Preferred. In addition, holdersHolders of the Series D Preferred are entitled to receive cumulative 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%)8% per annum, payable in cash or shares of Common Stock at the sole discretion of the Company.Board of Directors. 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)(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 votevotes with the Common Stock on an as-converted basis. Each share of Series D Preferred entitles the holder thereof to 6,00030 votes. The Common Stock into which the shares of Series D Preferred areis convertible, shall, upon issuance, havehas all of the same voting rights as other issued and outstanding Common Stock of the Company.Stock. 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 6,00030 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 haswe have the right, exercisable at itsour 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 onthat is equal to 120% of the terms contained inoriginal purchase price of the Certificate.shares redeemed. Any redemption of less than all of the Series D Preferred shallwill 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 purchasers of Series D Preferred in connection with their collective investment of $3,330,000. Pursuant to that agreement, the Company agreed to have a registration statement approved and effective with respect to the common On February 16, 2014, we redeemed 261 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.cash payments totaling $312,008.
In connection with the purchase agreements by which all other cash investors of the Series D Preferred acquired their shares, the Company granted piggyback registration rights to such holders with respect to the shares of Common 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. INDEMNIFICATIONUtah Anti-Takeover Law and Articles and Bylaws Provisions
OurCertain provisions of our Articles of Incorporation provideand Bylaws, and of applicable Utah State corporation law, have the effect of making more difficult an acquisition of control of the Company in a transaction not approved by the Board of Directors. Specifically, Article VIII of the Articles of Incorporation provides that we shall indemnifythe affirmative vote of the holders of not less than two-thirds of the outstanding shares of our officers, directors,voting stock is required for approval of the following types of transactions:
| · | Merger or consolidation with another entity if the other entity or its affiliates are directly or indirectly the beneficial owners of more than 10% of the total voting power of all of the outstanding shares of our voting stock (defined as a “Related Corporation”), or | | | | · | The sale or exchange of all or substantially all of our assets to a Related Corporation, or | | | | · | The issuance or delivery of our stock or other securities in exchange for payment for any properties or assets or the securities of a Related Corporation or the merger of any our affiliates with or into a Related Corporation or any of its affiliates. |
Any amendment of Article VIII requires the affirmative vote of the holders of not less than two-thirds of the outstanding shares of our voting stock. PLAN OF DISTRIBUTION We are registering the Shares issued to the Selling Shareholder to permit the resale of these Shares by the Selling Shareholder from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale of the Shares. We will pay all fees and expenses incident to our obligation to register the Shares. The Shares offered by this prospectus are being offered by the Selling Shareholder. The Shares may be sold or distributed from time to time by the Selling Shareholder directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents incorporatorsat market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which may be changed. The sale of the Shares offered by this prospectus could be effected in one or more of the following methods: | · | ordinary brokers’ transactions; | | | | · | transactions involving cross or block trades; | | | | · | through brokers, dealers, or underwriters who may act solely as agents; | | | | · | “at the market” into an existing market for the Common Stock; | | | | · | in other ways not involving market makers or established business markets, including direct sales to purchasers or sales effected through agents; | | | | · | in privately negotiated transactions; or | | | | · | any combination of the foregoing. |
In order to comply with the securities laws of certain states, if applicable, the Shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the Shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the state’s registration or qualification requirement is available and complied with. The Selling Shareholder and any broker-dealer participating in the distribution of the Shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the Shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of Shares being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other personsterms constituting compensation from the Selling Shareholder and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers. The Selling Shareholder may indemnify any broker-dealer that participates in transactions involving the sale of the Shares against certain liabilities, incurred by them that result from their acts that are performed in furtheranceincluding liabilities arising under the Securities Act. We know of our businessno existing arrangements between the Selling Shareholder or any other shareholder, broker, dealer, underwriter or agent relating to the full extent permitted by the lawssale or distribution of the State of Utah. Our bylaws provide that,Shares offered by this prospectus. We will pay the expenses incident to the full extent permitted by law, we shall indemnifyregistration, offering, and sale of the Shares to the Selling Shareholder; provided, however, that the Selling Shareholder is solely responsible for the payment of any directorfee or officer or former director or officer of our company, orcommission payable to 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,broker-dealer in connection with the defensesale of the Shares. Brokers, dealers, underwriters or agents participating in the distribution of the Shares as agents may receive compensation in the form of commissions, discounts, or concessions from the Selling Shareholder and/or purchasers of the Shares for whom the broker-dealers may act as agent. The compensation paid to a particular broker-dealer may be less than or in excess of customary commissions. Neither we nor the Selling Shareholder can presently estimate the amount of compensation that any agent will receive. The Selling Shareholder and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any action, suitof the Shares by the Selling Shareholder and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the Shares to engage in market-making activities with respect to the Shares. All of the foregoing may affect the marketability of the Shares and the ability of any person or proceeding, civilentity to engage in market-making activities with respect to the Shares. This offering will terminate on the date that all Shares offered by this prospectus have been sold by the Selling Shareholder or criminal,may be sold by the Selling Shareholder without restriction under Rule 144(b)(1)(i) under the Securities Act. Our Common Stock is quoted on the OTCQB under the symbol “SCRA”. LEGAL MATTERS The validity of the securities being offered by this prospectus has been passed upon for us by Durham Jones & Pinegar, P.C., Salt Lake City, Utah. EXPERTS Eide Bailly, LLP, our independent registered public accounting firm, has audited our balance sheet as of September 30, 2013 and the related statement of operations, changes in capital, deficit and cash flows for the year then ended. We have included our financial statements in this prospectus and elsewhere in the registration statement of which it is a part in reliance on Eide Bailly LLP’s report, given on their authority as experts in accounting and auditing. Hansen Barnett & Maxwell, P.C., an independent registered public accounting firm, has audited our balance sheet as of September 30, 2012 and the related statement of operations, changes in capital, deficit and cash flows for the year then ended. We have included our financial statements in this prospectus and elsewhere in the registration statement of which it is a part in reliance on Hansen Barnett & Maxwell, P.C.’s report, given on their authority as experts in accounting and auditing. On September 23, 2013, Hansen, Barnett & Maxwell, P.C. (“HBM”) resigned as our independent registered public accounting firm. Prior to that resignation, HBM entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which Eide Bailly acquired the operations of HBM, and certain of the professional staff and partners of HBM joined Eide Bailly either as employees or partners of Eide Bailly and continue to practice as members of Eide Bailly. Concurrent with the resignation of HBM, the Company, through and with the approval of our Audit Committee, engaged Eide Bailly as our independent registered public accounting firm. Prior to engaging Eide Bailly, we did not consult with Eide Bailly regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Eide Bailly on our financial statements, and Eide Bailly did not provide any written or oral advice that was an important factor considered by us in reaching a decision as to any such accounting, auditing or financial reporting issue. The reports of HBM regarding our financial statements for the fiscal year ended September 30, 2012 contained a going concern note. Other than such note, the reports of HBM did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended September 30, 2012, and during the period from September 30, 2012 through September 23, 2013, the date of resignation, there were no disagreements with HBM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of HBM would have caused it to make reference to such disagreement in its reports. We previously filed a Current Report on Form 8-K with the SEC to report this change. We also filed as an exhibit to the Current Report a copy of HBM’s letter dated September 24, 2013 in which he or she is made a party by reason of being or having been such director or officer, except in relation to matters as toHBM stated its agreement with the above statements 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 andwere also contained in the Utah Revised Business CorporationsCurrent Report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION We filed with the SEC a registration statement under the Securities Act subject to certain limitationsfor the Shares in this offering. This prospectus does not contain all of the information in the Utah Revised Business Corporation Act, we may be permitted or compelled to provide indemnificationregistration statement and advancement of expenses to our directors, officers, agents,the exhibits and employees when they are made parties to an investigation or legal action in connectionschedules that were filed with services performed at our request, including when such persons are alleged to have violated the Securities Act. Insurance purchasedregistration statement. For further information with respect to such persons may also cover expensesus and our Common Stock, we refer you to the registration statement and the exhibits and schedules that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other liabilities associated withdocument filed as an allegation of violationsexhibit to the registration statement. A copy of the Securities Act.registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the SEC at 100 F Street, N.E. Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov. We file periodic reports under the Exchange Act, including annual, quarterly and special reports, and other information with the SEC. These periodic reports and other information are available for inspection and copying at the regional offices, public reference facilities and website of the SEC referred to above. We make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers andor persons controlling persons ofthe registrant pursuant to the foregoing provisions, or otherwise, we havethe registrant has been advisedinformed 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 settled by controlling precedent, submi 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 CONSEQUENCESThe 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.SecureAlert, Inc.
Consolidated Financial Statements September 30, 2013 and 2012 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 purposesIndex 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 StockConsolidated Financial Statements.”
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 deductibility 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. holder’s U.S. Federal inco 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 FirmEide Bailly | F-245 | | | | | | Report of Hansen, Barnett & Maxwell, P.C. | 46 | | | | | Consolidated Balance Sheets as of September 30, 20092013 and 20082012 | F-347 | | | | | | Consolidated Statements of Operations for the fiscal years ended September 30, 20092013 and 20082012 | F-548 | | | | | | Consolidated Statements of Stockholders’ Equity (Deficit) for the fiscal years ended September 30, 20082012 and 20092013 | F-649 | | | | | | Consolidated Statements of Cash Flows for the fiscal years ended September 30, 20092013 and 20082012 | F-1251 | | | | | | Notes to Consolidated Financial Statements | F-1553 |
H ANSEN, 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
www.hbmcpas.com
| |  |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersShareholders of SecureAlert, Inc.,
(Formerly known as RemoteMDx, Inc.)
We have audited the accompanying consolidated balance sheetssheet of SecureAlert, Inc., formerly known as RemoteMDx, Inc., and subsidiariesSubsidiaries (collectively the Company) as of September 30, 2009 and 2008,2013 and the related consolidated statementsstatement of operations, stockholders’ equity, (deficit), and cash flows for each of the years in the two-year period ended September 30, 2009.year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2013 and the consolidated results of its operations, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Eide Bailly LLP
Salt Lake City, Utah January 14, 2014 5 Triad Center, Ste. 750 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of SecureAlert, Inc. We have audited the accompanying consolidated balance sheets of SecureAlert, Inc. and Subsidiaries (collectively the Company) as of September 30, 2012 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidenceevidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsaudit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2009 and 2008,2012, and the consolidated results of its operations, and its cash flows for each of the years in the two-year periodyear then 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 (not presented herein), the Company has incurred losses, negative cash flows from operating activities, notes payable in default and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1.1 (not presented herein). The consolidated financial statements do not include any adjustmentsadjustment that might result from the outcome of this uncertainty.
| HANSEN, BARNETT & MAXWELL, P.C. |
HANSEN, BARNETT & MAXWELL, P.C.Salt Lake City, Utah January 12, 201010, 2013
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 20092013 AND 20082012 | Assets | | 2013 | | | 2012 | | | Current assets: | | | | | | | | Cash | | $ | 3,382,428 | | | $ | 458,029 | | | Accounts receivable, net of allowance for doubtful accounts of $3,968,000 and $772,000, respectively | | | 3,721,964 | | | | 2,411,701 | | | Note receivable, current portion | | | 176,205 | | | | 74,801 | | | Prepaid expenses and other | | | 1,783,805 | | | | 1,760,579 | | | Inventory, net of reserves of $148,043 and $192,000, respectively | | | 467,101 | | | | 630,566 | | | Current assets from discontinued operations | | | - | | | | 989,905 | | | Total current assets | | | 9,531,503 | | | | 6,325,581 | | | Property and equipment, net of accumulated depreciation of $2,092,222 and $1,879,540, respectively | | | 318,201 | | | | 504,491 | | | Monitoring equipment, net of accumulated amortization of $1,183,346 and $669,929, respectively | | | 1,236,696 | | | | 3,171,947 | | | Note receivable, net of current portion | | | 28,499 | | | | 112,492 | | | Intangible assets, net of accumulated amortization of $1,256,647 and $327,540, respectively | | | 15,413,920 | | | | 15,494,598 | | | Other assets | | | 170,172 | | | | 65,597 | | Non-current assets from discontinued operations, net of accumulated depreciation of $0 and $2,837,498, respectively | | | - | | | | 859,019 | | | Total assets | | $ | 26,698,991 | | | $ | 26,533,725 | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable | | | 348,074 | | | | 1,830,075 | | | Accrued liabilities | | | 2,180,791 | | | | 2,439,451 | | | Dividends payable | | | 9,427 | | | | 630,528 | | | Deferred revenue | | | 8,674 | | | | 354,570 | | | Current portion of long-term related-party debt | | | 60,000 | | | | 12,654,701 | | | Current portion of long-term debt | | | 88,095 | | | | 339,151 | | | Current liabilities from discontinued operations | | | - | | | | 1,677,450 | | | Total current liabilities | | | 2,695,061 | | | | 19,925,926 | | | Long-term related-party debt, net of current portion | | | - | | | | 1,730,712 | | | Long-term debt, net of current portion | | | 40,588 | | | | 85,680 | | | Long-term liabilities from discontinued operations | | | - | | | | 364,270 | | | Total liabilities | | | 2,735,649 | | | | 22,106,588 | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 468 and 48,763 shares outstanding, respectively (aggregate liquidation preference of $467,507) | | | 1 | | | | 5 | | Common stock, $0.0001 par value: 15,000,000 shares authorized; 9,805,503 and 3,096,641 shares outstanding, respectively | | | 980 | | | | 310 | | | Additional paid-in capital | | | 290,391,698 | | | | 252,940,448 | | | Accumulated deficit | | | (266,429,337 | ) | | | (248,513,626 | ) | | Total equity | | | 23,963,342 | | | | 4,427,137 | | | Total liabilities and stockholders’ equity | | $ | 26,698,991 | | | $ | 26,533,725 | |
See accompanying notes to consolidated financial statements.
| | | | | | | | | | | 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 | |
The accompanying notes are 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 | |
The accompanying notes are 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, 20092013 AND 2008 | | 2009 | | | 2008 | | | Revenues: | | | | | | | Products | $ | 570,749 | | | $ | 2,577,600 | | | Monitoring services | | 12,055,159 | | | | 9,826,077 | | | Total revenues | | 12,625,908 | | | | 12,403,677 | | | Cost of revenues: | | | | | | | | | Products | | 275,688 | | | | 1,675,212 | | | Monitoring services | | 9,862,925 | | | | 10,862,830 | | | Impairment of monitoring equipment and parts (Note 3) | | 2,319,530 | | | | 570,948 | | | Total cost of revenues | | 12,458,143 | | | | 13,108,990 | | | Gross (negative) margin | | 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 | | | Research and development (including $0 and $1,045,285, respectively, paid in stock or stock options / warrants) | | 1,777,873 | | | | 4,811,128 | | | Impairment of goodwill (Note 4) | | 2,804,580 | | | | - | | | Loss from operations | | (20,955,333 | ) | | | (41,983,119 | ) | | Other income (expense): | | | | | | | | | Gain on sale of intellectual property | | - | | | | 2,400,000 | | | Redemption of SecureAlert Monitoring Series A Preferred | | 95,816 | | | | (8,372,566 | ) | | Interest income | | 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 | ) | | Derivative valuation gain (Note 11) | | 1,867,007 | | | | - | | | Other income (expense), net | | 905,626 | | | | 314,059 | | | Net loss from continuing operations | | (23,081,500 | ) | | | (49,172,938 | ) | | Discontinued operations | | - | | | | (414,112 | ) | | Net loss | | (23,081,500 | ) | | | (49,587,050 | ) | | Dividends on Series A Preferred stock | | (175 | ) | | | (345,356 | ) | | Net loss attributable to common stockholders | $ | (23,081,675 | ) | | $ | (49,932,406 | ) | | Net loss per common share from continuing operations, basic and diluted | $ | (0.13 | ) | | $ | (0.35 | ) | | Net loss per common share from discontinued operations, basic and diluted | $ | 0.00 | | | $ | (0.01 | ) | | Net loss per common, basic and diluted | $ | (0.13 | ) | | $ | (0.36 | ) | | Weighted average common shares outstanding, basic and diluted | | 182,188,000 | | | | 140,092,000 | |
The| | | 2013 | | | 2012 | | | Revenues: | | | | | | | | Products | | $ | 612,437 | | | $ | 1,595,252 | | | Monitoring and other related services | | | 15,028,625 | | | | 11,519,727 | | | Total revenues | | | 15,641,062 | | | | 13,114,979 | | | | | | | | | | | | | Cost of revenues: | | | | | | | | | | Products | | | 262,022 | | | | 1,353,953 | | | Monitoring and other related services | | | 7,554,870 | | | | 5,951,649 | | | Impairment of monitoring equipment and parts | | | 213,276 | | | | 1,648,762 | | | Total cost of revenues | | | 8,030,168 | | | | 8,954,364 | | | | | | | | | | | | | Gross profit | | | 7,610,894 | | | | 4,160,615 | | | | | | | | | | | | | Operating expenses: | | | | | | | | | Selling, general and administrative (including non-cash expenses of $430,618 and $3,576,194, respectively, of compensation expense paid in stock, stock options and warrants or as a result of amortization of stock-based compensation) | | | 7,679,124 | | | | 12,623,114 | | | Impairment of goodwill | | | - | | | | 5,514,395 | | | Settlement expense | | | 360,000 | | | | 403,678 | | | Research and development | | | 987,934 | | | | 1,248,654 | | | | | | | | | | | | | Loss from continuing operations | | | (1,416,164 | ) | | | (15,629,226 | ) | | | | | | | | | | | | Other income (expense): | | | | | | | | | | Currency exchange rate loss | | | (145,612 | ) | | | (28,358 | ) | | Loss on disposal of equipment | | | (2,949 | ) | | | (5,374 | ) | Interest expense (including non-cash expenses of $15,954,355 and $963,233, respectively, paid in stock, stock options and warrants, or amortization of debt discount) | | | (17,048,519 | ) | | | (1,431,416 | ) | | Other income (expense), net | | | 279,174 | | | | (55,914 | ) | | Net loss from continuing operations | | | (18,334,070 | ) | | | (17,150,288 | ) | | Gain on disposal of discontinued operations | | | 424,819 | | | | - | | | Net loss from discontinued operations | | | (6,460 | ) | | | (307,819 | ) | | Net loss | | | (17,915,711 | ) | | | (17,458,107 | ) | | Dividends on Series D Preferred stock | | | (1,042,897 | ) | | | (2,480,298 | ) | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (18,958,608 | ) | | $ | (19,938,405 | ) | | Net loss per common share, basic and diluted from continuing operations | | $ | (3.79 | ) | | $ | (6.27 | ) | | Net loss per common share, basic and diluted from discontinued operations | | $ | 0.09 | | | $ | (0.11 | ) | | Weighted average common shares outstanding, basic and diluted | | | 4,832,000 | | | | 2,735,170 | |
See accompanying notes are an integral part of theseto consolidated financial statements. SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20082012 AND 20092013 | | | Preferred Stock | | | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | | | | | | | | | | | | | | | Balance as of October 1, 2007 | | | 19 | | | $ | 1 | | | | 12,999 | | | $ | 1 | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | Conversion of Series B Preferred stock | | | - | | | | - | | | | (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 Monitoring Series A Preferred stock | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Subscription receivable | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | SecureAlert Monitoring Series A Preferred stock redemption | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | |
| | | Preferred Stock | | | Common Stock | | | Additional | | | | | | | | | | | Series D | | | | | | | | | | | | Paid-in | | | Accumulated | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2011 | | | 44,845 | | | $ | 5 | | | | 2,518,117 | | | $ | 252 | | | $ | 244,670,570 | | | $ | (231,055,519 | ) | | $ | 13,615,308 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | | | (90 | ) | | | - | | | | 2,700 | | | | - | | | | - | | | | - | | | | - | | | Royalty payment | | | - | | | | - | | | | 71,969 | | | | 7 | | | | 819,965 | | | | - | | | | 819,972 | | | Services | | | - | | | | - | | | | 4,315 | | | | - | | | | 40,000 | | | | - | | | | 40,000 | | | Debt | | | - | | | | - | | | | 8,449 | | | | 1 | | | | 118,279 | | | | - | | | | 118,280 | | | Dividends from Series D Preferred stock | | | - | | | | - | | | | 210,689 | | | | 21 | | | | 2,391,547 | | | | - | | | | 2,391,568 | | | Employee compensation | | | - | | | | - | | | | 121,700 | | | | 12 | | | | 732,622 | | | | - | | | | 732,634 | | | Board of director fees | | | - | | | | - | | | | 3,000 | | | | - | | | | 48,060 | | | | - | | | | 48,060 | | | Cash | | | - | | | | - | | | | 155,703 | | | | 17 | | | | 1,032,983 | | | | - | | | | 1,033,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting and re-pricing of stock options | | | - | | | | - | | | | - | | | | - | | | | 1,405,500 | | | | - | | | | 1,405,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acceleration of vesting and cancellation of stock warrants | | | - | | | | - | | | | - | | | | - | | | | 1,398,060 | | | | - | | | | 1,398,060 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | - | | | | - | | | | - | | | | - | | | | 1,475,000 | | | | - | | | | 1,475,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred dividends | | | - | | | | - | | | | - | | | | - | | | | (2,480,298 | ) | | | - | | | | (2,480,298 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrant to settle a lawsuit | | | - | | | | - | | | | - | | | | - | | | | 253,046 | | | | - | | | | 253,046 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for Board of Director fees | | | - | | | | - | | | | - | | | | - | | | | 105,042 | | | | - | | | | 105,042 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for consulting fees | | | - | | | | - | | | | - | | | | - | | | | 33,357 | | | | - | | | | 33,357 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repricing of common stock warrants in connection with debt and accrued interest | | | - | | | | - | | | | - | | | | - | | | | 39,965 | | | | - | | | | 39,965 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for cash | | | 4,008 | | | | - | | | | - | | | | - | | | | 2,004,000 | | | | - | | | | 2,004,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commission paid in connection with capital raise | | | - | | | | - | | | | - | | | | - | | | | (1,147,250 | ) | | | - | | | | (1,147,250 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,458,107 | ) | | | (17,458,107 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2012 | | | 48,763 | | | $ | 5 | | | | 3,096,641 | | | $ | 310 | | | $ | 252,940,448 | | | $ | (248,513,626 | ) | | $ | 4,427,137 | |
See accompanying notes to consolidated financial statements. The accompanying notes are 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, 20082012 AND 20092013 | | | | | | Additional | | | | | | | | Common Stock | | | Paid-In | | | Deferred | | | | | Shares | | | Amount | | | Capital | | | Compensation | | | | | | | | | | | | | | | | | Balance as of October 1, 2007 | | | 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 | ) | | | - | | | Settlement of lawsuit | | | 325,000 | | | | 33 | | | | 571,967 | | | | - | | | Debt | | | 360,000 | | | | 36 | | | | 403,164 | | | | (403,200 | ) | | Services | | | 9,135,000 | | | | 914 | | | | 15,843,671 | | | | (1,520,000 | ) | | Cash | | | 6,177,219 | | | | 618 | | | | 5,187,296 | | | | - | | | Acquisition of subsidiaries | | | 650,000 | | | | 65 | | | | 2,599,435 | | | | - | | | Exercise of options and warrants | | | 3,618,814 | | | | 361 | | | | 2,509,520 | | | | - | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | Debt | | | - | | | | - | | | | 1,872,000 | | | | - | | Services | | | - | | | | - | | | | 4,398,279 | | | | (134,812 | ) | | | | | | | | | | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | - | | | | - | | | | 5,162,770 | | | | | | | | | | | | | | | | | | | | | Amortization of financing costs | | | - | | | | - | | | | - | | | | 865,568 | | | | | | | | | | | | | | | | | | | | | Issuance of SecureAlert Monitoring Series A Preferred stock | | | 825,893 | | | | 82 | | | | 825,810 | | | | - | | | | | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | (345,356 | ) | | | - | | | | | | | | | | | | | | | | | | | | | Subscription receivable | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | SecureAlert Monitoring Series A Preferred stock redemption | | | 7,434,249 | | | | 743 | | | | 8,548,643 | | | | - | | | | | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | 1,550,081 | | | | - | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | | 155,881,260 | | | $ | 15,588 | | | $ | 186,203,084 | | | $ | (3,498,672 | ) |
| | | Preferred Stock | | | Common Stock | | | Additional | | | | | | | | | | | Series D | | | | | | | | | | | | Paid-in | | | Accumulated | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2012 | | | 48,763 | | | $ | 5 | | | | 3,096,641 | | | $ | 310 | | | $ | 252,940,448 | | | $ | (248,513,626 | ) | | $ | 4,427,137 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | | | (48,295 | ) | | | (4 | ) | | | 1,894,283 | | | | 189 | | | | (185 | ) | | | - | | | | - | | | Services | | | - | | | | - | | | | 21,884 | | | | 2 | | | | 141,758 | | | | - | | | | 141,760 | | | Debt | | | - | | | | - | | | | 4,607,361 | | | | 461 | | | | 20,732,657 | | | | - | | | | 20,733,118 | | | Dividends from Series D Preferred stock | | | - | | | | - | | | | 181,832 | | | | 18 | | | | 1,663,979 | | | | - | | | | 1,663,997 | | | Accrued board of director fees | | | - | | | | - | | | | 3,661 | | | | - | | | | 47,500 | | | | - | | | | 47,500 | | | Cash | | | - | | | | - | | | | (159 | ) | | | - | | | | (1,996 | ) | | | - | | | | (1,996 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting and re-pricing of stock options | | | - | | | | - | | | | - | | | | - | | | | 160,301 | | | | - | | | | 160,301 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | - | | | | - | | | | - | | | | - | | | | 15,349,074 | | | | - | | | | 15,349,074 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred stock dividends | | | - | | | | - | | | | - | | | | - | | | | (1,042,897 | ) | | | - | | | | (1,042,897 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for Board of Director fees | | | - | | | | - | | | | - | | | | - | | | | 401,059 | | | | - | | | | 401,059 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,915,711 | ) | | | (17,915,711 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2013 | | | 468 | | | $ | 1 | | | | 9,805,503 | | | $ | 980 | | | $ | 290,391,698 | | | $ | (266,429,337 | ) | | $ | 23,963,342 | |
See accompanying notes to consolidated financial statements. The accompanying notes are 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 | | | | | | | | | | | | | | Balance as of October 1, 2007 | | $ | (407,500 | ) | | $ | (133,096,946 | ) | | $ | 1,277,868 | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | Conversion of Series B Preferred stock | | | - | | | | - | | | | - | | | Settlement of lawsuit | | | - | | | | - | | | | 572,000 | | | Debt | | | - | | | | - | | | | - | | | Services | | | - | | | | - | | | | 14,324,585 | | | Cash | | | - | | | | - | | | | 5,187,914 | | | Acquisition of subsidiaries | | | - | | | | - | | | | 2,599,500 | | | Exercise of options and warrants | | | - | | | | - | | | | 2,509,881 | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | Debt | | | - | | | | - | | | | 1,872,000 | | Services | | | - | | | | - | | | | 4,263,467 | | | | | | | | | | | | | | | | | Amortization of deferred consulting | | | - | | | | - | | | | 5,162,770 | | | | | | | | | | | | | | | | | Amortization of financing costs | | | - | | | | - | | | | 865,568 | | | | | | | | | | | | | | | | | Issuance of SecureAlert Monitoring Series A Preferred stock | | | - | | | | - | | | | 825,892 | | | | | | | | | | | | | | | | | Issuance of Series A Preferred stock for accrued dividends | | | - | | | | - | | | | (345,356 | ) | | | | | | | | | | | | | | | | Subscription receivable | | | 407,500 | | | | - | | | | 407,500 | | | | | | | | | | | | | | | | | SecureAlert Monitoring Series A Preferred stock redemption | | | - | | | | - | | | | 8,549,386 | | | | | | | | | | | | | | | | | Deconsolidation of subsidiary | | | - | | | | - | | | | 1,550,081 | | | | | | | | | | | | | | | | | Net loss | | | - | | | | (49,587,050 | ) | | | (49,587,050 | ) | | | | | | | | | | | | | | | | Balance as of September 30, 2008 | | $ | - | | | $ | (182,683,996 | ) | | $ | 36,006 | |
The accompanying notes are 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 | | | | | Series A Shares | | | Series A Amount | | | Series B Shares | | | Series B Amount | | | | | | | | | | | | | | | | | Balance as of October 1, 2008 | | | 19 | | | $ | 1 | | | | 10,999 | | | $ | 1 | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | Conversion of Series A Preferred stock | | | (19 | ) | | | (1 | ) | | | - | | | | - | | | Conversion of Series B Preferred stock | | | - | | | | - | | | | (10,999 | ) | | | (1 | ) | | Settlement of 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 SecureAlert Series A Preferred stock for accrued dividends | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2009 | | | - | | | $ | - | | | | - | | | $ | - | |
The accompanying notes are 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
| | | Common Stock | | | Additional Paid-In | | | Deferred | | | | | Shares | | | Amount | | | Capital | | | Compensation | | | | | | | | | | | | | | | | | Balance as of October 1, 2008 | | | 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 | | | | - | | | | - | | | Conversion of Series B Preferred stock | | | 10,999 | | | | 1 | | | | - | | | | - | | | Settlement of lawsuits | | | 5,400,000 | | | | 540 | | | | 1,029,460 | | | | - | | | Related issuances of debt | | | 25,953,016 | | | | 2,595 | | | | 1,767,955 | | | | (138,000 | ) | | Services | | | 2,254,121 | | | | 226 | | | | 928,648 | | | | (200,000 | ) | | Cash | | | 17,850,000 | | | | 1,785 | | | | 3,248,215 | | | | - | | | Acquisition of subsidiaries | | | 2,857,286 | | | | 286 | | | | 656,890 | | | | - | | | Acquisition extension | | | 150,000 | | | | 15 | | | | 19,485 | | | | - | | | | | | | | | | | | | | | | | | | | | Issuance of warrants for: | | | | | | | | | | | | | | | | | | Related issuances of debt | | | - | | | | - | | | | 96,844 | | | | - | | | Services | | | - | | | | - | | | | 392,506 | | | | (46,667 | ) | | 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 | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2009 | | | 210,365,988 | | | $ | 21,037 | | | $ | 194,659,044 | | | $ | (1,287,406 | ) |
The accompanying notes are 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 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 | ) |
The accompanying notes are 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, 20092013 AND 20082012 | | | | | | | | | | | 2009 | | | 2008 | | | Cash flows from operating activities: | | | | | | | | Net loss | | $ | (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 | | | Common stock issued for services | | | 728,876 | | | | 13,620,584 | | | Common stock issued to settle lawsuit | | | 261,521 | | | | 1,276,000 | | | Amortization of debt discount | | | 2,030,504 | | | | - | | | Amortization of deferred financing and consulting costs | | | 2,595,933 | | | | 5,968,338 | | | Derivative liability valuation | | | (1,867,007 | ) | | | - | | | Registration payment arrangement expense | | | - | | | | 130,000 | | | Stock options and warrants issued during the period for services | | | 345,838 | | | | 4,263,467 | | | Redemption of SecureAlert Monitoring Series A Preferred stock | | | (95,816 | ) | | | 8,205,922 | | | Impairment of goodwill | | | 2,804,580 | | | | - | | | Common stock issued for acquisition option extension cost | | | 19,500 | | | | - | | | Increase in related-party line of credit for services | | | 272,281 | | | | 618,433 | | | Impairment of monitoring equipment and parts | | | 2,319,530 | | | | 570,948 | | | Loss from discontinued operations | | | - | | | | 414,112 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable, net | | | (23,490 | ) | | | 3,293,050 | | | Interest receivable (payable) | | | - | | | | (9,068 | ) | | Deposit held in escrow | | | 500,000 | | | | (500,000 | ) | | Prepaid expenses and other assets | | | (25,212 | ) | | | 720,591 | | | Accounts payable | | | 745,630 | | | | (1,373,491 | ) | | Accrued liabilities | | | 1,824,042 | | | | 999,310 | | | Deferred revenue | | | 35,515 | | | | (20,382 | ) | | Net cash used in operating activities | | | (8,521,326 | ) | | | (9,672,744 | ) | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | Purchase of property and equipment | | | (380,647 | ) | | | (334,226 | ) | | Purchase of monitoring equipment and parts | | | (1,312,397 | ) | | | (192,221 | ) | | Proceeds from sale of equipment | | | 16,577 | | | | - | | | Net cash used in investing activities | | | (1,676,467 | ) | | | (526,447 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | Payments on related-party line of credit | | | (739,063 | ) | | | (315,392 | ) | | Net principal proceeds (reductions) in bank line of credit borrowings | | | 388,593 | | | | (396,700 | ) | | Payments on notes payable | | | (1,115,237 | ) | | | (336,133 | ) | | Borrowings on related-party notes payable | | | 680,229 | | | | 975,578 | | | Principal payments on notes payable related to acquisitions | | | - | | | | (2,176,821 | ) | | Cash acquired through acquisitions | | | - | | | | 163,002 | | | Proceeds from the issuance of Series A 15% debentures | | | 4,496,750 | | | | - | | | Proceeds from sale of common stock | | | 3,250,000 | | | | 5,058,014 | | | Proceeds from sale of warrants and subsidiary stock | | | - | | | | 2,400,000 | | | Proceeds from issuance of notes payable | | | 1,055,889 | | | | 34,344 | | | Proceeds from exercise of options and warrants | | | - | | | | 2,772,381 | | | Net cash provided by financing activities | | | 8,017,161 | | | | 8,178,273 | | | Net decrease in cash | | | (2,180,632 | ) | | | (2,020,918 | ) | | Cash, beginning of year | | | 2,782,953 | | | | 4,803,871 | | | Cash, end of year | | $ | 602,321 | | | $ | 2,782,953 | |
| | | 2013 | | | 2012 | | | Cash flows from operating activities: | | | | | | | | Net Loss | | $ | (17,915,711 | ) | | $ | (17,458,107 | ) | | Gain on sale of subsidiaries | | | (424,819 | ) | | | - | | | Loss from discontinued operations | | | 6,460 | | | | 307,819 | | | Loss from continuing operations | | | (18,334,070 | ) | | | (17,150,288 | ) | Adjustments to reconcile net loss to net cash used and provided by in operating activities: | | | | | | | | | | Depreciation and amortization | | | 2,414,270 | | | | 1,816,945 | | | Vesting and re-pricing of stock options for services | | | 160,301 | | | | 1,405,500 | | | Issuance of common stock to employees for the cancellation of warrants | | | - | | | | 2,130,694 | | | Issuance of common stock for services | | | 141,760 | | | | 40,000 | | | Re-pricing of warrants in connection with debt with related parties | | | - | | | | 39,965 | | Accretion of debt discount and beneficial conversion feature recorded as interest expense | | | 15,954,355 | | | | 923,268 | | | Issuance of warrants with related parties | | | 128,559 | | | | - | | | Impairment of monitoring equipment and parts | | | 213,276 | | | | 1,648,763 | | | Impairment of goodwill | | | - | | | | 5,514,395 | | | Factional shares of common stock paid in cash | | | (1,996 | ) | | | - | | | Loss on disposal of property and equipment | | | 4,740 | | | | 5,374 | | | Loss on disposal of monitoring equipment and parts | | | 84,805 | | | | 188,901 | | | Loss on forgiveness of note receivable | | | - | | | | 22,750 | | | Property and equipment disposed for services and compensation | | | - | | | | 2,790 | | | Change in assets and liabilities: | | | | | | | | | | Accounts receivable, net | | | (652,749 | ) | | | 854,673 | | | Notes receivable | | | 63,978 | | | | 88,061 | | | Inventories | | | 186,913 | | | | (437,421 | ) | | Prepaid expenses and other assets | | | 107,576 | | | | (908,673 | ) | | Accounts payable | | | (1,473,530 | ) | | | 572,277 | | | Accrued expenses | | | 2,186,618 | | | | 1,102,638 | | | Deferred revenue | | | (345,896 | ) | | | 229,321 | | | Net cash provided by (used in) operating activities | | | 838,910 | | | | (1,910,067 | ) | | | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | | Purchase of property and equipment | | | (50,682 | ) | | | (101,875 | ) | | Purchase of monitoring equipment and parts | | | (509,743 | ) | | | (2,745,399 | ) | | Net cash used in investing activities | | | (560,425 | ) | | | (2,847,274 | ) | | | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | | Borrowings on related-party notes payable | | | 2,800,000 | | | | 2,980,000 | | | Principal payments on related-party notes payable | | | - | | | | (3,187,578 | ) | | Proceeds from convertible debentures | | | - | | | | 500,000 | | | Proceeds from related-party convertible debentures | | | - | | | | 2,900,000 | | | Proceeds from notes payable | | | - | | | | 1,745 | | | Principal payments on notes payable | | | (299,276 | ) | | | (687,354 | ) | | Net proceeds from issuance of common stock | | | - | | | | 1,033,000 | | | Net proceeds from issuance of Series D Convertible Preferred stock | | | - | | | | 2,004,000 | | | Commissions paid in connection with capital raise | | | - | | | | (1,147,250 | ) | | Net cash provided by financing activities | | | 2,500,724 | | | | 4,396,563 | | | | | | | | | | | | | Cash flow from discontinued operations: | | | | | | | | | | Net cash provided by operating activities | | | 126,715 | | | | 200,679 | | | Net cash provided by investing activities | | | - | | | | 126,330 | | | Net cash provided by (used in) financing activities | | | 18,475 | | | | (220,869 | ) | | Net cash provided by discontinued operations | | | 145,190 | | | | 106,140 | | | | | | | | | | | | | Net increase in cash | | | 2,924,399 | | | | (254,638 | ) | | Cash, beginning of period | | | 458,029 | | | | 712,667 | | | Cash, end of period | | $ | 3,382,428 | | | $ | 458,029 | |
See accompanying notes to consolidated financial statements. The accompanying notes are 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, 20092013 AND 20082012 | | | | 2009 | | | 2008 | | | | | | | | | | | | Cash paid for interest | | $ | 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 | | $ | - | | | | | | | | | | | | 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 | | | | | | | | | | | | Issuance of 2,000,000 and 360,000 common shares, respectively for deferred consulting services and financing services | | | 384,667 | | | 403,200 | | | | | | | | | | | | Preferred Series A and C stock dividends | | | 175 | | | 423 | | | | | | | | | | | | SecureAlert Monitoring Series A Preferred stock dividends accrued | | | - | | | 480,537 | | | | | | | | | | | | Forgiveness of debt from related-party debt | | | 79,022 | | | - | | | | | | | | | | | | Shares issued prepaid services | | | - | | | 1,520,000 | | | | | | | | | | | | Fair value of assets acquired in purchase of Court Programs through the issuance of common stock | | | - | | | 1,316,338 | | | | | | | | | | | | Fair value of liabilities assumed in purchase of Court Programs through the issuance of common stock | | | - | | | 468,837 | | | | | | | | | | | | Issuance of common stock in acquisition of Court Programs, Inc | | | - | | | 847,500 | | | | | | | | | | | | Settlement of SecureAlert Series A Preferred stock | | | - | | | 3,590,000 | | | | | | | | | | | | Deconsolidation of ActiveCare | | | - | | | 607,869 | | | | | | | | | | | | Fair value of assets acquired in purchase of Midwest Monitoring through the issuance of common stock | | | - | | | 2,974,666 | | | | | | | | | | | | Fair value of liabilities assumed in purchase of Midwest Monitoring through the issuance of common stock | | | - | | | 1,222,666 | | | | | | | | | | | | Issuance of common stock in acquisition of Midwest Monitoring | | | - | | | 1,752,000 | | | | | | | | | | | | Issuance of common stock and stock options to acquire the assets and liabilities of Bishop Rock Software | | | 856,522 | | | - | | | | | | | | | | | | Stock issued in connection with debt (as discount) | | | 1,739,393 | | | - | | | | | | | | | | | | Beneficial conversion feature recorded | | | 122,727 | | | - | | | | | | | | | | | | Debt issued to settle line of credit | | | 3,549,631 | | | - | |
| | | 2013 | | | 2012 | | | Cash paid for interest | | $ | 238,080 | | | $ | 444,644 | | | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | | Issuance of stock warrants for settlement of debt | | | - | | | | 253,046 | | | Issuance of common stock in connection with Series D Preferred stock dividends | | | 1,663,997 | | | | 2,391,568 | | | Series D Preferred stock dividends earned | | | 1,042,897 | | | | 2,480,298 | | | Issuance of warrants for accrued Board of Director fees | | | 272,500 | | | | 105,042 | | | Issuance of common stock shares for accrued Board of Director fees | | | 47,500 | | | | 48,060 | | Issuance of shares of common stock, respectively, for related-party royalty payable | | | - | | | | 819,972 | | | Issuance of common stock shares for settlement of debt | | | 20,733,118 | | | | 118,280 | | | Issuance of warrants to a consultant for services | | | - | | | | 33,357 | | | Issuance of common stock shares from the conversion of shares of Series D | | | | | | | Preferred stock | | | 189 | | | | 54 | | Accretion of debt discount and beneficial conversion feature expense recorded with convertible debentures | | | 15,954,355 | | | | 473,334 | | | Issuance of debt to repurchase royalty agreement | | | 11,616,984 | | | | - | | | Note payable issued to acquire monitoring equipment and property and equipment | | | - | | | | 69,000 | | | Beneficial conversion feature recorded with related-party convertible debentures | | | - | | | | 1,001,666 | |
TheSee accompanying notes are an integral part of theseto consolidated financial 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™ReliAlert™ devices. The TrackerPAL™ isReliAlert™ devices are used to monitor convicted offenders that are on probation or parole in the criminal justice system. The TrackerPAL™ device utilizessystem or pretrial defendants. ReliAlert™ devices utilize GPS, radio frequencies, and cellular technologies in conjunction with a monitoring center that is staffed 24/7 and 365 days a year. The Company believes that its technologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. The TrackerPAL™ isReliAlert™ devices are targeted to meet the needs of this market domestically as well as internationally. Going Concern The Company has incurredhad a history of recurring net losses and negative cash flows from operating activities fora significant accumulated deficit. For the fiscal yearsyear ended September 30, 2009 and 2008. In addition,2012, the Company has accumulated deficits of $205,765,496 and $182,683,996 as of September 30, 2009 and 2008, respectively. These factors raisedid not have enough cash on hand to meet its current liabilities. As a result, the report from the independent registered public accounting firm for fiscal year 2012 included an explanatory paragraph in respect to the substantial doubt aboutof the Company'sCompany’s ability to continue as a going concern. The financial statements dofor fiscal year 2012 and for prior periods did not include any adjustments that might result from the outcome of thisthat uncertainty.
In order The Company’s plan for the Company to continuecontinuing as a going concern it must generate positive cash flows from operating activities and obtainincluded obtaining the necessary funding to meet its projected capital investment requirements. Management’s plans with respect to this uncertainty include raising additional capital from the issuance of preferred stockrequirements 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.needs.
To lessen the Company’s cash burden and to raise additional capital, subsequentSubsequent to September 30, 2009,2013, the Company entered into agreementsa Facility Agreement, whereby the Company may borrow up to issue 15,986 shares$25,000,000 for working capital and acquisitions purposes (see Note 5). As of Series D Convertible Preferred stock in exchange for conversionJanuary 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement which its Board of $15,723,204 in debt, accrued liabilitiesDirectors and interestmanagement believes provides the Company sufficient working capital and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received inenough cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.on hand to satisfy its current obligations.
| (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 asInternational Surveillance Services Corp, and SecureAlert Inc.,Chile SpA (collectively, the “Company”). Additionally, during the fiscal year ended September 30, 2013, the Company sold Midwest Monitoring & Surveillance, Inc., Bishop Rock Software, Inc., and Court Programs, Inc., Court Programs of 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 (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Statements The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, accrued liabilities and other debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company’s debt obligations approximate fair value as the interest rates approximate market interest rates.
Concentration of Credit Risk
In the normal course of business, the Company provides credit terms to its customers and requires no collateral. Accordingly, the Company performs credit evaluations of its customers' financial condition.
The Company had sales to entities which represent more than 10 percent of total revenues as follows for the years ended September 30: | | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | | | Customer A | | $ | 5,252,959 | | | | 34 | % | | $ | 2,450,984 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | Customer B | | $ | 1,622,326 | | | | 10 | % | | $ | 1,876,285 | | | | 12 | % |
No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2013 or 2012. Customer A which attributed $5,252,959 (34 percent) derived from a contract that completed during the fiscal year ended 2013 and it is uncertain if the Company will provide services to this customer in the future. Customer B which attributed $1,622,326 (10%) derived from a three-year contract which completed in November 2013 and has continued under a month-to-month contract. This contract could be terminated at anytime with a 30-day notice. Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, are shown in the table below: | | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | | | Customer A | | $ | 887,233 | | | | 24 | % | | $ | 681,781 | | | | 24 | % | | | | | | | | | | | | | | | | | | | | Customer B | | $ | 732,163 | | | | 20 | % | | $ | 475,800 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | Customer C | | $ | 892,897 | | | | 24 | % | | $ | - | | | | 0 | % |
Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts receivable. Subsequent to the fiscal year ended September 30, 2013, the Company received $387,483 from Customer A and $518,137 from Customer B for a total of $905,620. Cash Equivalents
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company has cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
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$3,128,187 and $0$350,716 of cash deposits in excess of federally insured limits as of September 30, 20092013 and 2008,2012, respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves areThe allowance is estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within its normal terms. Intere stInterest income is not recorded on trade receivables that are past due, unless that interest is collected. Note Receivable
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but had entered into an agreement with one of its customers during the fiscal year ended September 30, 2012. Payments are under the note are recorded as they are received and are immediately offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective note. The note requires monthly payments of $15,000 and matures in May 2014. The note is currently in default and accrues interest at a rate of 17% per annum. As of September 30, 2013, the outstanding balance of the note was $199,682 and $5,022 of accrued interest. Prepaid and Other Expenses
The carrying amounts reported in the balance sheets for prepaid and other expenses approximate their fair market value based on the short-term maturity of these instruments. As of September 30, 2013 and 2012, the outstanding balance of prepaid and other expenses was $1,783,805 and $1,760,579, respectively. Of the $1,783,805, was a bond posted for an international customer in the amount of $1,488,778, which the Company believes will be returned to the Company by March 31, 2014.
Inventory
Inventory is valued at the lower of the cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is determined based on the estimated net realizable value, which generally is the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. The Company impaired its inventory by $1,555 and $359,734 during the fiscal years ended September 30, 2013 and 2012, respectively.
Inventory consists of productsraw materials that are available for sale and raw materials used in the manufacturing of TrackerPAL™ReliAlert™ devices. Completed TrackerPAL™ReliAlert™ devices are reflected in Monitoring Equipment. As of September 30, 20092013 and 2008,2012, respectively, inventory consisted of the following:
| | | 2009 | | | 2008 | | | 2013 | | | 2012 | | | Raw materials | | $ | 686,421 | | | $ | - | | | $ | 615,144 | | | $ | 822,566 | | | Reserve for damaged or obsolete inventory | | | (83,092 | ) | | | - | | | | (148,043 | ) | | | (192,000 | ) | | Total inventory, net of reserves | | $ | 603,329 | | | $ | - | | | $ | 467,101 | | | $ | 630,566 | |
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful liveslife of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized. 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, 20092013 and 2008,2012, respectively:
| | | 2009 | | | 2008 | | | 2013 | | | 2012 | | | Equipment, software, tooling, and other fixed assets | | $ | 2,742,537 | | | $ | 2,472,076 | | | | Equipment, software and tooling | | | $ | 2,002,577 | | | $ | 1,970,327 | | | Automobiles | | | 305,658 | | | | 287,736 | | | | 33,466 | | | | 33,466 | | | Building and land | | | 377,555 | | | | 377,555 | | | | Leasehold improvements | | | 127,912 | | | | 102,190 | | | | 127,162 | | | | 127,287 | | | Furniture and fixtures | | | 284,824 | | | | 279,711 | | | | 247,218 | | | | 252,951 | | | Total property and equipment | | | 3,838,486 | | | | 3,519,268 | | | | Total property and equipment before accumulated depreciation | | | | 2,410,423 | | | | 2,384,031 | | | Accumulated depreciation | | | (2,525,180 | ) | | | (1,937,710 | ) | | | (2,092,222 | ) | | | (1,879,540 | ) | | Property and equipment, net of accumulated depreciation | | $ | 1,313,306 | | | $ | 1,581,558 | | | $ | 318,201 | | | $ | 504,491 | |
Property and equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are included in the results of operations. During the fiscal years ended September 30, 2013 and 2012, the Company disposed of net property and equipment of $4,740 and $5,374, respectively.
Depreciation expense for the fiscal years ended September 30, 20092013 and 20082012 was $677,016$231,853 and $638,138,$281,791, respectively.
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. Monitoring equipment as of September 30, 2013 and 2012 is as follows: | | | 2013 | | | 2012 | | | Monitoring equipment | | $ | 2,420,042 | | | $ | 3,841,876 | | | Less: accumulated amortization | | | (1,183,346 | ) | | | (669,929 | ) | | Monitoring equipment, net of accumulated depreciation | | $ | 1,236,696 | | | $ | 3,171,947 | |
Amortization expense for the fiscal years ended September 30, 20092013 and 20082012, was $1,300,783$1,230,293 and $1,082,648,$1,231,773, respectively. These expenses were classified as a cost of revenues.
AssetsMonitoring equipment to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the fiscal years ended September 30, 20092013 and 2008,2012, the Company disposed ofand impaired lease monitoring equipment and parts of $2,319,530$296,526 and $570,948,$1,837,664, respectively. These impairment costs were included in cost of revenues.
Impairment of Long-Lived Assets and Goodwill
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. The Company uses an equity 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 fromIn reviewing historical financial performance and participating in selling Court Programs, Inc. and Midwest Monitoring & Surveillance, Inc. by $2,343,753, the Company recorded an impairment expense.
The following summarizes the changes in goodwill during the fiscal years ended September 30, 2013 and from Bishop Rock Software by $460,827, Inc. for a total impairment expense of $2,804,580.2012:
| | | Court Programs, Inc. | | | Midest Monitoring & Surveillance, Inc. | | | | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | Gross carrying amount, beginning of period | | $ | - | | | $ | 2,488,068 | | | $ | - | | | $ | 3,026,327 | | | Additions | | | - | | | | - | | | | - | | | | - | | | Impairments | | | - | | | | (2,488,068 | ) | | | - | | | | (3,026,327 | ) | | Gross carrying amount, end of period | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Revenue Recognition
The Company’s revenue has historically been from two sources: (i) monitoring services; (ii) monitoring device and other(ii) product sales.
Monitoring Services Monitoring services include two components: (a) lease contracts in which the Company provides monitoring services and leases devices to distributors or end users and the Company retains ownership of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use the Company’s monitoring services.
The Company typically leases its devices under one-year contracts with customers that opt to use the Company’s monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under the Company’s standard leasing contract, the leased device becomes billable on the date of activation or 7 to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned to the Company. The Company recognizes revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
Product Sales Although not the focus of the Company’s business model, theThe Company sellsmay sell its monitoring devices in certain situations.situations to its customers. In addition, the Company sells home securitymay sell equipment in connection with the building out and Personal Emergency Response Systems (“PERS”) units.setting up a monitoring center on behalf of its customers. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPALTrackerPAL® and ReliAlert™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with the Company. The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
The Company sells and installs standalone tracking systems that do not require ongoing monitoring by the Company. The Company has experience in component installation costs and direct labor hours related to this type of sale and can typically reasonably estimate costs, therefore the Company recognizes revenue over the period in which the installation services are performed using the percentage-of-completion method of accounting for material installations. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project’s progress toward completion. The Company evaluates its estimated labor hours and costs and determines the estimated gross profit or loss on each installation for each reporting period. If it is determined that total cost estimates are likely to exceed revenues, the Company accrues the estimated losses immediately. All amounts billed have been earned. Multiple Element Arrangements The majority of the Company’s revenue transactions do not have multiple elements. OnHowever, on occasion, the Company hasenters into revenue transactions that have multiple elements (suchelements. These may include different combinations of products or monitoring services that are included in a single billable rate. These products or monitoring services are delivered over time as product sales and monitoring services).the customer utilizes the Company's services. For revenue arrangements that have multiple elements, the Company considers whether: (i)whether the delivered devices have standalone value to the customer; (ii)customer, there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services;services, and (iii) the customer does not have a general right of return. Based on these criteria, the Company recognizes revenue from the sale of devices separately from the monitoring services to be provided to the customer. In accordance with FASB ASC subtopic addressing multiple deliverables, ifcustomer as the fair value of the undelivered element exists, but the fair value does not exist for oneproducts or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteriaservices are met.
Other Matters The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days, and normal payment terms for device sales are between 120 and 180 days. The Company sells its devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
Geographical Information
The Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for the fiscal years ended September 30, 2013 and 2012, are as follows: | | | 2013 | | | 2012 | | | United States of America | | $ | 7,179,043 | | | $ | 7,398,627 | | | Latin American Countries | | | 5,252,960 | | | | 2,450,984 | | | Caribbean Countries and Commonwealths | | | 3,136,908 | | | | 3,217,651 | | | Other Foreign Countries | | | 72,151 | | | | 47,717 | | | Total | | $ | 15,641,062 | | | $ | 13,114,979 | |
The long-lived assets, net of accumulated depreciation and amortization, used in the generation of revenues by geographic area as of September 30, 2013 and 2012, were as follows:
| | | Net Property and Equipment | | | Net Monitoring Equipment | | | | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | United States of America | | $ | 318,201 | | | $ | 504,491 | | | $ | 878,823 | | | $ | 2,174,976 | | | Latin American Countries | | | - | | | | - | | | | - | | | | 719,171 | | | Caribbean Countries and Commonwealths | | | - | | | | - | | | | 351,138 | | | | 263,782 | | | Other Foreign Countries | | | - | | | | - | | | | 6,735 | | | | 14,018 | | | Total | | $ | 318,201 | | | $ | 504,491 | | | $ | 1,236,696 | | | $ | 3,171,947 | |
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 20092013 and 20082012 were for the development of SecureAlert’s TrackerPAL™the Company’s ReliAlert™ device and associated services. For the fiscal years ended September 30, 20092013 and 2008,2012, research and development expenses were $1,777,873$987,934 and $4,811,128,$1,248,654, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2009,2013 and 2008,2012, was $76,793$30,782 and $209,389,$29,141, respectively.
Stock-Based Compensation
For the fiscal years ended September 30, 2009 and 2008, theThe Company calculatedrecognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of $67,406 and $214,251, respectively related to the vesting of stock options granted in prior years.
Theaward based on their grant date fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model.value. The Company granted 1,517,714 and 1,725,000 stock options to employees duringestimates 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. Theusing a Black-Scholes option pricing model which requires management to make estimates for certain assumptions regarding risk-free interest rate, 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 vo latility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for thestock and 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.
The tax effects from uncertain tax positions can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements.
The Company’s policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense. As of September 30, 2013 and September 30, 2012, the Company did not record a liability for uncertain tax positions.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, and shares issuable upon conversion of preferred stock. As of September 30, 20092013 and 2008,2012, there were 75,789,348604,006 and 21,846,4122,825,171 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive. The common stock equivalents outstanding as of September 30, 2013 and 2012, consisted of the following:
| | | 2013 | | | 2012 | | | Conversion of debt and accrued interest and loan origination fees | | | - | | | | 863,499 | | | Conversion of Series D Preferred stock | | | 14,040 | | | | 1,462,890 | | | Exercise of outstanding common stock options and warrants | | | 427,966 | | | | 336,782 | | Exercise and conversion of outstanding Series D Preferred stock warrants | | | 162,000 | | | | 162,000 | | | Total common stock equivalents | | | 604,006 | | | | 2,825,171 | |
Recent Accounting Pronouncements
EffectiveIn July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which addresses the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This guidance requires the netting of unrecognized tax benefits against a deferred tax asset for December 2008, new accounting guidance was added relating to business combinations. The objectivea loss or other carryforward that would apply in settlement 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 interestuncertain tax positions. ASU 2013-11 will be effective for us beginning in the acquiree; (ii) what information to disclose in ourfirst quarter of fiscal 2014. Early adoption is permitted. Since ASU 2013-11 only impacts financial reports and; (iii) recognition and measurement criteriastatement disclosure requirements for goodwill acquired. This Topic is effective for any acquisitions made on or after December 15, 2008. Theunrecognized tax benefits, the Company does not expect the adoption of this Topic is not expectedthe guidance to have a material impact on ourthe Company's consolidated financial statements and disclosures.statements. | (3) | Acquisitions and Other Intangible Assets |
In May 2009,The following table summarizes the FASB issued guidanceactivity of intangible assets for the fiscal year ended September 30, 2013:
| | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | | | Intangible assets: | | | | | | | | | | | | | | Patent license agreement | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Royalty agreement | | | 11,616,984 | | | | 5,003,583 | | | | 50,000 | | | | 16,670,567 | | | Total intangible assets | | | 11,616,984 | | | | 5,003,583 | | | | 50,000 | | | | 16,670,567 | | | Accumulated amortization | | | (673,374 | ) | | | (562,903 | ) | | | (20,370 | ) | | | (1,256,647 | ) | | Intangile assets, net of accumulated amortization | | $ | 10,943,610 | | | $ | 4,440,680 | | | $ | 29,630 | | | $ | 15,413,920 | |
The following table summarizes the activity of intangible assets for the fiscal year ended September 30, 2012:
| | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | | | Intangible assets: | | | | | | | | | | | | | | Patent license agreement | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Royalty agreement | | | 10,768,555 | | | | 5,003,583 | | | | 50,000 | | | | 15,822,138 | | | Total intangible assets | | | 10,768,555 | | | | 5,003,583 | | | | 50,000 | | | | 15,822,138 | | | Accumulated amortization | | | - | | | | (312,724 | ) | | | (14,816 | ) | | | (327,540 | ) | | Intangile assets, net of accumulated amortization | | $ | 10,768,555 | | | $ | 4,690,859 | | | $ | 35,184 | | | $ | 15,494,598 | |
The following table summarizes the future maturities of amortization of intangible assets as of September 30, 2013:
| Fiscal Year | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | | | 2014 | | $ | 630,792 | | | $ | 250,179 | | | $ | 5,556 | | | $ | 886,527 | | | 2015 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | | 2016 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | | 2017 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | | 2018 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | | Thereafter | | | 7,789,650 | | | | 3,189,785 | | | | 1,850 | | | | 10,981,285 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 10,943,610 | | | $ | 4,440,680 | | | $ | 29,630 | | | $ | 15,413,920 | |
Borinquen Container Corporation On September 5, 2012, the Company entered into an agreement to redeem the royalty held by Borinquen pursuant to a royalty agreement dated July 1, 2011, as amended. Under the terms of the royalty, Borinquen had the right to receive 20 percent of net revenues derived within certain geographic territories.
As of September 30, 2012, the agreement to redeem the royalty had not yet been completed and as a result the Company capitalized $10,768,555 as a non-current asset and recorded a loan payable to Borinquen to reflect the obligation. On February 1, 2013, the Company completed the redemption of the royalty with Borinquen which establishes general standardswas funded under a Loan and Security Agreement (“Loan”) from Sapinda Asia Limited (“Sapinda Asia”), see Note 5. The Company capitalized the total cost of accountingthe royalty purchase commitment of $11,616,984, as a non-current asset and disclosurewill amortize the asset over the remaining term of events that occur after the balance sheet date but before financial statements are issued or are availableroyalty agreement, subject to be issued. In particular, this Topic sets forth: (i)periodic analysis for impairment based on future expected revenues. The Company will annually calculate the period afteramortization based on the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosureeffective royalty rate and on the revenues 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 appliedgeographic territory subject to the accountingroyalty. The Company’s analysis will be based on such factors as historical revenue and disclosureexpected revenue growth in the territory.
During the fiscal years ended 2013 and 2012, the Company recorded $673,374 and $0 of subsequent events. This Topic doesamortization expense for the intangible asset, resulting in a total accumulated amortization of $673,374 and $0, and net intangible assets of $10,943,610, and $10,768,555, respectively.
International Surveillance Services Corp. Effective July 1, 2011, the Company entered into a stock purchase agreement and purchased ISS, a Puerto Rico corporation, in consideration of 310,000 shares of its common stock, valued at $5,084,000 of which $5,003,583 was recorded as a royalty intangible asset. ISS is an international distributor of electronic monitoring devices to individuals on parole or probation. The Company acquired ISS to utilize the knowledge and connections the company has in Central and South America and to acquire the rights to its territorial commissions that were being paid to ISS. The Company recorded $250,179 and $250,179 of amortization expense on intangible assets for ISS during the fiscal year ended September 30, 2013 and 2012, resulting in a total accumulated amortization of $562,903 and $312,724, and net intangible assets of $4,440,680 and $4,690,859, respectively. Patent On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to Company a non-exclusive license under U.S. Patent No. 6,405,213 and any and all patents issuing from continuation, continuation-in-part, divisional, reexamination and reissues thereof and along with all foreign counterparts, to make, have made, use, sell, offer to sell and import covered products in SecureAlert’s present and future business. The license granted will continue for so long as any of the licensed patents have enforceable rights. The license granted is not apply to subsequent eventsassignable or transactions that aretransferable except for sublicenses within the scope of other applicable accounting standards that provide different guidance onits license to the accounting treatmentCompany’s subsidiaries. The Company paid $50,000 as consideration 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 adoptionthe use of this Topic did not have a material impact on our financial statements and disclosures.patent.
In June 2009,During the FASB issued guidance which becamefiscal years ended 2013 and 2012, the sourceCompany recorded $5,554 and $5,557 of authoritative GAAP recognized byamortization expense for 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 GAAPpatent, resulting in a hierarchy for users to apply accordi ngly. This Topic is effective for financial statements issued for interimtotal accumulated amortization of $20,370 and annual periods ending after September 15, 2009. The adoption$14,816, and net intangible assets of this Topic did not have a material impact on our disclosure of the financial statements.$29,630 and $35,184, respectively.
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 begi 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 currently assessing the futu 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 wit 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 statements on a nonrecur 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 significantly impact our re 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 and financial positio n.
| (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 | | | Goodwill | | $ | 1,259,995 | | | $ | 1,208,086 | | | $ | - | | | $ | 2,468,081 | | | Other Intangible Assets | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | 229,000 | | | Software | | | - | | | | - | | | | 380,001 | | | | 380,001 | | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | 6,000 | | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | 8,000 | | | Total Other Intangible Assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 623,001 | | | Accumulated other intangible asset amortization | | | (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 | |
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 liabilitie 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 in 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, | | | | | 2009 | | | 2008 | | | Revenues: | | | | | | | | Products | | $ | 570,749 | | | $ | 2,593,925 | | | Monitoring services | | | 12,055,841 | | | | 11,322,201 | | | Total revenues | | | 12,626,590 | | | | 13,916,126 | | | Cost of revenues: | | | | | | | | | | Products | | | (275,688 | ) | | | (1,675,212 | ) | | Monitoring services | | | (9,862,925 | ) | | | (12,261,139 | ) | | Impairment of monitoring equipment and parts | | | (2,319,530 | ) | | | (570,948 | ) | | Total cost of revenues | | | (12,458,143 | ) | | | (14,507,299 | ) | | Gross margin (deficit) | | | 168,447 | | | | (591,173 | ) | | Operating expenses: | | | | | | | | | | Selling, general and administrative | | | (16,701,374 | ) | | | (36,777,665 | ) | | Research and development | | | (1,777,873 | ) | | | (4,811,128 | ) | | Impairment of goodwill | | | (2,804,580 | ) | | | - | | | Loss from operations | | | (21,115,380 | ) | | | (42,179,966 | ) | | Other income (expense): | | | | | | | | | | Gain on sale of intellectual property | | | - | | | | 2,400,000 | | | Redemption of Monitoring SecureAlert Series A Preferred stock | | | - | | | | (8,372,566 | ) | | Interest income | | | 18,187 | | | | 35,230 | | | Interest expense | | | (5,012,803 | ) | | | (1,588,073 | ) | | Derivative valuation gain | | | 1,867,007 | | | | - | | | Change from estimate to actual on Series A | | | 95,816 | | | | - | | | Other income (loss) | | | 905,626 | | | | 314,059 | | | Net loss from continuing operations | | | (23,241,547 | ) | | | (49,391,316 | ) | | Discontinued operations | | | - | | | | (414,112 | ) | | Net loss | | | (23,241,547 | ) | | | (49,805,428 | ) | | Dividends on Series A and C Preferred stock | | | (175 | ) | | | (345,356 | ) | | Net loss attributable to common stockholders | | $ | (23,241,722 | ) | | $ | (50,150,784 | ) | | Net loss per common share – basic and diluted | | $ | (0.13 | ) | | $ | (0.36 | ) | | Weighted average common shares outstanding – basic and diluted | | | 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.
2013 and 2012: | | | 2013 | | | 2012 | | | Accrued royalties | | $ | 714,400 | | | $ | 641,446 | | | Accrued payroll, taxes and employee benefits | | | 473,179 | | | | 540,931 | | | Accrued consulting | | | 317,300 | | | | 352,072 | | | Accrued taxes - foreign and domestic | | | 262,880 | | | | 262,440 | | | Accrued settlement costs | | | 76,000 | | | | 50,000 | | | Accrued board of directors fees | | | 68,090 | | | | 265,000 | | | Accrued other expenses | | | 65,903 | | | | 183,722 | | | Accrued legal costs | | | 57,001 | | | | 14,628 | | | Accrued cellular costs | | | 55,000 | | | | 27,662 | | | Accrued outside services | | | 33,022 | | | | 38,630 | | | Accrued warranty and manufacturing costs | | | 30,622 | | | | 30,622 | | | Accrued interest | | | 27,394 | | | | 27,831 | | | Accrued cost of revenues | | | - | | | | 4,467 | | | Total accrued expenses | | $ | 2,180,791 | | | $ | 2,439,451 | |
(7)(5) | Certain Relationships and Related Party Transactions |
The Company has entered into certain transactions with related parties.parties during the fiscal years ended September 30, 2013 and 2012. These transactions consist mainly of financing transactions and consulting arrangements.service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Related-Party Line of CreditRoyalty Agreement
AsOn August 4, 2011, with an effective date of September 30, 2009,July 1, 2011, the Company owed $76,022 underentered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to purchase its wholly-owned subsidiary ISS for 310,000 shares of the Company’s common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,003,583. As additional consideration, the Company also granted Borinquen a line-of-creditroyalty in the amount of 20% of net revenues from the sale or lease of monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. The royalty payments were due quarterly through June 30, 2031.
On February 1, 2013, the Company entered into an agreement with ADP Management, an entity ownedSapinda Asia and controlled by Mr. Derrick,Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the Company’s Chief Executive Officer. Outstanding amounts onrepurchase of the lineroyalty (at a cost of credit accrue interest at 11% per annum$11,616,984) and are due upon demand.to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance this redemption, the Company borrowed $16,700,000 in connection with the Loan from Sapinda Asia. The Company used $13,000,000 toward the redemption of the royalty and to pay off accrued royalty fees and used $3,700,000 of the loan for operating capital. During the fiscal year ended September 30, 2009,2013, the net decrease under this lineCompany recorded a debt discount of credit$14,296,296 which was $466,782. This decrease consistedrecorded as interest expense to account for a beneficial conversion feature in connection with the Loan. Additionally, $605,281 of cash repaymentsinterest expense was recorded during the fiscal year ended 2013 to record accretion of $739,063 offset, in part, by $272,281 of expenses owed to ADP Management that are reimbursable by the Company.
As ofdebt discount. On September 30, 2008,2013, Sapinda Asia converted all outstanding principal and interest in connection with the Company owed $542,804 to ADP Management under a line-of-credit agreement. DuringLoan in the year ended September 30, 2008, the lineamount 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$17,576,627 into 3,905,917 shares of common stock or other additional financing activities or February 4, 2009, whichever comes first. The Company paid to Mr. Derrickat a loan origination feerate of $50,000 in cash and 100,000 shares of restricted common stock. In February 2009, Mr. Derrick loaned an additional $500,000 to the Company resulting in a total of $1,500,000 due to Mr. Derrick. The Company and Mr. Derrick agreed to extend the due date of the full obligation to February 26, 2010. As of September 30, 2009, the Company owed $1,500,000 plus $12,197 in 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.$4.50 per share.
Revolving Loan Agreement
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,On February 1, 2013, the Company entered into a promissory noterevolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, the Company may borrow up to $1,200,000 at an unrelated entity in the amount of $1,000,000 payable on December 31, 2010. The note bears interest at a rate of 15%3% per annum paid quarterly. As additional consideration for the loan to settle a registration rights dispute, the Company granted the lender 8,000,000 shares of common. Additionally, a related-party entity, ADP Management, collateralized this note with 5,000,000 shares of the Company’s common stock it owns. In August 2009, the Company defaulted on the loan because it failed to register the 8,000,000 shares of common stock within 30 days of entering into the agreement resulting in the lender foreclosing on the 5,000,000 shares of common stock held as collateral.unused funds and 10% per annum for borrowed funds. As of September 30, 2009, the Company accr 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 payment2013, no advances have been made under 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 monthloan and the Company agreed to reimbursehad accrued $23,868 in interest liability on the expenses incurred by ADP Management (includingRevolving Loan. On October 24, 2013, the salaries of certain of our officers)Company drew down the full $1,200,000 for use in the course of performing servicesa performance bond as required 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.a contract with an international customer.
Related-Party Service Agreement
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, 2009,2013, the Company entered into an unsecured convertible promissory note for $2,700,000agreement with Paranet Solutions, LLC to provide the following primary services: (1) procurement of hardware and software necessary to ensure that vital databases are available in order to purchase TrackerPAL™ units. The note, at the lender’s option, may convert into sharesevent of a disaster (backup and disaster recovery system); and (2) providing the security of all data and the integrity of such data against all loss of data, misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of the Company’s common stock at a conversion priceExecutive Committee, is the Chief Executive Officer 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 dateParanet.
As consideration for these services, 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 discount balance of $41 ,556. Subsequent to September 30, 2009, the holders of the convertible promissory note of $2,050,000 agreed to convertpay Paranet $4,500 per month. The arrangement can be terminated by either party for any reason upon ninety (90) days written notice to the note and the total outstanding accrued interest of $98,414 into 2,149 shares of Series D Preferred stock.other party. Related-Party Loan
(9) | Senior Secured Convertible Notes |
During the fiscal year ended September 30, 2009,2012, 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 atborrowed $500,000 from 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 subject 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 |
former officer. During the fiscal year ended September 30, 2009,2013, the Company received $4,400,000 in cash from the issuanceestablished terms for this loan which created a debt discount of Series A 15% debentures. Additionally, the Company issued debentures$500,000 which was immediately recorded as interest expense to account for a consultantbeneficial conversion feature to reflect an adjustment in the principal amount of $106,750 for services renderedconversion rate from $11.00 to $4.50 to equal the Company. As of September 30, 2009, the total outstanding balanceconversion rate of the debenturesLoan to redeem the royalty. During fiscal year 2013, this debt 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 investedconverted 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 into111,112 shares of common stock atstock. Related-Party Convertible Debenture #1
During the fiscal year ended 2012, the Company borrowed $500,000 from a conversiondirector with an interest rate of $0.208% per share or into shares at a reduced conversiannum. The debenture was to mature on rate shouldDecember 17, 2012 and secured by the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion featuresdomestic patents 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 discount resulting in a tot al $3,130,423 in a debt discount to be amortized over the life of the debentures.Company. During the fiscal year ended September 30, 2009,2013, the debenture was convertible at $4.50 which created a beneficial conversion feature discount of $110,556 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 117,784 shares of common stock.
Related-Party Convertible Debenture #2
During the fiscal year ended 2012, the Company amortized $1,308,703borrowed $2,000,000 from a significant shareholder with an interest rate of this debt discount8 percent per annum. The debenture was to mature on December 17, 2012 and recorded it as interest expense. Assecured by the domestic patents 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 duringCompany. During the fiscal year ended September 30, 2008.2013, the debenture was convertible at $4.50 which created a beneficial conversion feature discount of $442,222, which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 472,548 shares of common stock.
Facility Agreement On January 3, 2014, the Company entered into a loan agreement (“Facility Agreement”) with Tetra House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Republic of Singapore and is controlled by Mr. Guy Dubois who is a director and currently serves as the Chairman of the Company’s Board of Directors. .Under this agreement, the Company may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8% per annum and interest is payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due and payable on January 3, 2016. The Company may prepay (in minimum amounts of $1,000,000) borrowed amounts without penalty. In consideration of the Facility Agreement, the Company agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the Facility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) being withheld from the first draw down of funds under the Facility Agreement. The Company may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House. Tetra House has 10 business days in which to fund the Utilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement. Additional Related-Party Transactions and Summary of All Related-Party Obligations (12) | | | | 2013 | | | 2012 | | | | | | | | | | Note payable in connection with the redemption of a royalty agreement for $10,768,555. The note required installment payments and was paid off by the proceeds of the Loan. | | $ | - | | | $ | 10,050,027 | | | | | | | | | | | | | Note payable in connection with the purchase of the remaining ownership of Court Programs, Inc., interest at 12% per annum, with monthly payments of $10,000. This note was assumed through the sale of Court Programs, Inc. | | | - | | | | 46,693 | | | | | Note payable from a shareholder and former officer. This was converted into 111,112 shares of common stock. | | | - | | | | 500,000 | | | | | | | | | | | | Convertible debenture from a director with an interest rate of 8% per annum. The debenture matured December 17, 2012 and was secured by the domestic patents. The debenture and accrued interest was converted into 117,784 shares of common stock. | | | - | | | | 500,000 | | | | | Convertible debenture with a significant shareholder with an interest rate of 8% per annum. The debenture matured December 17, 2012 and was secured by the domestic patents. The debenture and accrued interest was converted into 472,548 shares of common stock. | | | - | | | | 2,000,000 | | | | | | | | | | | | Convertible debenture of $16,700,000 from a shareholder with an interest rate of 8% per annum. The debenture matured on August 14, 2014. On September 30, 2013, $16,640,000 plus accrued interest of $936,627 was converted into 3,905,917 shares of common stock. A debt discount of $14,296,296 and $605,281, respectively, was recorded to reflect a beneficial conversion feature. As of September 30, reflect a beneficial conversion feature. As of September 30, 2013, the remaining debt discount was $0. The remaining balance of $60,000 plus accured interest of $3,143 was paid in cash on October 3, 2013. | | | 60,000 | | | | 1,288,693 | | | | | | | | | | | | | Total related-party debt obligations | | | 60,000 | | | | 14,385,413 | | | Less current portion | | | (60,000 | ) | | | (12,654,701 | ) | | Long-term debt, net of current portion | | $ | - | | | $ | 1,730,712 | |
(6) Debt Obligations |
Debt obligations as of September 30, 20092013 and 20082012, 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 | | | | - | |
| | | 2013 | | | 2012 | | | | | | | | | | | Settlement liability from patent infringement suit and countersuit settled in February 2010. The liability was paid in March 2013. | | $ | - | | | $ | 200,000 | | | | | | | | | | | | | Note issued in connection with the acquisition of a subsidiary and matures in December 2014. | | | 64,111 | | | | 94,459 | | | | | | | | | | | | | Capital leases with effective interest rates that range between 8.51% and 17.44%. Leases mature between August 2013 and November 2015. $154,410 was assumed through the sale of Midwest Monitoring & Surveillance, Inc. to its former owners. | | | 59,266 | | | | 118,098 | | | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.06%, due June 2014. $125,614 was assumed through the sale of Midwest Monitoring & Surveillance, Inc. to its former owners. | | | 5,306 | | | | 12,274 | | | | | | | | | | | | | Total debt obligations | | | 128,683 | | | | 424,831 | | | Less current portion | | | (88,095 | ) | | | (339,151 | ) | | Long-term debt, net of current portion | | $ | 40,588 | | | $ | 85,680 | |
The following table summarizes the Company’s future maturities of debt obligations as of September 30, 2013:
| Fiscal Year | | Total | | | 2014 | | $ | 88,095 | | | 2015 | | | 38,945 | | | 2016 | | | 1,643 | | | Thereafter | | | - | | | Total | | $ | 128,683 | |
| | | | | | | | | | | 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 | |
(13) | | Fiscal Year | | Total | | | 2014 | | $ | 36,419 | | | 2015 | | | 27,721 | | | 2016 | | | 1,722 | | | 2017 | | | - | | | Thereafter | | | - | | | Total minimum lease payments | | | 65,862 | | | Less: amount representing interest | | | (6,596 | ) | | Present value of net minimum lease payments | | | 59,266 | | | Less: current portion | | | (31,576 | ) | | Obligation under capital leases - long-term | | $ | 27,690 | |
As of September 30, 2013 and 2012, the Company had total capital lease obligations of $59,266 and $272,508, the current portion being $31,576 and $131,072, respectively. Capital leases are secured by assets with a total original cost of $105,162 and $234,659 with related accumulated depreciation of $40,932 and $83,577 as of September 30, 2013 and 2012, respectively.
(7) Preferred Stock |
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's Board of Directors has the authority to amend the Company's Articles of Incorporation, without further stockholdershareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series A 10 %D Convertible Non-Voting Preferred Stock The
In July 2011, the Company designated 40,000 sharesamended its Articles of preferred stock as Series A 10% Convertible Non-Voting Preferred stock ("Series A Preferred stock"). DuringIncorporation and increased the year ended September 30, 2009, all 19 outstandingtotal designated 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 AD Preferred stock was entitledfrom 70,000 to dividends at the rate of 10% per year on the stated value of the 85,000 shares (“Series AD 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.stock”). During the fiscal years ended September 30, 20092013 and 2008,2012, the Company recorded $175issued 0 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 15,9864,008 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 fromunder securities purchase agreements totaling $6,100,000for $0 and $2,004,000 in net cash proceeds, respectively.
As 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 ofSeptember 30, 2013 and 2012, there were 468 and 48,763 Series D Preferred stock.shares outstanding, respectively.
Dividends The Series D Preferred stock is entitled to dividends at the rate equal to eight8 percent (8%) per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be). Dividends are payable quarterly, no later than thirty30 days following the end of the accrual period.
During the fiscal year ended September 30, 2013, the Company issued 181,832 shares of common stock to pay $1,663,997 of accrued dividends on the Series D Preferred stock earned for the twelve months between July 1, 2012 and June 30, 2013. Subsequent to September 30, 2013, the Company issued 483 shares of common stock to pay $5,650 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2013.
During the fiscal year ended September 30, 2012, the Company issued 210,689 shares of common stock to pay $2,391,568 of accrued dividends on the Series D Preferred stock earned for the twelve months between July 1, 2011 and June 30, 2012. Subsequent to September 30, 2012, the Company issued 103,803 shares of common stock to pay $630,528 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2012.
Convertibility Each share of Series D Preferred stock may be converted into 6,00030 shares of common stock, commencing after ninety days from the date of issue.
In February 2013, and as a condition to a loan agreement, the Company conducted an exchange offer (“Exchange Offer”) of Series D Preferred stock in order to simplify the capitalization structure. The Exchange Offer was conditioned upon at least 90 percent of the cumulative original issue price paid for all of the issued and outstanding shares of Series D Preferred stock. The shareholders were entitled to exchange their shares of Series D Preferred at a premium over the current conversion rate of 30 shares of common stock per Series D Preferred share as follows: 15 shares for each $1,000 of original price paid, 10 shares for each $676 of original price paid, and 8 shares for each $500 of original price paid. During the fiscal year ended September 30, 2013 and under the Exchange Offer, 48,295 shares of Series D Preferred stock converted into 1,894,283 shares of common stock.
During the fiscal year ended September 30, 2012, 90 shares of Series D Preferred stock were converted into 2,700 shares of common stock.
Subsequent to the fiscal year ended September 30, 2013, the Company entered into an Employment Agreement with its Chief Financial Officer. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. Voting Rights and Liquidation Preference The holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders,shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. In addition, on the issues of an increase in the number of shares of common stock the Company is authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series D Preferred stock may vote as a class holding the equivalent of 60 percent of the issued and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of the date of this report,September 30, 2013 and 2012, there were 25,186468 and 48,763 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.outstanding, respectively. Additionally, the holders are entitled to a liquidation preference equal to their original investment amount.
In the event of the liquidation, dissolution or winding up of the affairs of the Company (including in connection with a permitted sale of all or substantially all of the Company’s assets), whether voluntary or involuntary, the holders of shares of Series D Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its stockholders,shareholders, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.
(14) | SecureAlert Preferred Stock |
Series D Preferred Stock Warrants
SecureAlert, Inc.As of September 30, 2012, 5,400 warrants to purchase Series AD Preferred Shares
stock at an exercise price of $500 per share were issued and outstanding. During the fiscal year ended September 30, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. 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 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 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. In2013, no case will a dividend be paid if the gross revenue per contract per day to SecureAlert Monitoring aver ages less than $4.50. Dividends will 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 SecureAlert 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 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, SecureAle 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.stock warrants were issued or exercised.
Authorized Shares
The Company isheld an Annual Shareholders meeting on February 28, 2013, at which time the shareholders approved a reverse stock split at a ratio of 200 for 1 and reduced the total authorized to issue up to 250,000,000 shares of common stock.stock to 15,000,000 shares. The retroactive effect of the reverse stock split has been reflected throughout these financial statements.
Common Stock Issuances
During the fiscal year ended September 30, 2009,2013, the Company issued 54,484,7286,709,021 shares of common stock. Of these shares, 9,3061,894,283 shares were issued upon conversion of 1948,295 shares of Series AD 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; 2,254,12121,884 shares were issued for services rendered to the Company valued at $728,874; 3,007,286$141,758; 4,607,361 shares were issued in connection with debt and accrued interest of $20,733,118; 181,832 shares were issued to purchase Bishop Rockpay dividends from Series D Preferred stock of $1,663,997; and to extend an option to purchase the remaining percentage of ownership of Midwest; and 17,850,0003,661 shares were issued for net cash proceedsto pay Board of $3,250,000.Director fees of $47,500.
During the fiscal year ended September 30, 2008,2012, the Company issued 28,541,175578,524 shares of common stock. Of these shares, 15,0002,700 shares were issued upon conversion of 2,00090 shares of Series BD Preferred stock; 325,00071,969 shares were issued upon settlementas part of a lawsuit; 360,000 shares were issued for debt; 9,135,000royalty agreement, valued at $819,972; 4,315 shares were issued for services inrendered to the amount of $14,324,585; 6,177,219 shares were issued for cash proceeds of $5,187,914; 650,000Company valued at $40,000; 8,449 shares were issued in connection with the acquisitiondebt and accrued interest of Midwest$118,280; 210,689 shares were issued to pay dividends from Series D Preferred stock of $2,391,568; 121,700 shares were issued to employees for compensation of $732,634; 3,000 shares were issued to pay Board of Director fees of $48,060 and Court Programs; 825,893155,703 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.$1,033,000 in cash proceeds.
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.
(16)(9) | Stock Options and Warrants |
Stock Incentive Plan
DuringAt the fiscal year ended September 30, 2006,annual meeting of shareholders on December 21, 2011, the stockholdersshareholders approved the 20062012 Equity Incentive AwardCompensation Plan (the “2006“2012 Plan”)., which had previously been adopted by the Board of Directors of the Company. The 20062012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who have important relationships with the Company. A total of 10,000,00090,000 shares are authorized for issuance pursuant to awards granted under the 20062012 Plan. During the fiscal yearyears ended September 30, 2009, the Company granted 4,931,2142013 and 2012, 0 and 30,000 options were issued under this plan as described 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 | |
2012 Plan, respectively. As of September 30, 2009, 21,658,8312013, 60,000 shares of common stock were available for future grants under the 25,248,165 outstanding options and warrants were vested.2012 Plan.
Re-pricing of Warrants
During the fiscal year ended September 30, 2009,2013, the Company did not re-price any previously 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.warrants.
During the fiscal year ended September 30, 2008,2012, the Company re-priced 24,465 previously 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 debt financing agreements with original exercise prices rangeranging from $0.59$20 to $4.05 per share. The$60, revising the exercise price forto $15, resulting in additional interest expense of $39,965. Of the options granted during24,465 warrants re-priced, 21,055 warrants were in connection with related-party transactions.
All Options and Warrants
During the fiscal year ended September 30, 2008 were based upon2013, the quoted market priceCompany granted 143,937 warrants to members of its Board of Directors, valued at $701,062. As of September 30, 2013, $154,378 of compensation expense associated with unvested stock options and warrants issued previously to members of the Company’sBoard of Directors will be recognized over the next year.
During the fiscal year ended September 30, 2012, the Company granted options and warrants to purchase 54,500 shares of common stock as follows: 18,500 to members of the Board of Directors, valued at $105,041; 30,000 to settle a lawsuit, valued at $253,046; and 6,000 warrants to a consultant, valued at $33,358. The vesting periods for these options and warrants ranged from three to five years. Additionally during the fiscal year ended 2012, the Company cancelled 182,500 of unvested warrants held by executives of the Company and issued 121,700 shares of common stock and accelerated the vesting of 57,500 of warrants for services rendered. The modification of the equity awards resulted in $2,130,694 of compensation expense which includes the immediate recognition of the unamortized portion of the cancelled unvested warrants. The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2013 and 2012 using the Black-Scholes model, respectively:
| | | Fiscal Years Ended | | | | | September 30, | | | | | 2013 | | | 2012 | | | Expected cash dividend yield | | | - | | | | - | | | Expected stock price volatility | | | 108 | % | | | 95 | % | | Risk-free interest rate | | | 0.18 | % | | | 0.36 | % | | Expected life of options | | 1.38 Years | | 2 Years | |
The fair value of each stock option and warrant grant is estimated on the date of grant.grant using the Black-Scholes option-pricing model. The expected life of stock options and warrants represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. In fiscal year 2013, the Company changed from a daily to weekly volatility. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options and warrants. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock option and warrants.
(17) | Deferred Compensation |
AsA summary of September 30, 2008, deferred compensation in connection with common stockthe compensation-based options 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 duringactivity for the fiscal yearyears ended September 30, 2009. Additionally, the Company recorded deferred compensation expense of $384,667 related to common stock2013 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, 2009.2012 is presented below:
| | | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2011 | | | 495,891 | | | $ | 26.00 | | | | | | | Granted | | | 54,500 | | | $ | 18.00 | | | | | | | Expired | | | (213,609 | ) | | $ | 22.00 | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2012 | | | 336,782 | | | $ | 28.00 | | | | | | | Granted | | | 143,937 | | | $ | 11.18 | | | | | | | Expired / Cancelled | | | (52,754 | ) | | $ | 76.97 | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2013 | | | 427,965 | | | $ | 16.12 | | 1.38 years | | $ | 1,802,008.18 | | | Exercisable as of September 30, 2013 | | | 392,939 | | | $ | 16.75 | | 1.36 years | | $ | 1,435,627.07 | |
The issuance of common stock and warrants during the fiscal year endedend intrinsic values are based on a September 30, 2009 valued at $384,667 is outlined as follows:2013 closing price of $19.46 per share.
| · | 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, 20092013 and 2008,2012, the Company incurred net losses of $22,761,102 and $49,339,637, respectively, for income tax purposes.purposes of $3,427,372 and $8,693,769, respectively. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
At September 30, 2009,2013, the Company had net carryforwards available to offset future taxable income of approximately $158,807,000$179,000,000 which will begin to expire in 2017.2020. The utilization of the net loss carryforwards is dependent upon the tax laws in effect at the time the net operating loss carryforwards can be utilized. The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of these net operating loss carryforwards. For example, limitationsAs part of a debt conversion to common stock on September 30, 2013 the Company believes a Section 382 ownership change occurred. In general, a Section 382 ownership change occurs if there is a cumulative change in ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are imposedpermitted to offset future taxable income. Of our federal NOL amount as of September 30, 2013, approximately $79,000,000 is subject to an annual Section 382 limitation of approximately $6,200,000 per year due to the ownership change. Since the Company maintains a full valuation allowance on all of its U.S. and state deferred tax assets, the impact of the ownership change on the utilizationfuture realizability of net operating loss carryforwards if certain ownership changes have taken place or will take place. The Company will performits U.S. and state deferred tax assets did not result in an analysisimpact to determine whether any such limitations have occurred as the net operating losses are utilized.
Deferredour provision for income taxes are determined basedfor the year ended September 30, 2013, or on the estimated future effectsCompany’s net deferred tax asset as of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in place.September 30, 2013.
The deferred income tax assets (liabilities) were comprised of the following as of September 30:for the periods indicated: | | | | Fiscal Years Ended | | | | | | September 30, | | | | | | 2009 | | | | 2008 | | | 2013 | | | 2012 | | | Net loss carryforwards | | $ | 53,994,000 | | | $ | 45,367,000 | | | $ | 72,700,000 | | | $ | 72,200,000 | | | Accruals and reserves | | | 101,000 | | | | (99,000 | ) | | | 247,000 | | | | 529,000 | | | Contributions | | | 1,000 | | | | 3,000 | | | | 8,000 | | | | 6,000 | | | Depreciation | | | | 42,000 | | | | 26,000 | | | Stock-based compensation | | | | 5,880,000 | | | | 5,768,000 | | | Valuation allowance | | | (54,096,000 | ) | | | (45,271,000 | ) | | | (78,877,000 | ) | | | (78,529,000 | ) | | | | $ | - | | | $ | - | | | | Total | | | $ | - | | | $ | - | |
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the fiscal years ended September 30, 20092013 and 20082012 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 | | $ | - | | | $ | - | |
| | | Fiscal Years Ended | | | | | September 30, | | | | | 2013 | | | 2012 | | | Federal income tax benefit at statutory rate | | $ | 6,091,000 | | | $ | 5,936,000 | | State income tax benefit, net of federal income tax effect | | | 591,000 | | | | 576,000 | | Change in estimated tax rate and gain (loss) on non-deductible expenses | | | (5,556,000 | ) | | | (2,068,000 | ) | | Loss of operating losses for entities sold | | | (778,000 | ) | | | - | | | Change in valuation allowance | | | (348,000 | ) | | | (4,444,000 | ) | | Benefit for income taxes | | $ | - | | | $ | - | |
During the fiscal year ended September 30, 2013, the Company began recognizing revenues from international sources from its products and monitoring services. During the fiscal year ended September 30, 2013, the Company accrued $76,732 in value-added taxes which will be due upon collection.
The deferred incomeCompany’s open tax assets (liabilities) and theyears for its federal and state income tax benefits reflects an adjustment in calculatingreturns are for the valuation allowance using a tax rate of 15% used in fiscal yearyears ended 2008 to 34% in fiscal year ended 2009.September 30, 2010 through September 30, 2013.
(19) | Commitment(11) Commitments and Contingencies |
Legal Matters
Satellite TrackingLazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach 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 suitcontract with regard to certain Stock Redemption Agreements with the Company. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed againstby the Company and other defendants in the United States District Court for the Eastern District of Texasplaintiffs 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.November 15, 2012. The Company also asserted a counterclaim for declaratory judgment that the Company has not infringed the '909 Patentbelieves these allegations are inaccurate 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, andintend to defend 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 for infringement accor 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 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 Scien tific, 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 name of RemoteMDx, Inc. The Company intends to vigorously defend itself against Castellanos’ claims.vigorously. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. The Company intends to defend this matter. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming the Company breached a contract for computer services and intentionally interfered with its economic relations. The Company believes the allegations are inaccurate and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
Informal Inquiry.Christopher P. Baker v. SecureAlert, Inc. 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 advisedFebruary 2013, Mr. Baker filed suit against the Company in its correspondencethe Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that this informal inquiry shouldthe Company breached a 2006 consulting agreement with him and claims damages of 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.less than $210,000. The Company voluntarily disclosed this inquirydisputes plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, the Company filed a claim in its Quarterly Reportthe United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on Form 10-Q for the fiscal qua rter ended March 31, 2008. There were no material developments in thislanguage and intent of the parties and we will pursue the matter during the fiscal year ended September 30, 2009.vigorously.
Operating Lease Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2009:2013:
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 | |
| Fiscal Year | | Total | | | | | | | | 2014 | | $ | 237,580 | | | 2015 | | | 34,721 | | | Thereafter | | | - | | | | | | | | | Total | | $ | 272,301 | |
The total contractualoperating lease obligations of $1,463,094$272,301 consist of the following: $1,324,432$272,301 from facilities operating leases and $138,662$0 from equipment leases. During the fiscal years ended September 30, 20092013 and 2008,2012, the Company paid approximately $487,000$350,073 and $536,000,$383,187, in lease payment obligations, respectively.
Indemnification AgreementsIntellectual Property Settlement
In November 2001,January 2010, the Company entered into an intellectual property settlement agreement with an entity whereby the Company agreed to begin paying the greater of a 6% royalty or $0.35 per activated device of monitoring revenues, subject to certain adjustments. The Company and other party disagree with the methodology used to calculate such royalty, litigation was filed by the Company in December 2013 to resolve the matter. Indemnification Agreements
The Company’s Bylaws require the Company to indemnify any individual who is made a party to a proceeding because the individual is or was a director or officer of the Company against any liability or expense incurred in connection with such proceeding to the extent allowed under the Utah Revised Business Corporation Act (the “UBCA”), if the Company has properly authorized indemnification under Section 16.10a-906 of the UBCA. Section 16-10a-906(2) of the UBCA requires that the Company determine, before granting indemnification, that: (i) the individual’s conduct was in good faith; (ii) the individual reasonably believed that the individual’s conduct was in, or not opposed to, the Company’s best interests; and (iii) in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual’s conduct was unlawful. The foregoing description is necessarily general and does not describe all details regarding the indemnification of officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.
Cellular Access AgreementInternational Importation Audit
During the fiscal year ended September 30, 2009,2013, the Company was notified that several international importation documents were selected to be audited by a taxing authority. The Company resubmitted documentation to comply with the country’s requirements; and as of the date of this Report, the audit results and potential penalties are uncertain. (12) Discontinued Operations
SecureAlert entered into a Stock Purchase Agreement with certain of the former principals of its wholly-owned subsidiary, Midwest Monitoring & Surveillance, Inc. (“Midwest”) whereby they purchased from the Company all of the issued and outstanding capital stock of Midwest. The agreement was effective as of October 1, 2012. Additionally, the Company entered into several agreements with cellular organizationsa Stock Purchase Agreement to provide communication services. sell to a former principal all of the issued and outstanding stock of Court Programs Inc. (“Court Programs”), effective January 1, 2013. Midwest and Court Programs were components of the Company’s consolidated entity, and as a result of the sale of these entities, these financial statements include the applicable discontinued operations reporting treatment.
The cost tofollowing is a summary of the Company duringassets and liabilities of Midwest and Court Programs reported as discontinued operations for the fiscal years ended September 30, 20092013 and 2008 was approximately $2,422,5412012, respectively:
| | | 2013 | | | 2012 | | | Current assets: | | | | | | | | Cash | | $ | - | | | $ | 237,082 | | | Accounts receivable, net of allowance for doubtful accounts | | | - | | | | 452,841 | | | Note receivable | | | - | | | | 81,389 | | | Prepaid expenses and other assets | | | - | | | | 218,593 | | | Total current assets | | $ | - | | | $ | 989,905 | | | | | | | | | | | | | Non-current assets: | | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | - | | | $ | 173,002 | | | Monitoring equipment, net of accumulated amortization | | | - | | | | 153,163 | | | Deposits | | | - | | | | 9,218 | | | Goodwill | | | - | | | | 375,000 | | | Intangible assets, net of accumulated amortization | | | - | | | | 148,636 | | | Total non-current assets | | $ | - | | | $ | 859,019 | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable | | $ | - | | | $ | 614,557 | | | Accrued liabilities | | | - | | | | 561,611 | | | Deferred revenue | | | - | | | | 67,613 | | | Current portion of long-term related-party debt | | | - | | | | 138,602 | | | Current portion of long-term debt | | | - | | | | 295,067 | | | Total current liabilities | | $ | - | | | $ | 1,677,450 | | | | | | | | | | | | | Long-term liabilities: | | | | | | | | | | Long-term portion of related-party debt | | | - | | | | - | | | Long-term portion of debt | | | - | | | | 364,270 | | | Total long-term liabilities | | $ | - | | | $ | 364,270 | |
The following is a summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and $2,940,000, respectively. These amounts are included in cost of sales.2012: | | | 2013 | | | 2012 | | | Revenues | | $ | 477,298 | | | $ | 6,676,513 | | | Cost of revenues | | | (163,487 | ) | | | (4,112,410 | ) | | Gross profit | | | 313,811 | | | | 2,564,103 | | | Selling, general and administrative | | | (319,976 | ) | | | (2,782,628 | ) | | Loss from operations | | | (6,165 | ) | | | (218,525 | ) | | Other expense | | | (295 | ) | | | (89,294 | ) | | Net loss from discontinued operations | | $ | (6,460 | ) | | $ | (307,819 | ) |
(13) Subsequent Events
The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2013, the following events occurred:| 1) | The Company issued to directors for services rendered during the fourth fiscal quarter ended September 30, 2013, warrants to purchase 6,840 shares of Common Stock with an exercise price of $19.46 per share, valued at the date of grant at $53,091 using the Black-Scholes model. |
| 2) | The Company issued 483 shares of common stock for fourth quarter Series D Preferred stock dividends, valued at $5,650. |
| 3) | The Company issued 760 shares of common stock to several directors for services rendered, valued at $15,000. |
| 4) | The Company issued 500 shares of common stock to a consultant from the exercise of warrants with an exercise price of $16.00 per share which provided cash proceeds to the Company of $8,000. |
| 5) | The Company issued 4,700 shares of common stock to an officer upon the cashless exercise of warrants with exercise prices ranging from $15.00 to $16.66 per share. |
| 6) | The Company entered into an Employment Agreement with its Chief Financial Officer. The term of this agreement commenced on November 14, 2013 and continues until the earlier of (i) 30 days following the closing of an acquisition of or by the Company; or (ii) November 13, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment terminates as a result of an involuntary termination other than for cause or at the end of the term of the agreement, he will be entitled to receive separation benefits which include payment of salary of $192,000 paid over a 120-day period and other benefits as outlined in the agreement. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. |
| 7) | On November 15, 2013, the Company entered into a 41-month agreement with the Gendarmeria de Chile (the Republic of Chile’s uniformed prison service) to provide electronic (GPS and residential) monitoring of offenders and other services to the Chilean government. The agreement calls for the Company to put into service up to 9,400 electronic monitoring (GPS) devices over the contract. The Company was required under the agreement, to post a performance bond in the amount of $3,382,082 U.S. Dollars. In addition, the Company will design and construct a real-time monitoring and data center to be staffed by Chilean government employees. Training from the monitoring center personnel will also be provided by the Company. The maximum sum to be paid for the services provided by the Company is approximately $70,000,000 U.S. Dollars, at current exchange rates, over the term of the agreement. |
| 8) | The Company drew down an advance of $1,200,000 from a line-of-credit to be used with other available cash on hand to issue a bond for an international customer in the amount of $3,382,082. |
| 9) | The Company borrowed $1,500,000 from a shareholder for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014. |
| 10) | On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously. |
| 11) | On December 17, 2013, the Company entered into a non-binding letter of intent to acquire all of the issued and outstanding stock of GPS Global, an Israeli corporation located in Tel Aviv. The parties are currently negotiating a definitive agreement for the stock purchase; compensation for the stock will be a combination of cash and our common stock. It is the intent of the parties to close the transaction as soon as possible. |
| 12) | On January 3, 2014, the Company entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by the Company’s Chairman, Guy Dubois. Under this agreement, the Company may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on January 3, 2016. In addition, the Company agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the loan. As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement. |
(20) | Subsequent EventsSecureAlert, Inc. |
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. | | | | | | | |
| FORM 10-Q | | | 2) | On November 2, 2009, | | | | | | | | For 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.Quarterly Period Ended December 31, 2013 |
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
Index to Consolidated Financial Statements
| | | | | | | | | | | INDEX | | | | | | | | | | | | | | | | | | | | Page | | PART I. FINANCIAL INFORMATION | | | | | | | | | | | | Item 1 | Financial Statements | | | | | | | | | | | | | | | | | | | Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009 (Unaudited) | F-3873 | | | | Condensed Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2010 and 2009 (Unaudited)(Unaudited | F-4074 | | | | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (Unaudited) | F-4175 | | | | | Notes to Condensed Consolidated Financial Statements (Unaudited) | F-4377 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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)| | | December 31, | | | September 30, | | | Assets | | 2013 | | | 2013 | | | Current assets: | | | | | | | | Cash | | $ | 1,326,278 | | | $ | 3,382,428 | | Accounts receivable, net of allowance for doubtful accounts of $3,959,000 and $3,968,000, respectively | | | 3,563,456 | | | | 3,721,964 | | | Note receivable, current portion | | | 167,301 | | | | 176,205 | | | Prepaid expenses and other | | | 2,230,328 | | | | 1,783,805 | | | Inventory, net of reserves of $252,114 and $148,043, respectively | | | 640,541 | | | | 467,101 | | | Total current assets | | | 7,927,904 | | | | 9,531,503 | | Property and equipment, net of accumulated depreciation of $2,139,395 and $2,092,222, respectively | | | 333,108 | | | | 318,201 | | Monitoring equipment, net of accumulated amortization of $1,238,912 and $1,183,346, respectively | | | 1,600,180 | | | | 1,236,696 | | | Note receivable, net of current portion | | | - | | | | 28,499 | | | Intangible assets, net of accumulated amortization of $1,478,279 and $1,256,647, respectively | | | 15,192,288 | | | | 15,413,920 | | | Other assets | | | 3,516,650 | | | | 170,172 | | | Total assets | | $ | 28,570,130 | | | $ | 26,698,991 | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable | | $ | 670,609 | | | $ | 348,074 | | | Accrued liabilities | | | 2,233,599 | | | | 2,180,791 | | | Dividends payable | | | 9,427 | | | | 9,427 | | | Deferred revenue | | | 8,685 | | | | 8,674 | | | Current portion of long-term related-party debt | | | 2,700,000 | | | | 60,000 | | | Current portion of long-term debt | | | 87,115 | | | | 88,095 | | | Total current liabilities | | | 5,709,435 | | | | 2,695,061 | | | Long-term debt, net of current portion | | | 19,350 | | | | 40,588 | | | Total liabilities | | | 5,728,785 | | | | 2,735,649 | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 468 and 468 shares outstanding, respectively (aggregate liquidation preference of $467,507) | | | 1 | | | | 1 | | Common stock, $0.0001 par value: 15,000,000 shares authorized; 9,811,946 and 9,805,503 shares outstanding, respectively | | | 980 | | | | 980 | | | Additional paid-in capital | | | 290,539,894 | | | | 290,391,698 | | | Accumulated deficit | | | (267,699,530 | ) | | | (266,429,337 | ) | | Total equity | | | 22,841,345 | | | | 23,963,342 | | | Total liabilities and stockholders’ equity | | $ | 28,570,130 | | | $ | 26,698,991 | |
| | | 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 | | | | | Three months ended June 30, | | | Nine months ended June 30, | | | December 31, | | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2013 | | | 2012 | | | Revenues: | | | | | | | | | | | | | | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | | $ | 225,380 | | | $ | 493,595 | | | $ | 65,611 | | | $ | 1,212,497 | | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | | | 9,056,757 | | | | 8,985,386 | | | | Monitoring and other related services | | | | 2,593,683 | | | | 4,375,575 | | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | | | 9,282,137 | | | | 9,478,981 | | | | 2,659,294 | | | | 5,588,072 | | | | | | | | | | | | | | Cost of revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | | | 27,140 | | | | 246,310 | | | | 62,721 | | | | 615,592 | | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | | | 5,348,448 | | | | 8,049,230 | | | | Monitoring and other related services | | | | 1,336,108 | | | | 2,362,926 | | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | | | 5,375,588 | | | | 8,295,540 | | | | 1,398,829 | | | | 2,978,518 | | | | | | | | | | | | | | Gross profit | | | 1,363,765 | | | | 788,143 | | | | 3,906,549 | | | | 1,183,441 | | | | 1,260,465 | | | | 2,609,554 | | | | | | | | | | | | | | 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 | | | Selling, general and administrative (including $140,196 and $7,344, respectively, of compensation expense paid in stock, stock options / warrants or as a result of amortization of stock-based compensation) | | | | 2,171,447 | | | | 2,038,022 | | | Settlement expense | | | - | | | | 23,046 | | | | 1,150,000 | | | | 23,046 | | | | - | | | | 350,000 | | | Research and development | | | 490,258 | | | | 431,201 | | | | 1,161,539 | | | | 1,277,102 | | | | 319,570 | | | | 201,594 | | | Impairment of goodwill | | | - | | | | - | | | | 204,735 | | | | - | | | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | | | (7,541,526 | ) | | | (11,194,766 | ) | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | (1,230,552 | ) | | | 19,938 | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | Currency exchange rate loss | | | (672 | ) | | | - | | | | (8,756 | ) | | | - | | | | (7,035 | ) | | | (8,204 | ) | | Loss on disposal of equipment | | | - | | | | - | | | | (8,713 | ) | | | - | | | | - | | | | (1,365 | ) | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | | | (21,263 | ) | | | 20,449 | | | | Interest income | | | 86 | | | | 8,215 | | | | 13,227 | | | | 11,658 | | | | 11,223 | | | | - | | | 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 | | | Interest expense (including $2,118 and $700,384, respectively, paid in stock, stock options / warrants, and accretion of debt discount) | | | | (43,918 | ) | | | (843,224 | ) | | Other income (expense), net | | | | 89 | | | | (7,983 | ) | | Net loss from continuing operations | | | | (1,270,193 | ) | | | (840,838 | ) | | Gain on disposal of discontinued operations | | | | - | | | | 285,255 | | | Net loss from discontinued operations | | | | - | | | | (6,460 | ) | | Net loss | | | (2,054,238 | ) | | | (5,032,308 | ) | | | (11,084,874 | ) | | | (14,037,457 | ) | | | (1,270,193 | ) | | | (562,043 | ) | 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 | ) | | | Dividends on Series D Preferred stock | | | | (9,427 | ) | | | (630,330 | ) | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485 | ) | | $ | (5,032,308 | ) | | $ | (11,902,504 | ) | | $ | (14,037,632 | ) | | $ | (1,279,620 | ) | | $ | (1,192,373 | ) | | Net loss per common share, basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | (0.08 | ) | | | Net loss per common share, basic and diluted from continuing operations | | | $ | (0.13 | ) | | $ | (0.26 | ) | | Net loss per common share, basic and diluted from discontinued operations | | | $ | - | | | $ | - | | | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | | | | 215,230,000 | | | | 173,137,000 | | | | 9,808,000 | | | | 3,183,520 | |
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, | | | | | 2010 | | | 2009 | | | Cash flows from operating activities: | | | | | | | | Net loss | | $ | (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 | | | Common stock issued for services | | | 27,500 | | | | 668,874 | | | Amortization of deferred financing and consulting costs | | | 541,860 | | | | 1,497,936 | | | Non-cash compensation related to re-pricing of stock options | | | 498,992 | | | | 345,838 | | | Common stock issued for acquisition option extension cost | | | - | | | | 19,500 | | | Amortization of debt discount | | | 2,918,050 | | | | 1,067,037 | | | Settlement expense | | | 1,150,000 | | | | - | | | Non-cash interest expense related to a beneficial conversion feature | | | 62,737 | | | | - | | | Common stock issued in connection with debt | | | 25,510 | | | | - | | | Common stock issued to settle lawsuit | | | - | | | | 292,207 | | | Redemption of SecureAlert Monitoring Series A Preferred stock | | | 21,263 | | | | (20,448 | ) | | Increase in related-party line of credit for services | | | 117,193 | | | | 218,684 | | | Impairment of goodwill | | | 204,735 | | | | - | | | Derivative liability valuation (gain) loss | | | (200,534 | ) | | | 1,014,045 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable, net | | | (9,517 | ) | | | 269,388 | | | Deposit released from escrow | | | - | | | | 500,000 | | | Inventories | | | 252,257 | | | | (177,253 | ) | | Prepaid expenses and other assets | | | (81,004 | ) | | | (139,184 | ) | | Receivables | | | (99 | ) | | | 55,385 | | | Accounts payable | | | 91,999 | | | | 14,929 | | | Accrued liabilities | | | (56,376 | ) | | | 10,202 | | | Deferred revenue | | | (25,917 | ) | | | 18,572 | | | Net cash used in operating activities | | | (4,484,573 | ) | | | (6,705,204 | ) | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | Purchase of property and equipment | | | (241,491 | ) | | | (240,984 | ) | | Purchase of monitoring equipment | | | (1,588,093 | ) | | | (1,047,043 | ) | | Purchase of securities | | | - | | | | (200,000 | ) | | Disposal of property and equipment | | | 24,221 | | | | - | | | Disposal of monitoring equipment | | | 60,016 | | | | 33,519 | | | Net cash used in investing activities | | | (1,745,347 | ) | | | (1,454,508 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | Net payments on related-party line of credit | | | (137,970 | ) | | | (713,868 | ) | | Proceeds from related-party note payable | | | 500,000 | | | | 1,500,000 | | | Payment on related-party notes payable | | | (500,000 | ) | | | (603,280 | ) | | Principal payments on notes payable | | | (595,393 | ) | | | (453,766 | ) | | Proceeds from notes payable | | | 3,217 | | | | 55,744 | | | Net borrowings on bank line of credit | | | 747,400 | | | | 87,346 | | | Principal payments on notes payable related to acquisitions | | | (100,000 | ) | | | - | | | Proceeds from Series A 15% debenture, net of commissions | | | - | | | | 3,846,750 | | | Payments on Series A 15% debenture | | | (25,000 | ) | | | - | | | Proceeds from issuance of common stock, net of commissions | | | - | | | | 3,250,000 | | | Net proceeds from issuance of Series D Convertible Preferred stock | | | 7,615,300 | | | | - | | | Net cash provided by financing activities | | | 7,507,554 | | | | 6,968,926 | | | Net increase (decrease) in cash | | | 1,277,634 | | | | (1,190,786 | ) | | Cash, beginning of period | | | 602,321 | | | | 2,782,953 | | | Cash, end of period | | $ | 1,879,955 | | | $ | 1,592,167 | |
| | | Three Months Ended | | | | | December 31, | | | | | 2013 | | | 2012 | | | Cash flows from operating activities: | | | | | | | | Net Loss | | $ | (1,270,193 | ) | | $ | (562,043 | ) | | Income from discontinued operations | | | - | | | | 6,460 | | | Loss from continuing operations | | | (1,270,193 | ) | | | (555,583 | ) | Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | Depreciation and amortization | | | 459,799 | | | | 479,569 | | | Vesting of stock options for services | | | 71,250 | | | | 7,344 | | | Issuance of warrants to Board of Directors for services | | | 53,946 | | | | - | | | Issuance of common stock to Board of Directors for services | | | 15,000 | | | | - | | Accretion interest expense in connection with debt discount related to notes payable | | | 2,118 | | | | 147,606 | | | Beneficial conversion feature recorded as interest expense | | | - | | | | 552,778 | | | Impairment of monitoring equipment and parts | | | 75,000 | | | | 150,000 | | | Loss on disposal of property and equipment | | | - | | | | 1,365 | | | Loss on disposal of monitoring equipment and parts | | | 10,771 | | | | 31,851 | | | Gain on disposal of discontinued operations | | | - | | | | (285,255 | ) | | Change in assets and liabilities: | | | | | | | | | | Accounts receivable, net | | | 158,508 | | | | (3,248,722 | ) | | Notes receivable | | | 37,403 | | | | 37,332 | | | Inventories | | | (63,498 | ) | | | 7,607 | | | Prepaid expenses and other assets | | | (446,379 | ) | | | (43,784 | ) | | Accounts payable | | | 322,535 | | | | (83,600 | ) | | Accrued expenses | | | 52,808 | | | | 2,074,597 | | | Deferred revenue | | | 11 | | | | (317,551 | ) | | Net cash used in operating activities | | | (520,921 | ) | | | (1,044,446 | ) | | | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | | Purchase of property and equipment | | | (62,082 | ) | | | (3,826 | ) | | Purchase of monitoring equipment and parts | | | (750,189 | ) | | | (229,000 | ) | | Cash deposited in escrow to secure international bond | | | (3,346,622 | ) | | | - | | | Net cash used in investing activities | | | (4,158,893 | ) | | | (232,826 | ) | | | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | | Borrowings on related-party notes payable | | | 2,700,000 | | | | 1,800,000 | | | Principal payments on related-party notes payable | | | (60,000 | ) | | | - | | | Principal payments on notes payable | | | (24,336 | ) | | | (187,947 | ) | | Cash received from the exercise of warrants | | | 8,000 | | | | - | | | Net cash provided by financing activities | | | 2,623,664 | | | | 1,612,053 | | | | | | | | | | | | | Cash flow from discontinued operations: | | | | | | | | | | Net cash provided by operating activities | | | - | | | | 993 | | | Net cash used in financing activities | | | - | | | | (18,475 | ) | | Net cash used in discontinued operations | | | - | | | | (17,482 | ) | | | | | | | | | | | | Net increase (decrease) in cash | | | (2,056,150 | ) | | | 317,299 | | | Cash, beginning of period | | | 3,382,428 | | | | 458,029 | | | Cash, end of period | | $ | 1,326,278 | | | $ | 775,328 | |
The accompanying notes are an integral part of these statements.
ECUREALERT,SECUREALERT, 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 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 | | | | - | |
| | | Three Months Ended | | | | | December 31, | | | | | 2013 | | | 2012 | | | Cash paid for interest | | $ | 7,519 | | | $ | 41,715 | | | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of 483 and 103,808 shares of common stock in connection with Series D Preferred stock dividends | | | 9,427 | | | | 630,528 | | | Series D Preferred stock dividends earned | | | 9,427 | | | | 630,330 | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) BASIS OF PRESENTATION 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 the Instructions to Form 10-Q and Article 108 of Regulation S-X promulgated by the Securities and Exchange Commission.Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2010,December 31, 2013, and results of its operations for the three and nine months ended June 30, 2010December 31, 2013 and 2009.2012. 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, 2009.2013. The results of operations for the three and nine months ended June 30, 2010December 31, 2013 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)(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of SecureAlert and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation.
(4)(3) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009,From time to time, new accounting pronouncements are issued by the FASB issued additional guidanceFinancial Accounting Standards Board (FASB) or other standard setting bodies, which improvesare adopted by 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 about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be appliedCompany 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 thespecified effective date. The adoption of this guidance is not expected to have a material impact onUnless otherwise discussed, 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, with early adoptio n permitted providedCompany believes that the revised guidance is retroactively applied to the beginningimpact of the year of adoption. This guidance hasrecently issued standards that are 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 a 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 interim periods wit 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 disclosed at fair v 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 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 consolidatedits financial position or results of operations. The Company evaluated subsequent events through the date the accompanying condensed consolidated financial statements were issued.operations upon adoption.
(5)(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill,intangibles, 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 th atthat is independent of other groups of assets. During the ninethree months ended June 30, 2010December 31, 2013 and 2009,2012, the Company impaired goodwill from the purchase of Court Programs, Inc. by $204,735 and $0, respectively.had no impairments.
(6) REVENUE RECOGNITION(5) GEOGRAPHIC INFORMATION
During the three months ended December 31, 2013, the Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products and services. The Company’s revenue has historically been from two sources: (i) monitoring services; (ii) monitoring devicerevenues recognized by geographic area for the three months ended December 31, 2013 and other product sales.2012, are as follows:
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.| | | December 31, 2013 | | | December 31, 2012 | | | United States of America | | $ | 1,884,164 | | | $ | 1,768,366 | | | Latin American Countries | | | - | | | | 3,018,477 | | | Caribbean Countries and Commonwealths | | | 756,678 | | | | 786,530 | | | Other Foreign Countries | | | 18,452 | | | | 14,699 | | | Total | | $ | 2,659,294 | | | $ | 5,588,072 | |
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 d eferred revenue.
Monitoring Device Product Sales
Although notThe long-lived assets, net of accumulated depreciation, used in the focusgeneration of the Company’s business model, the Company sells its monitoring devices in certain situations. In addition, the Company sells home securityrevenues by geographic area as of December 31, 2013 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 (suchSeptember 30, 2013, were 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 customer s that have previously purchased devices at the end of each month that monitoring services have been provided.follows:
Multiple Element Arrangements| | | Net Property and Equipment | | | Net Monitoring Equipment | | | | | December 31, 2013 | | | September 30, 2013 | | | December 31, 2013 | | | September 30, 2013 | | | United States of America | | $ | 306,579 | | | $ | 318,201 | | | $ | 1,437,866 | | | $ | 878,823 | | | Latin American Countries | | | - | | | | - | | | | - | | | | - | | | Caribbean Countries and Commonwealths | | | 8,391 | | | | - | | | | 155,263 | | | | 351,138 | | | Other Foreign Countries | | | 18,138 | | | | - | | | | 7,051 | | | | 6,735 | | | Total | | $ | 333,108 | | | $ | 318,201 | | | $ | 1,600,180 | | | $ | 1,236,696 | |
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 customer. 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)(6) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") is computed by dividing net loss attributableavailable to common stockholdersshareholders 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 stockholdersshareholders by the sum of the weighted averageweighted-average number of common shares outstanding and the weighted averageweighted-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 stockshare 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, 2010December 31, 2013 and 2009,2012, there were 274,113,290466,094 and 76,128,7912,547,492 outstanding common stockshare equivalents, respectively, that were not included in the computation of diluted net loss per common shareDiluted EPS as their effect would be anti-dilutive. No reconciliation for discontinued operations was provided since the impact was immaterial. The common stock equivalents outstanding as of June 30, 2010,December 31, 2013 and 2012, 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 accrue d interest, and 19,678,165 shares underlying options and 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.following:
| | | December 31, 2013 | | | December 31, 2012 | | | Conversion of debt and accrued interest | | | - | | | | 586,070 | | | Conversion of Series D Preferred stock | | | 24,503 | | | | 1,462,890 | | | Exercise of outstanding common stock options and warrants | | | 399,591 | | | | 336,532 | | Exercise and conversion of outstanding Series D Preferred stock warrants | | | 42,000 | | | | 162,000 | | | Total common stock equivalents | | | 466,094 | | | | 2,547,492 | |
(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.(7) PREPAID AND OTHER EXPENSES
The carrying amounts reported in the balance sheets for prepaid and other expenses approximate their fair market 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 volatilityshort-term maturity of common stock. The risk-free interest rate representsthese instruments. As of December 31, 2013 and 2012, the U.S. Treasury bill rateoutstanding balance of prepaid and other expenses was $2,230,328 and $1,783,805, respectively. Of the $2,230,328, was a bond posted for an international customer totaling $1,488,778 which the expected life ofCompany believes will be returned to the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.Company by March 31, 2014.
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)(8) 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 productsraw materials that are available for sale and raw materials used in the manufacturing of TrackerPAL™TrackerPAL® and ReliAlert™ devices. Completed TrackerPAL™TrackerPAL® and ReliAlert™ devices are reflected in Monitoring Equipment. As of June 30, 2010December 31, 2013 and September 30, 2009,2013, respectively, inventory consisted of the following:
| | | | December 31, | | | September 30, | | | | | June 30, 2010 | | | September 30, 2009 | | | 2013 | | | 2013 | | | Raw materials | | $ | 475,797 | | | $ | 686,421 | | | $ | 892,655 | | | $ | 615,144 | | | Reserve for damaged or obsolete inventory | | | (124,725 | ) | | | (83,092 | ) | | | (252,114 | ) | | | (148,043 | ) | | Total inventory, net of reserves | | $ | 351,072 | | | $ | 603,329 | | | $ | 640,541 | | | $ | 467,101 | |
(10)(9) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2010December 31, 2013 and September 30, 2009,2013, were as follows: | | | | December 31, | | | September 30, | | | | | June 30, 2010 | | | September 30, 2009 | | | 2013 | | | 2013 | | | Equipment, software and tooling | | $ | 2,453,221 | | | $ | 2,742,537 | | | $ | 2,064,657 | | | $ | 2,002,577 | | | Automobiles | | | 308,611 | | | | 305,658 | | | | 33,466 | | | | 33,466 | | | Building and land | | | 377,555 | | | | 377,555 | | | | Leasehold improvements | | | 127,912 | | | | 127,912 | | | | 127,162 | | | | 127,162 | | | Furniture and fixtures | | | 284,824 | | | | 284,824 | | | | 247,218 | | | | 247,218 | | | Property and equipment, before accumulated depreciation | | | 3,552,123 | | | | 3,838,486 | | | | Total property and equipment before accumulated depreciation | | | | 2,472,503 | | | | 2,410,423 | | | Accumulated depreciation | | | (2,208,208 | ) | | | (2,525,180 | ) | | | (2,139,395 | ) | | | (2,092,222 | ) | | | | | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | 1,343,915 | | | $ | 1,313,306 | | | $ | 333,108 | | | $ | 318,201 | |
Depreciation expense for the ninethree months ended June 30, 2010December 31, 2013 and 20092012, was $311,150$47,175 and $527,917,$67,156, respectively.
AssetsProperty and equipment to be disposed of areis reported at the lower of the carrying amount or fair value, less the estimated costs to sell.sell and any gains or losses are included in the results of operations. During the ninethree months ended June 30, 2010December 31, 2013 and 2009,2012, the Company disposed of property and equipment with a net book value of $24,221$0 and $0,$1,365, respectively.
(11)(10) MONITORING EQUIPMENT
Monitoring equipment as of June 30, 2010December 31, 2013 and September 30, 2009,2013, was as follows:
| | | | December 31, | | | September 30, | | | | June 30, 2010 | | | September 30, 2009 | | 2013 | | | 2013 | | | Monitoring equipment | | $ | 5,432,285 | | | $ | 4,260,690 | | | $ | 2,839,092 | | | $ | 2,420,042 | | | Less: accumulated depreciation | | | (3,200,324 | ) | | | (2,944,197 | ) | | | (1,238,912 | ) | | | (1,183,346 | ) | | Total | | $ | 2,231,961 | | | $ | 1,316,493 | | | | Monitoring equipment, net of accumulated depreciation | | | $ | 1,600,180 | | | $ | 1,236,696 | |
The Company leasesbegan leasing monitoring equipment to agencies for offender tracking in April 2006 under operating lease arrangements. The monitoring equipment is depreciatedamortized using the straight-line method over an estimated useful life of 3three years.
Depreciation expense for the ninethree months ended June 30, 2010December 31, 2013 and 20092012, was $642,609$190,992 and $1,106,380,$324,246, respectively. Additionally, as of December 31, 2013, the Company reserved $75,000 for future monitoring equipment impairment. 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 ninethree months ended June 30, 2010December 31, 2013 and 2009,2012, the Company disposedrecorded in cost of revenues disposal of lease monitoring equipment and parts with a net book value of $60,016$10,771 and $33,519,$31,851, respectively.
(12) GOODWILL AND OTHER(11) INTANGIBLE ASSETS
The following table summarizes the activity of intangible assets for the first fiscal quarter ended December 31, 2013:
| | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | | | Intangible assets: | | | | | | | | | | | | | | Patent license agreement | | $ | - | | | $ | - | | | $ | 50,000 | | | $ | 50,000 | | | Royalty agreement | | | 11,616,984 | | | | 5,003,583 | | | | - | | | | 16,620,567 | | | Total intangible assets | | | 11,616,984 | | | | 5,003,583 | | | | 50,000 | | | | 16,670,567 | | | Accumulated amortization | | | (831,072 | ) | | | (625,448 | ) | | | (21,759 | ) | | | (1,478,279 | ) | | Intangible assets, net of accumulated amortization | | $ | 10,785,912 | | | $ | 4,378,135 | | | $ | 28,241 | | | $ | 15,192,288 | |
Borinquen Container Corporation On September 5, 2012, the Company entered into an agreement to redeem the royalty held by Borinquen Container Corporation (“Borinquen”) pursuant to a royalty agreement dated July 1, 2011, as amended. Under the terms of the royalty, Borinquen had the right to receive 20 percent of net revenues derived within certain geographic territories. On February 1, 2013, the Company redeemed the royalty with Borinquen and the Company capitalized the total cost of the royalty purchase commitment of $11,616,984, as a non-current asset and will amortize the asset over the remaining term of the royalty agreement, subject to periodic analysis for impairment based on future expected revenues. The Company will annually calculate the amortization based on the effective royalty rate and on the revenues in the geographic territory subject to the royalty. The Company’s analysis will be based on such factors as historical revenue and expected revenue growth in the territory.
As of June 30, 2010,December 31, 2013, the Company had recorded goodwill and intangible assets related to the acquisitiona balance of controlling interest$11,616,984 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
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 Midwest’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 approxim ately $4.00 per share), transaction costs of $45,324, and long-term liabilities assumed of $334,919.
Effective March 1, 2010, the Company purchased the remaining 49% ownership of Court Programs. Consideration for the remaining ownership of Court Programs consisted of the following: $100,000 in cash, a note payable of $200,000, a note payable for $849,631 which was subsequently exchanged 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$157,698 of amortization expense on intangible assets for Court ProgramsBorinquen during the ninethree months ended June 30, 2010December 31, 2013, resulting in a total accumulated amortization of $26,150$831,072 and net other intangible assets of $84,850.$10,785,912.
Bishop Rock SoftwareInternational Surveillance Services Corp.
Effective January 14, 2009,July 1, 2011, the Company entered into a stock purchase agreement and purchased a 100% ownership interest, including a voting interest, in Bishop Rock Software, Inc.all of the issued and outstanding shares of International Surveillance Services Corp. (“ISS”), a CaliforniaPuerto Rico corporation, (“Bishop Rock”) for 2,857,286 sharesto utilize the knowledge and connections of ISS in Central and South America and to acquire the Company’s common stock valued at $0.23 per share ($657,176), optionsrights 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,certain territorial commissions that were payable by the Company recorded an impairment expense of $460,827, resulting in no more remaining goodwi ll.to ISS.
As of December 31, 2013, the Company had a balance of $5,003,583 of intangible assets, as noted in the table above. The Company recorded $95,500$62,545 of amortization expense on intangible assets for Bishop Rock SoftwareISS during the ninethree months ended June 30, 2010,December 31, 2013, resulting in a total accumulated amortization of $185,855$625,448 and net other intangible assets of $204,146.$4,378,135.
Patent License On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to the 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’sthe Company’s present and future business. The license granted shallwill continue for so long as any of the licensed patents have enforceable rights. The license granted is not assignable or transferable except for sublicenses within the scope of itsthe license to the Company’s subsidiaries.
The Company agreed to paypaid $50,000 as consideration for the use of this patent. OfThe Company recorded $1,389 of amortization expense for the $50,000, $25,000 was paidpatent during the three months ended June 30, 2010December 31, 2013, resulting in a total accumulated amortization relating to the patent of $21,759 and net intangible assets of $28,241.
(12) OTHER ASSETS
The carrying amounts reported in the balance sheets for other assets approximate their fair market value based on the long-term maturity of these instruments. As of December 31, 2013 and 2012, the outstanding balance of other assets was $3,516,650 and $170,172, respectively. Of the $3,516,650, $3,346,622 is cash held in Chilean Pesos to guarantee a bond for an international customer and will be released and available to the Company on March 16, 2018. The Company will reflect an unrealized gain or loss in future periods to reflect the change in currency fluctuations between Chilean Pesos and the balanceUS dollar until the money is due by January 29, 2011. Sincereturned to the Company has not yet begun utilizing this patent and is inat which time a realized gain or loss will be recorded on the process of determining its useful life, no amortization was recorded in connection with the license for the nine months ended June 30, 2010.financial statements.
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 | |
(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, 2010December 31, 2013 and September 30, 2009:2013: | | | December 31, | | | September 30, | | | | | 2013 | | | 2013 | | | Accrued royalties | | $ | 843,676 | | | $ | 714,400 | | | Accrued payroll, taxes and employee benefits | | | 493,623 | | | | 473,179 | | | Accrued consulting | | | 308,324 | | | | 317,300 | | | Accrued taxes - foreign and domestic | | | 91,101 | | | | 262,880 | | | Accrued travel | | | 82,080 | | | | 50,000 | | | Accrued legal costs | | | 78,070 | | | | 57,001 | | | Accrued settlement costs | | | 70,000 | | | | 76,000 | | | Accrued interest | | | 63,793 | | | | 27,394 | | | Accrued board of directors fees | | | 60,000 | | | | 68,090 | | | Accrued cellular costs | | | 57,630 | | | | 55,000 | | | Accrued outside services | | | 39,728 | | | | 33,022 | | | Accrued warranty and manufacturing costs | | | 30,622 | | | | 30,622 | | | Accrued other expenses | | | 14,952 | | | | 15,903 | | | Total accrued expenses | | $ | 2,233,599 | | | $ | 2,180,791 | |
(14) DEBT OBLIGATIONS
| | | 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) | CONVERTIBLE PROMISSORY NOTE |
| | | December 31, | | | September 30, | | | | | 2013 | | | 2013 | | | | | | | | | | Note issued in connection with the acquisition of a subsidiary and matures in December 2014. | | $ | 51,230 | | | $ | 64,111 | | | | | | | | | | | | Capital leases with effective interest rates that range between 8.51% and 17.44%. Leases mature between June 2015 and November 2015. $154,410 was assumed through the sale of Midwest Monitoring & Surveillance, Inc. to its former owners. | | | 51,734 | | | | 59,266 | | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.06%, due June 2014. | | | 3,501 | | | | 5,306 | | | | | | | | | | | | | Total debt obligations | | | 106,465 | | | | 128,683 | | | Less current portion | | | (87,115 | ) | | | (88,095 | ) | | Long-term debt, net of current portion | | $ | 19,350 | | | $ | 40,588 | |
(15) RELATED-PARTY TRANSACTIONS
The Company entered into certain transactions with related parties during the three months ended December 31, 2013. These transactions consist mainly of financing transactions and service arrangements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Loan Agreement
On January 15, 2009,February 1, 2013, the Company entered into a loan agreement with Sapinda Asia (the “Loan”). Under this arrangement, the Company may borrow up to $1,200,000 at 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 sharesinterest rate of the Company’s common stock at a conversion price of $0.22 per share. The note bears interest at 8%three percent per annum for unused funds and 10 percent per annum for borrowed funds. On October 24, 2013 the Company drew down the full $1,200,000 for use in a performance bond as required under a contract with an international customer. As of December 31, 2013, the Company owed $1,200,000 of principal and $49,316 of accrued interest on the Loan. The Loan 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 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 remain 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) | SENIOR SECURED CONVERTIBLE NOTES |
2014.
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 No te 18). This resulted in a debt discount valued at $853,166. Additionally, with the issuance of these notes, the Company issued 3,549,630 shares of common stock valued at $226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt discount is expensed over the life of these notes. On January 13, 2010 the holders of $2,270,000 of this debt converted the notes into 2,270 shares of Series D Preferred stock. 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 d ate from March 13, 2010 to May 31, 2010. As of June 30, 2010 and 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.
Related-Party Promissory Note
(17) | SERIES A 15% DEBENTURES |
On November 19, 2013, the Company borrowed $1,500,000 from Sapinda Asia, a significant shareholder. The unsecured note bears interest at a rate of 8 percent per annum and matures on November 18, 2014. As of December 31, 2013, the Company owed $1,500,000 of principal and $14,137 of accrued interest on the promissory note.
Related-Party Service Agreement
During the fiscal year ended September 30, 2009,2013, the Company received $4,400,000entered into an agreement with Paranet Solutions, LLC to provide the following primary services: (1) procurement of hardware and software necessary to ensure that vital databases are available in cash from the issuanceevent of Series A 15% debentures. Additionally,a disaster (backup and disaster recovery system); and (2) providing the security of all data and the integrity of such data against all loss of data, misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of the Company’s Executive Committee, is the Chief Executive Officer of Paranet.
Facility Agreement
On January 3, 2014, the Company issued debenturesentered into a loan agreement (“Facility Agreement”) with Tetra House Pte. Ltd. (“Tetra House”) to a consultant in the principal amount of $106,750 for services renderedprovide unsecured debt financing to the Company. As of June 30, 2010Company for acquisitions and September 30, 2009,for other corporate purposes, including working capital. Tetra House is a private company incorporated under the total outstanding balancelaws of the debentures was $0Republic of Singapore and $4,506,750, respectively. The debentures earnedis controlled by Mr. Guy Dubois who is a director and member of the Company’s Executive Committee, and currently serves as the Chairman of the Company’s Board of Directors. Under this agreement, the Company may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 15% interest8 percent per annum and interest is payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due quarterly and principal due at maturity 18 months after issuance.payable on January 3, 2016. The Company may prepay (in minimum amounts of $1,000,000) borrowed amounts without penalty. In addition, for every $1 invested in the debenture the holder received one shareconsideration of the Company’s common stock. At the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0 .20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the debentures were subject to derivative accounting treatment (see Note 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,Facility Agreement, the Company agreed to re-price outstanding warrants held by the investor from $1.00pay Tetra House an arrangement fee equal to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing3 percent of the warrants attributed an additional $587,248aggregate maximum amount under the Facility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) being withheld from the first draw down of funds under the Facility Agreement. The Company may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House. Tetra House has 10 business days in which to fund the debt discount resulting in a tot al $3,130,423 in a debt discount to be amortized over the lifeUtilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the debentures. During the nine months ended June 30, 2010,Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. Since January 3, 2014, the Company amortized $1,821,720 of this debt discount and recorded it as interest expense.borrowed $10,000,000 under the Facility Agreement. On January 13, 201014, 2014 the holdersCompany was informed that Tetra House had assigned all of debenturesits rights and interests in the Facility Agreement to Conrent Invest, S.A., through its compartment “Safety II”, a securitization company established under the Luxembourg Law of $4,718,197 in principal22 March 2004 on securitization. Another compartment of Conrent Invest, S.A., “Safety” is a shareholder of the Company. The Company has sought additional information regarding the relationship between these compartments 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.how they are controlled by Conrent Invest, S.A.
(18) DERIVATIVES
The Company does not hold or issue derivative instruments for trading purposes. However, the Company had convertible notesAdditional Related-Party Transactions 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 periodSummary 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:All Related-Party Obligations
| | | 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 | | | | - | |
| | | December 31, | | | September 30, | | | | | 2013 | | | 2013 | | | | | | | | | | Loan from a significant shareholder with an interest rate of 10% per annum. Principal and interest due at maturity on June 30, 2014. | | $ | 1,200,000 | | | $ | - | | | | | | | | | | | | Promissory note with a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on November 19, 2014. | | | 1,500,000 | | | | - | | | | | | | | | | | | Convertible debenture of $16,700,000 from a significant shareholder with an interest rate of 8% per annum. On September 30, 2013, $16,640,000 plus accrued interest of $936,627 was converted into 3,905,917 shares of common stock and in October 2013, the Company paid $60,000 in cash to pay off the debenture. | | | - | | | | 60,000 | | | | | | | | | | | | | Total related-party debt obligations | | | 2,700,000 | | | | 60,000 | | | Less current portion | | | (2,700,000 | ) | | | (60,000 | ) | | Long-term debt, net of current portion | | $ | - | | | $ | - | |
| 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 | | | | | | | | | | | | | 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 | | | | | | | | | | | | | 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 | | | | | | | | | | | | | 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 | | | | | | | | | | | | | Note payable to a stockholder of Midwest. The note bears interest at 5% maturing in February 2013. | | | - | | | | 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 | | | Total debt obligations | | $ | 1,405,708 | | | $ | 1,282,099 | | | Less current portion | | | (886,424 | ) | | | (272,493 | ) | | Long-term debt, net of current portion | | $ | 519,284 | | | $ | 1,009,606 | |
(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 rest 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)(16) 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 boardBoard of directorsDirectors has the authority to amend the Company's Articles of Incorporation, without further stockholdershareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series D Convertible Preferred Stock
In November 2009,July 2011, the Company amended its Articles of Incorporation and increased the total designated 50,000 shares of preferred stock as Series D Convertible Preferred stock $0.0001 par value per sharefrom 70,000 to 85,000 shares (“Series D Preferred stock”). During the ninethree months ended June 30, 2010,December 31, 2013 and 2012, the Company issued a total of 17,174did not issue any additional new 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. stock.
As of JuneDecember 31, 2013 and September 30, 2010,2013, there were 37,851468 Series D Preferred shares outstanding.
Dividends The Series D Preferred stock is entitled to dividends at athe rate equal to eight8 percent (8%) per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of common stock at the sole discretion of the boardBoard of directors.Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be). Dividends are payable quarterly, no later than thirty30 days following the end of the accrual period. On April 29, 2010
During the three months ended December 31, 2013 and 2012, the Company issued 2,925,817 shares of the Company’s co mmon stock to pay $359,479 of accrued dividends. Subsequent to June 30, 2010, the Company issued 4,693,307483 and 103,803 shares of common stock to pay $578,048$9,427 and $630,528 of accrued dividends foron the third fiscal quarter.Series D Preferred stock earned during the three months ended September 30, 2013 and 2012, respectively. Subsequent to December 31, 2013, the Company issued 496 shares of common stock to pay $9,427 of accrued dividends on Series D Preferred stock earned during the three months ended December 31, 2013.
Convertibility Each share of Series D Preferred stock may be converted into 6,00030 shares of common stock, commencing after ninety days from the date of issue. During the ninethree months ended June 30, 2010, 3,316December 31, 2013 and 2012, no shares of Series D Preferred stock were converted into 19,896,000 shares of common stock. SubsequentDuring fiscal year 2013, the Company entered into an employment agreement with an officer. In addition, the officer and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155 percent of each share’s original investment; provided that the officer must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. As of December 31, 2013, the 468 shares of Preferred stock were convertible into 24,503 shares of common stock.
Redemption On January 16, 2014, the Company sent out notices to June 30, 2010, 3,218Series D Preferred shareholders regarding the Company’s election under the Amended and Restated Designation of the Rights and Preferences to redeem 261 shares of Series D Preferred stock were converted into 19,308,000 shares of common stock.
As of June 30, 2010, 132at 120% of the 37,851aggregate original investment of $260,007 through the payment of cash totaling $312,008. The redemption date is February 13, 2014. The redemption is subject to the shareholder’s right to convert the shares of Series D Preferred stock outstanding were able to be converted into common stock dueby giving notice of conversion prior 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.redemption date.
Voting Rights and Liquidation Preference The holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders,shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. In addition, on the issues of an increase in the number of shares of common stock the Company is authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series D Preferred stock may vote as a class holding the equivalent of 60 percent of the issued and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of the date of this report,December 31, 2013 and September 30, 2013, there were 34,633468 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,shareholders, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.
Series D Preferred Stock Warrants During the nine months ended June 30, 2010, the Company issued and vestedAs of December 31, 2013, 1,400 warrants to purchase a total of 4,000 Series D Preferred stock at an exercise price of $500.00$500 per share. The warrantsshare were valued usingissued and outstanding. During 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. Thethree months ended December 31, 2013, no Series D Preferred stock 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.(17) COMMON STOCK
SecureAlert Monitoring, Inc. (formerly SecureAlert, Inc.) Series A PreferredAuthorized 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 reflectheld an Annual Shareholders meeting on February 28, 2013, at which time the difference betweenshareholders approved a reverse stock split at a ratio of 200 for 1 and reduced 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 5,160,858total authorized shares of common stock to satisfy $609,772 in contingency payments on SMI Series A Preferred15,000,000 shares. The retroactive effect of the reverse stock and issued 229 shares of Series D Preferred stock to convert future contingency payments for two individuals, valued at $229,000.split has been reflected throughout these financial statements.
(22) COMMON STOCKCommon Stock Issuances
On June 30, 2010,During the three months ended December 31, 2013, 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 ofissued 483 shares of common stock to pay $9,427 of accrued dividends on Series D Preferred stock; 760 shares of common stock to pay $15,000 of Board of Director fees for services rendered during the fourth fiscal quarter ended September 30, 2013; and 5,200 shares of common stock were issued from the exercise of options and warrants providing net cash proceeds to the Company is authorizedof $8,000. Subsequent 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,December 31, 2013, the Company issued 28,382,675496 shares of common stock as follows:payment of dividends on Series D Preferred stock for the first fiscal quarter ended December 31, 2013, valued at $9,427.
(18) STOCK OPTIONS AND WARRANTS
| · | 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. |
Stock Incentive Plan
| · | 250,000 shares of common stock, valued at $27,500 for services rendered. |
At the annual meeting of shareholders on December 21, 2011, the shareholders approved the 2012 Equity Compensation Plan (the “2012 Plan”), which had previously been adopted by the Board of Directors of the Company. The 2012 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 90,000 shares are authorized for issuance pursuant to awards granted under the 2012 Plan. During the three months ended December 31, 2013 and 2012, no options were issued under this 2012 Plan, respectively. As of December 31, 2013, 60,000 shares of common stock were available for future grants under the 2012 Plan.
| · | 19,896,000 shares of common stock for the conversion of Series D Convertible Preferred stock |
All Options and Warrants
| · | 2,925,817 shares of common stock, valued at $359,479, for Series D Convertible Preferred stock dividends |
During the three months ended December 31, 2013 and 2012, the Company granted 6,840 and 0 stock purchase warrants, respectively. These warrants were fully vested at the time of grant and have a term of two years. The 6,840 warrants granted this quarter were to members of its Board of Directors for services rendered during the fourth fiscal quarter ended September 30, 2013, valued at $53,947. As of December 31, 2013, $83,128 of compensation expense associated with unvested stock options and warrants issued previously to members of the Board of Directors will be recognized over the next year.
| · | 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
The Company recorded $125,196 and Warrants$7,344 of expense for the three months ended December 31, 2013 and 2012, respectively, related to the granting and vesting of all stock options and warrants. The following are the weighted-average assumptions used for options granted during the three months ended December 31, 2013 and 2012 using the Black-Scholes model, respectively: As
| | | Three Months Ended December 31, | | | | | 2013 | | | 2012 | | | Expected cash dividend yield | | | - | | | | - | | | Expected stock price volatility | | | 103 | % | | | - | | | Risk-free interest rate | | | 0.10 | % | | | - | | | Expected life of options/warrants | | 1 Year | | | | - | |
The fair value of June 30, 2010, 18,455,498each stock option and warrant grant is estimated on the date of grant using the 19,678,165 outstandingBlack-Scholes option-pricing model. The expected life of stock options and warrants were vested with a weighted average exerciserepresents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of $0.34the Company’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options and warrants. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock option and warrants.
A summary of stock option and warrant activity for the three months ended December 31, 2013 is presented below: | | | Shares Under Option/ Warrant | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | | Outstanding as of September 30, 2013 | | | 427,965 | | | $ | 16.12 | | | | | | | Granted | | | 6,840 | | | $ | 19.46 | | | | | | | Expired / Cancelled | | | - | | | $ | - | | | | | | | Exercised | | | (35,214 | ) | | $ | 16.43 | | | | | | | Outstanding as of December 31, 2013 | | | 399,591 | | | $ | 16.15 | | 1.16 years | | $ | 1,640,319 | | | Exercisable as of December 31, 2013 | | | 380,730 | | | $ | 16.50 | | 1.15 years | | $ | 1,446,243 | |
The intrinsic values are based upon the closing price on December 31, 2013 of $19.29 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-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)(19) CHANGES IN EQUITY (DEFICIT)
A summary of the composition of Equity (Deficit)equity of the Company at June 30, 2010 and 2009,as of December 31, 2013, and the changes during the ninethree months then ended is presented in the following table: | | | Total SecureAlert, Inc. stockholders' equity (deficit) | | | Noncontrolling interest | | | Total equity (deficit) | | | Balance at September 30, 2009 | | $ | (11,988,229 | ) | | $ | (384,592 | ) | | $ | (12,372,821 | ) | | Issuance of common stock | | | 1,014,751 | | | | - | | | | 1,014,751 | | | Issuance of common stock options | | | 498,992 | | | | - | | | | 498,992 | | | Amortization of deferred compensation | | | 541,860 | | | | - | | | | 541,860 | | | Series D preferred stock dividends | | | (939,371 | ) | | | - | | | | (939,371 | ) | | Issuance of series D preferred stock | | | 25,817,795 | | | | - | | | | 25,817,795 | | | Beneficial conversion feature | | | 62,736 | | | | - | | | | 62,736 | | | Acquisition of subsidiary | | | (4,824 | ) | | | 335,086 | | | | 330,262 | | | Net loss | | | (10,963,133 | ) | | | (121,741 | ) | | | (11,084,874 | ) | | Balance at June 30, 2010 | | $ | 4,040,577 | | | $ | (171,247 | ) | | $ | 3,869,330 | |
| | | Total Equity | | | Balance at September 30, 2013 | | $ | 23,963,342 | | | Issuance of common stock for: | | | | | | Dividends from Series D Preferred stock | | | 9,427 | | | Board of Director fees | | | 15,000 | | | Exercise of options and warrants | | | 8,000 | | | Vesting of stock options and warrants | | | 71,250 | | | Series D Preferred dividends | | | (9,427 | ) | | Issuance of warrants for Board of Director fees | | | 53,946 | | | Net loss | | | (1,270,193 | ) | | Balance at December 31, 2013 | | $ | 22,841,345 | |
| | | 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 | ) |
Legal Matters Lazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements with the Company. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. The Company believes these allegations are inaccurate and intend to defend the case vigorously. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. The Company intends to defend this matter. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming the Company breached a contract for computer services and intentionally interfered with its economic relations. The Company believes the allegations are inaccurate and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against the Company in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that the Company breached a 2006 consulting agreement with him and claims damages of not less than $210,000. The Company disputes plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously.
(21) DISCONTINUED OPERATIONS
SecureAlert entered into a Stock Purchase Agreement to sell to a former principal all of the issued and outstanding stock of Court Programs Inc. (“Court Programs”), effective January 1, 2013. Court Programs were components of the Company’s consolidated entity, and as a result of the sale, these financial statements include the applicable discontinued operations reporting treatment.
Since the sale of Court Programs was effective January 1, 2013, there were no effect to the assets and liabilities of Court Programs reported as discontinued operations for the three months ended December 31, 2013 and fiscal year ended September 30, 2013, respectively:
A summary of the operating results of discontinued operations for the three months ended December 31, 2013 and 2012 are as follows:
| | | December 31, | | | December 31, | | | | | 2013 | | | 2012 | | | Revenues | | $ | - | | | $ | 477,298 | | | Cost of revenues | | | - | | | | (163,487 | ) | | Gross profit | | | - | | | | 313,811 | | | Selling, general and administrative | | | - | | | | (319,976 | ) | | Loss from operations | | | - | | | | (6,165 | ) | | Other expense | | | - | | | | (295 | ) | | Net loss from discontinued operations | | $ | - | | | $ | (6,460 | ) |
(22) SUBSEQUENT EVENTS The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to December 31, 2013, the following events occurred:
| 1) | The Company issued to directors for services rendered during the first fiscal quarter ended December 31, 2013, warrants to purchase 5,860 shares of Common Stock with an exercise price of $19.29 per share, valued at the date of grant at $30,035 using the Black-Scholes model. | | | | 2) | 496 shares of common stock were issued for first quarter Series D Preferred stock dividends, valued at $9,427. | | | | 3) | 1,173 shares of common stock were issued to several directors for services rendered, valued at $22,500. | | | | 4) | 134 shares of common stock were issued from the cashless exercise of employee options, valued at $2,600. | | | | 5) | On January 3, 2014, the Company entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by the Company’s Chairman, Guy Dubois. Under this agreement, the Company may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8 percent per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on January 3, 2016. In addition, the Company agreed to pay Tetra House an arrangement fee equal to 3 percent of the aggregate maximum amount under the loan. After the loan was executed, Tetra House assigned the Facility Agreement to Conrent Invest S.A. Since January 3, 2014, the Company borrowed $10,000,000 under the Facility Agreement. | | | | 6) | On January 16, 2014, the Company sent notices of redemption to holders of 261 shares of Series D Preferred stock of the Company. Pursuant to Section 10(c) of the Designation of Rights and Preferences the Company has the right to redeem Series D Preferred shares for cash at 120 percent of the original issue price at any time after December 1, 2010. The date of redemption has been set as February 13, 2014. The redemption by the Company is subject to the right of the Series D shareholder to convert the shares of Series D Preferred stock into common stock by giving notice of conversion prior to the date of redemption. If all 261 shares of Series D Preferred stock are redeemed by the Company, the cost to the Company will be $312,008. | | | | 7) | On February 10, 2014, the Company entered into a non-binding letter of intent to acquire all of the issued and outstanding stock of Emerge Monitoring, Inc, a Florida corporation and all of its subsidiaries and affiliate entities. The parties are currently negotiating a definitive agreement for the stock purchase; compensation for the stock will be a combination of cash and our common stock. It is the intent of the parties to close the transaction as soon as possible. |
| SECUREALERT, INC. | | | 236,469 Shares of Common Stock | | | PROSPECTUS | | April XX, 2014 |
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and DistributionDistribution. EstimatedThe following table sets forth all costs and expenses, payable by us in connection with the offering described in thissale of the Common Stock being registered. All amounts shown are estimates except for the SEC registration statement are as follows:fee.
| 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 | | | | |
| | | Amount to | | | | | be Paid | | | SEC registration fee | | $ | 548 | | | Printing and engraving expenses | | $ | 5,000 | | | Legal fees and expenses | | $ | 30,000 | | | Accounting fees and expenses | | $ | 15,000 | | | Transfer agent and registrar fees and expenses | | $ | 1,000 | | | Miscellaneous expenses | | $ | 1,000 | | | | | | | | | Total | | $ | 52,548 | |
Item 14. Indemnification of Directors and OfficersOfficers. We are a Utah corporation. Section 16-10a-90216-10a-841 of the Utah Revised Business Corporation Act (the "Revised Act"“UBCA”) allows a Utah corporation to provide, in its articles of incorporation, bylaws or by shareholder resolution, for the elimination or limitation of personal liability of a director to the corporation or to its shareholders for monetary damages for any action or omission, as a director, except (i) liability for a financial benefit received by a director to which he was not entitled, (ii) intentional infliction of harm on the corporation or the shareholders, (iii) an unlawful distribution to shareholders in violation of the UBCA, and (iv) intentional violation of criminal law.
Section 16-10a-902 of the UBCA provides that a Utah 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 orparty to a 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, settl ement, penalty, fine or reasonable expenses (including attorneys' fees),liability incurred in the Proceeding, if his or herproceeding, if: (a) the director’s conduct was in good faith, he or she(b) the director reasonably believed that his or her conduct was in, or not opposed to, the corporation’s best interests of the corporation,interests; and (c) in the case of any criminal Proceeding,proceeding, the director had no reasonable cause to believe such conduct was unlawful; provided, however, that pursuant to Subsections 902(4)-(5): (i) indemnificationa corporation may not indemnify a director under Section 90216-10a-902 if the director was adjudged liable to the corporation in connection with a Proceedingproceeding 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 inv olving action in his or her official capacity, in which Proceeding he or she was adjudged liable on the basis that he or she derivedfor deriving an improper personal benefit. All indemnification is limited to reasonable expenses only. Section 16-10a-903 of the Revised ActUBCA provides that, unless limited by its articles of incorporation, a Utah corporation shall indemnify an Indemnifiable Directora director who was successful, on the merits or otherwise, in the defense of any Proceeding,proceeding, or in the defense of any claim, issue or matter in the Proceeding,proceeding, to which he or shethe director was a Partyparty because he or she is or was an Indemnifiable Directora director of the corporation, against reasonable expenses (including attorneys' fees) incurred in connection with the Proceedingproceeding or claim with respect to which he or shethe director has been successful. In addition to the indemnification provided by Sections 902 and 903, Section 16-10a-9056-10a-905 of the Revised ActUBCA provides that, unless otherwise limited by a corporation'scorporation’s articles of incorporation, an Indemnifiable Directora director may apply for indemnification to the court conducting the Proceedingproceeding or to another court of competent jurisdiction. Under Section 16-10a-904 of the Revised Act provides thatUBCA, a Utah corporation may pay for or reimburse the reasonable expenses (including attorneys' fees) incurred by an Indemnifiable Director who is a Party to a Proceedingdirector in advance of the final disposition of the Proceeding uponproceeding if the satisfactiondirector furnishes the corporation a written affirmation of certain conditions.his or her good faith belief that the director has met the applicable standard of conduct, provides a written undertaking personally binding the director to pay the advance if it is ultimately determined that he or she did not meet the standard of conduct, and a determination is made that the facts then known to those making a determination would not preclude indemnification. The director’s undertaking need not be secured and may be accepted without reference to financial ability to make repayment. Section 16-10a-906 prohibits a corporation from making any discretionary indemnification, payment or reimbursement of expenses unless a determination has been made that the director has met the applicable standard of conduct.
The determination required under Sections 16-10a-904 and 16-10a-906 of the UBCA must be made as follows: (1) by a majority vote of a quorum of the board of directors who are not parties to the proceeding; (2) if a quorum cannot be obtained as contemplated by (1), above, by a majority vote of a committee of two or more members of the board of directors who are not parties to the proceeding and are designated by the board of directors; (3) by special legal counsel selected by a quorum of the board of directors or its committee composed of persons determined in the manner prescribed in (1) or (2), above, or if a disinterested quorum of the board of directors or committee is not possible, then selected by a majority vote of the full board of directors, or (4) by a majority of the shareholders entitled to vote by person or proxy at a meeting. Section 16-10a-907 of the Revised ActUBCA provides that, unless a corporation'scorporation’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,a director, (ii) thea corporation may indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as an Indemnifiable Director,a director, and (iii) a corporation may also indemnify and advance expenses to an officer, employee, fiduciary or agent who is not an Indemnifiable Directora 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 ActUBCA 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 0;Sections 902, 903 or 907 of the Revised Act.UBCA. Section 16-10a-909 of the Revised ActUBCA provides that a provision treating a corporation'scorporation’s indemnification of or advance for expenses to, Indemnifiable Directorsdirectors 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(except an insurance policy,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 articlesThe Company’s Amended and Restated Articles of incorporationIncorporation 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 bylawsAct or any other applicable law, a director of the Company will not be personally liable to the Company or its shareholders for monetary damages for any action taken or failure to take any action as a director, except liability for (a) the amount of a financial benefit received by a director to which he is not entitled, (b) an intentional infliction of harm on the Company or its shareholders, (c) a violation of Section 16-10a-842 of the Revised Act (regarding unlawful distributions) or (d) an intentional violation of criminal law.
The Amended and Restated Articles of Incorporation also include mandatory indemnificationprovide that, to the fullest extent permitted by the Revised Act or other applicable law, (a) the Company will indemnify a person made or threatened to be made a party to any action for all liabilities and expenses incurred by such person in connection with such action because such person is or was a director or officer of the Company or served at the request of the Company as a director, officer, partner, trustee, employee, fiduciary or agent of another entity and (b) the Company will advance expenses to such person in advance of a final disposition of such action. The Amended and Restated Articles of Incorporation further provide that neither an amendment nor repeal of the such provisions of the Company’s Amended and Restated Articles of Incorporation, nor the adoption of a provision of the Company’s Amended and Restated Articles of Incorporation that is inconsistent with respectsuch provisions, will eliminate or reduce the effect of our officers and directors and discretionary indemnificationsuch provisions with respect to employeesany matter that occurs or action or proceeding that accrues or arises prior to such amendment or repeal of such provisions or the adoption of a provision that is inconsistent with such provisions. The Company’s Bylaws require the Company to indemnify any individual who is made a party to a proceeding because the individual is or was a director or officer of the Company against any liability or expenses incurred in connection with such proceeding to the maximum extent allowed under Utah law, and agents,to advance expenses to any such individual. The Company has also entered into Indemnification Agreements with each subjectof its directors and executive officers. In such agreements, the Company agrees to limitations generally reflectinghold harmless and indemnify, including with respect to expenses, the limitations on indemnification set forthrespective officer or director to the fullest extent authorized or permitted by the Revised Act, the Company’s Amended and Restated Articles of Incorporation or the Company’s Bylaws. The Company also agrees to pay the entire amount of liabilities and expenses, without requiring the contribution of the respective officer or director, in any action in which the Company is held jointly liable with such officer or director. The Indemnification Agreements further require the Company to advance expenses to such officer or director to the maximum extent as may be permitted under 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 an 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.persons of the Company.
Item 15. Recent Sales of Unregistered SecuritiesSecurities. Since October 1, 2007,During the fiscal year ended September 30, 2013, we issuedsold the following securities described below without registration under the Securities Act of 1933, as amended (the “Securities Act”). in reliance upon exemptions from registration available under Section 4(a)(2) of the Securities Act and rules and regulations promulgated under the Securities Act, including Regulation D and Regulation S.
Fiscal Year 2008Common Stock
Shares Issued Pursuant to AcquisitionsWe issued the following shares of Common Stock: 181,832 shares of Common Stock as payment of dividends on our Series D Convertible Preferred stock; 21,884 shares of Common Stock for services, valued at $141,758; 3,661 shares of Common Stock for the payment of board of director fees, valued at $47,500; 4,607,361 shares of Common Stock for conversion of debt totaling $20,733,118; and 1,894,283 shares of Common Stock upon the exchange or conversion of 48,295 shares of Series D Preferred stock.
650,000 shares valued at $2,599,500In each of the transactions listed above, the securities were issued in December 2007 pursuantprivate transactions, solely to acquisitions. The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501without general solicitation and without registration under the Securities Act. TheseAct in reliance on Section 4(a)(2) of the Securities Act and the rules and regulations promulgated under the Securities Act, as indicated above.
In each of the transactions listed above, the shares of Common Stock were issued without registration under the Securities Act in reliance on exemptions from registration provided by 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)4(a)(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 inCompany’s reliance on Section 4(2)4(a)(2) of the Securities Act andwas based upon 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 withfollowing factors: (a) the issuance of the shares.
Shares Issued Upon the Conversion of Preferred Stock
15,000 shares of Common Stocksecurities was an isolated private transaction which did not involve a public offering; (b) there 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. Theonly a limited 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 Stockofferees; (c) there were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2)no subsequent or contemporaneous public offerings of the Securities Actsecurities; (d) the securities were not broken down into smaller denominations; and (e) the rules and regulations promulgated thereunder. The recipients ofnegotiations for the shares were accredited investors and were already security holders. The common shares were issued pursua 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 solicitationsale 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, was effected without registration undersecurities took place directly between the Securities Act in reliance on Section 4(2) of the Securities Actofferees 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 connect ion with the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates.Company.
Shares Issued Upon ExercisePurchases of WarrantsEquity Securities
3,618,814 shares were issued uponNeither 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 investorsCompany nor any affiliated purchaser 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)10b-18(3) of the SecuritiesExchange 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 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 numberpurchases of shares of the Company’s 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 com 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. 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, was 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 with 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.
Year Ended September 30, 2010
Common Stock
Duringduring the year ended September 30, 2010, we issued 5,434,143 shares of Common Stock, valued at $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.2012.
We 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.Item 16.
Additionally, we entered into an agreement with four minority owners of Midwest MonitoringExhibits 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, we paid a fee (to be credited against the purchase price for the remaining shares of Midwest Monitoring) by issuing 150,000 restricted shares of 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, we received share 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.Financial Statement Schedules.
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.(a) Exhibits
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 year ended September 30, 2010, we issued 57,204,000 shares of Common Stock upon conversion of 9,534 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
During the year ended September 30, 2010, we issued 44,941 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 $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 63 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-QSB10- 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 of SecureAlert, Inc. (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001). | | | | | | 3(i)(6) | Certificate of Amendment to the Designation of Rights and Preferences Related to Series C 8% Convertible Preferred Stock of SecureAlert, Inc. (incorporated by reference to our Current Report on Form 8-K, filed with the Commission on March 24, 2006). |
| | | | 3(i)(7) | Articles of Amendment to Articles of Incorporation filed July 12, 2006 (previously filed as exhibits to our current report on Form 8-K filed July 18, 2006, and incorporated herein by reference). | | | | | | 3(i)(8) | Articles of Amendment to the Fourth Amended and Restated Designation of Right and Preferences of Series A 10% Convertible Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | | | | | | 3(i)(9) | Articles of Amendment to the Designation of Right and Preferences of Series A Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | | | | | | 3(i)(10) | Articles of Amendment to the Articles of Incorporation and Certificate of Amendment to the Designation of Rights and Preferences Related to Series D 8% Convertible Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-Q for the three months ended March 31, 2010,10-K filed in MayJanuary 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, 200928, 2011 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2010,8-K filed in August 2010)April 4, 2011). | | | | | | 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)(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)(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, 2010August 1, 2011 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2010, filed in August 2010)15, 2011). | | | | | 3(i)(13) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed December 28, 2011 (previously filed as Exhibit to Definitive Proxy Statement, filed October 25, 2011) | | | | 3(i)(14) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed April 11, 2013 (previously filed as Exhibit on Form 10-Q filed May 15, 2013). | | | | 3(ii) | Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997). | | | | | 3(iii) | Amended and Restated Bylaws (previously filed in February 2011 as an Exhibit to the Form 10-Q for the three months ended December 31, 2010). | | | | | 4.01 | 2006 Equity Incentive Award Plan (previously filed in August 2006 as an Exhibit to the Form 10-QSB10- QSB for the nine months ended June 30, 2006). | | | | | | 4.02 | 5.012012 Equity Incentive Award Plan (previously filed as Exhibit to Definitive Proxy Statement, filed October 25, 2011). |
| 5.1 | Opinion regarding legality, filed herewith.of Durham Jones & Pinegar** | | | | | 10.01 | Distribution and Separation Agreement (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | | | 10.01 | | 10.02 | 1997 Stock Incentive Plan of the Company, (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | | | | 10.03 | 1997 Transition Plan (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | | | | 10.04 | Securities Purchase Agreement for $1,200,000 of Series A Preferred Stock (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | | | | 10.05 | Loan Agreement (as amended) dated June 2001 between ADP Management and the Company (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001). | | | | | | 10.0210.06 | Loan Agreement (as amended and extended) dated March 5, 2002 between ADP Management and the Company, effective December 31, 2001 (filed as an exhibitExhibit to our quarterly report on Form 10-QSB for the quarter ended December 31, 2001). | | | | 10.07 | Agreement with ADP Management, Derrick and Dalton (April 2003) (previously filed as Exhibit on Form 10-QSB for the six months ended March 31, 2003) |
| 10.08 | Security Agreement between Citizen National Bank and the Company (previously filed with Form 8-K in July 2006). | | | | 10.09 | Promissory Note between Citizen National Bank and the Company (previously filed with Form 8-K in July 2006). | | | | 10.10 | Common Stock Purchase Agreement dated as of August 4, 2006 (previously filed as an Exhibit to our current report on Form 8-K filed August 7, 2006 and incorporated herein by reference). | | | | 10.11 | Change in Terms Agreement between Citizen National Bank and the Company (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2006) | | | | 10.12 | Securities Purchase Agreement between the Company and VATAS Holding GmbH, a German limited liability company (previously filed with Form 8-K in November 2006). | | | | 10.13 | Common Stock Purchase Warrant between the Company and VATAS Holding GmbH dated November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2001)2006, filed in February 2007). | | | | | 10.14 | Settlement Agreement and Mutual Release between the Company and Michael Sibbett and HGR Enterprises, LLC, dated as of February 1, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007). | | | 10.03 | | 10.15 | Distributor Sales, Service and License Agreement between the Company and Seguridad Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007). | | | | 10.16 | Distributor Agreement between the Company and QuestGuard, dated as May 31, 2007. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | | | | 10.17 | Stock Purchase Agreement between the Company and Midwest Monitoring & Surveillance, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). | | | | | | 10.0410.18 | Stock Purchase Agreement between the Company and Court Programs, Inc., Court Programs of Florida Inc., and Court Programs of Northern Florida, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). | | | | | 10.19 | Sub-Sublease Agreement between the Company and Cadence Design Systems, Inc., a Delaware corporation, dated March 10, 2005 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). |
| 10.20 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | | | 10.05 | | 10.21 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | | | | 10.22 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | | | | 10.23 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | | | | 10.24 | Stock Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to Futuristic Medical, LLC), dated January 15, 2008, including voting agreement (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | | | | 10.25 | Distribution and License Agreement between euromicron AG, a German corporation, and the Company, dated Mayay 28, 2009 (previously filed as an Exhibit on Form 10-Q for the nine months ended June 30, 2009, filed in August 2009). |
| 10.26 | Agreement for Monitoring & Associated Services among I.C.S. of the Bahamas Co., Ltd., SecureAlert, Inc., International Surveillance Services Corp and The Ministry of National Security, dated November 19, 2010 (previously filed with Form 8-K in November 2010). | | | | | 10.27 | 10.06 | SettlementAgreement and Royalty Agreement between Satellite Tracking of People, L.L.C.Borinquen Container Corporation and the Company, dated January 29, 2010. Portions of this exhibit were redacted pursuant to a request for confidential treatmentSecureAlert, effective July 1, 2011 (previously filed with Form 8-K in August 2011). | | | | 10.28 | Addendum to the SecuritiesRoyalty Agreement between Borinquen Container Corporation and Exchange CommissionSecureAlert, effective July 1, 2011 (previously filed as Exhibit on Form 10-QSB10-Q for the threesix months ended DecemberMarch 31, 2009,2012, filed in February 2010)May 2012). | | | | | | 10.29 | 10.07 | Stock Purchase Agreement between the CompanyGary Shelton, Larry and Sapinda Group, Ltd., dated November 25, 2009Sue Gardner and SecureAlert, effective October 1, 2012 (previously filed as Exhibit on Form 10-QSB for the three months ended8-K in December 31, 2009, filed in February 2010)2012). | | | | | | 10.30 | 10.08 | Amended Stock PurchaseLoan and Security Agreement between Court ProgramsSapinda Asia Limited and the Company,SecureAlert, effective March 31, 2010December 3, 2012 (previously filed as Exhibit to Current Report on Form 8-K/A, filed by the Company on May 14, 2010)8-K in December 2012). | | | | | | 10.31 | 10.09 | Second Extension ofStock Purchase Agreement amongbetween David Rothbart and SecureAlert, Inc., Midwest Monitoring & Surveillance, Inc., Gary Shelton, Gary Bengtson, Larry Gardner and Sue Gardner, dated effective April 1, 2010February 8, 2013 (previously filed as Exhibit to Current Report on Form 8-K, filed by the Company on May 7, 2010)10-Q in February 2012). | | | | | | 10.32 | 21.01 | Subsidiaries of the Company,Settlement and Royalty and Share Buy Back among Borinquen Container Corporation, Sapinda Asia Limited, and SecureAlert, effective February 4, 2013 (previously filed herewith. | | | | | 23.01 | Consent of Durham, Jones & Pinegar, P.C. (incorporated by reference to Exhibit 5.01 included herewith)on Form 8-K in February 2013). | | | | | 10.33 | Acknowledgement and Agreement between Sapinda Asia Limited, and SecureAlert, dated August 13, 2013. | | | 23.02 | | 14.1 | Code of Ethics (previously filed on Form 10-K in January 2014). | | | | 23.1 | Consent of Hansen, Barnett & Maxwell, P.C., (incorporated herewith) | | | | 23.2 | Consent of Eide Bailly, LLP (incorporated herewith) | | | | 23.3 | Consent of Durham Jones & Pinegar (included in Exhibit 5)** | | | | 99.1 | Insider Trading Policy Adopted (previously filed herewith.on Form 10-K in January 2014). | | | | 101.INS* | XBRL INSTANCE DOCUMENT | | | | 101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA | | | | 101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | | | | 101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | | | | 101.LAB* | XBRL TAXONOMY EXTENSION LABEL LINKBASE | | | | 101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
* Filed herewith ** To be filed by amendment (b) Financial Statement Schedules No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto. Item 17. Undertakings (A) Undertakings.
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; |
| (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 SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; and | | (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 liability under the Securities Act, each 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; and | | 4. | That, for the purpose of determining our liability under the Securities Act to any purchaser, 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 a 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. |
(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 eventsInsofar as indemnification for liabilities 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 offeri 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 shallmay be deemedpermitted to be a new registration statement relatingour directors, officers and controlling persons pursuant to the securities offered therein,foregoing provisions, or otherwise, we have been informed 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 offeringevent that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our directors, officers or control persons in the successful defense of any action, suit or proceeding) is asserted by 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 ofdirector, officer or control person in connection with the securities being registered, which remain unsold atwe will, unless in the terminationopinion of our counsel the offering.
(4) Formatter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the purpose of determining liability underquestion whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectussuch issue.
Each Prospectus filed pursuant to Rule 424(b) as part of a registration statementRegistration Statement relating to an offering, other than registration statementsRegistration Statements relying on Rule 430B or other than prospectusesProspectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statementRegistration Statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statementRegistration Statement or prospectusProspectus that is part of the registration statementRegistration Statement or made in a document incorporated or deemed incorporated by reference into the registration statementRegistration Statement or prospectusProspectus that is part of the registration statementRegistration Statement will, , as to thea purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statementRegistration Statement or prospectusProspectus that was part of the registration statementRegistration 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 secur 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 registrantRegistrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Salt Lakethe City State of Sandy, Utah, on December 3, 2010.the XX day of April, 2014. | | | | | | | SECUREALERT, INC. | | | By: | SECUREALERT, INC. | | /s/ Guy Dubois | | | | | | | | | | | By: | | /s/ David G. Derrick | | | | | Name: | | David G. Derrick | | | | | Title: | | ChiefGuy Dubois, member, Executive Officer | | Committee |
POWERS OF ATTORNEY Each person whose signature appears below appoints Guy Dubois and Gordon Jesperson, and each of them, any of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any Registration Statement (including any amendment thereto) for this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, 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 attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them of their or his substitute and substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statementregistration statement has been signed by the following persons in the capacities and on the dates indicated. | | | | | | Signature | | Title | | Date | | | | | | | | /s/Guy Dubois | | Director, Member Executive Committee | | | /s/ David G. DerrickGuy Dubois David G. Derrick
| | Chief(Acting Principal Executive Officer (Principal Executive Officer) and Director | | December 3, 2010 | | | | | | | /s/ Chad D. Olsen
Chad D. Olsen
/s/David S. Boone | | Chief Financial Officer, Controller and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer)Director | | December 3, 2010 | | David S. Boone | | | | | | | | | | | /s/ /s/John L. Hastings, III*
John L. Hastings, III
R. Merrill | | President, Chief OperatingFinancial Officer and Director (Principal Financial | | December 3, 2010 | | John R. Merrill | | Officer and Principal Accounting Officer | | | | | | | | | /s/ Larry G. Schafran*
Larry G. Schafran
/s/Rene Klinkhammer | | Director | | December 3, 2010 | | Rene Klinkhammer | | | | | | | | | | | /s/ Edgar Bernardi*
Edgar Bernardi
/s/Winfried Kunz | | Director | | December 3, 2010 | | Winfried Kunz | | | | | | | | | | | /s/ Robert E. Childers*
Robert E. Childers
/s/Dan L. Mabey | | Director | | December 3, 2010 | | Dan L. Mabey | | | | | | | | | | | /s/ David P. Hanlon*
David P. Hanlon
/s/George F. Schmitt | | Director | | December 3, 2010 | /s/ Rene Klinkhammer*
Rene Klinkhammer
George F. Schmitt | | Director
| | December 3, 2010
|
*By:
/s/ David G. Derrick | As Attorney-in-Fact |
II-1196
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