MarkTrademark | | Application Number | | | Registration Number | | Status/ Next Action | MOBILE911Mobile911 Siren with 2-Way Voice Communication & Design® | 75/615,118 | 2,437,673 | Registered76/013,886 | | | | | MOBILE911 SIREN WITH 2-WAY VOICE
COMMUNICATION & DESIGN 2,595,328 | 76/013,886 | 2,595,328 | Registered | PAL Services® | | | 78/514,514 | | | | | WHEN EVERY SECOND MATTERS3,100,192 | 76/319,759 | 2,582,183 | Registered | TrackerPAL® | | | 78/843,035 | | | | | MOBILEPAL3,345,878 | 78/514,031 | 3,035,577 | Registered | Mobile911® | | | 78/851,384 | | | | | HOMEPAL3,212,937 | 78/514,093 | 3,041,055 | Registered | TrackerPAL® | | | CA 1,315,487 | | | | | PAL SERVICES749,417 | 78/514,514 | 3,100,192 | Registered | TrackerPAL® | | | MX 805,365 | | | | 960954 | | Registered | REMOTEMDXForesight® | 78/561,796 | pending77/137/822 | Allowed-Awaiting Statement of Use | | | | | TRACKERPAL™3481509 | 78/843,035 | 3,345,878 | Registered | ReliAlert™ | | | 85/238,049 | | | | | MOBILE9114200738 | 78/851,384 | 3,212,937 | Registered | HomeAware™ | | | 85/238,064 | | | | 4111064 | | Registered | TRACKERPAL™SecureCuff™ | CA 1,315,487 | pending | Pending85/238,058 | | | | 4271621 | | Registered | TRACKERPAL™TrueDetect™ | MX 805,365 | 960954 | 85/237,202 | | | | 4365120 | | Registered | SecureAlert™ | | | 86/031,550 | | | | 4623370 | | Registered |
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 office’s we have four patents issued and ten pending internationally. 11 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:Patents | | Application# | | Date Filed | | Patent TitlePatent# | Application/Patent
Number
| Filing/Issue Dates Issued | | Status | Remote Tracking and Communication Device | 7,330,122 | 2/12/08 | Issued | | | | | Remotely Controllable Thermostat | 6,260,765 | 7/17/01 | Issued | | | | | | | | 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 | 6,366,538 | 4/2/02 | Issued09/651523 | | 29-Aug-00 | | | | Multiple Emergency Response Services Combination Emergency Phone and Personal Audio Device6366538 | 6,285,867 | 9/4/012-Apr-02 | | Issued | Remote Tracking and Communication Device | | | 11/202427 | | 10-Aug-05 | | | 7330122 | | 12-Feb-08 | | Issued | Remote Tracking System and Device withWith Variable Sampling | 11/486,991 | 6/9/09 | Issued | 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 | 11/489,992 | 7/14/06 | Pending11/486992 | | 14-Jul-06 | | | 7737841 | | 15-Jun-10 | | Issued | 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 | | | | 12/028088 | | 8-Feb-08 | | | 7804412 | | 28-Sep-10 | | Issued | A Remote Tracking System with a Dedicated Monitoring Center | 11/486,976 | 7/14/06 | Pending11/486976 | | 14-Jul-06 | | | 7936262 | | 3-May-11 | | Issued | MethodsAlarm and Alarm Management System for Establishing Emergency Communications Between a Communications Device and a Response Center | 11/830,398 | 7/30/07 | Pending | Remote Tracking Devices | | | 12/792572 | | 2-Jun-10 | | | 8013736 | | 6-Sep-11 | | Issued | Remote Tracking and CommunicationsCommunication Device | 12/028,088 | 2/8/08 | Pending | | | | 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 | US 61/034,720 | 3/7/08 | Pending12/399151 | | 6-Mar-09 | | | | Beacon | 12/394.151 | 9/2009 | Pending |
International Patents:8232876 | | 31-Jul-12 | | Patent Title | Application/Patent Number | Filing/Issue Dates | StatusIssued | Emergency Phone with Single-Button Activation | ZL 01807350.6 | 10/5/05 | Issued11/174191 | | 30-Jun-05 | | | | Remote Tracking and Communication Device | Brazil PI0614742.9 | 8/4/06 | Pending | 7251471 | | | | Remote Tracking and Communication Device | Canada 2617923 | 8/4/06 | Pending | 31-Jul-07 | | | | Remote Tracking and Communication Device | Europe 06836098.1 | 8/4/06 | Pending | | | | | Remote Tracking and Communication Device | Mexico a/2008/001932 | 8/4/06 | Pending | | | | | Emergency Phone with Single-Button Activation | EP 01924386.4 | 3/28/01 | Pending | | | | | Emergency Phone with Single-Button Activation | JP 2001-571568 | 3/28/01 | Pending | | | | | Alarm and Alarm Management System for Remote Tracking Devices | PCT/US2007/072736 | 7/3/07 | Pending | | | | Issued | A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center | PCT/US2007/072740 | 7/3/07 | Pending11/486989 | | 14-Jul-06 | | | 8797210 | | 5-Aug-14 | | Issued | A Remote Tracking Device and a System withand Method for Two-Way Voice Communication Between the Device and a Dedicated Monitoring Center | PCT/US2007/072743 | 7/3/07 | Pending | | | | 14/323,831 | | 03-Jul-14 | | | -- | | -- | | Pending | A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device with Variable Sampling and Sending Capabilities Based on Environmental Factorsa Monitoring Center | PCT/US2007/072746 | 7/3/07 | 14/307,260 | | 17-Jul-14 | | | -- | | -- | | Pending |
During the year ended September 30, 2008,-18-
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 - Mexico | | MX/a/2008/1932 | | 4-Aug-06 | | | 278405 | | | 24-Aug-10 | | Issued | A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Mexico | | MX/a/2010/001932 | | 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 | | | 319057 | | | 14-Sep-14 | | Issued | 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 |
Trade Secrets. We own certain intellectual property, including trade secrets that we reacquired Patent Number 6,366,538 which was previously soldseek to protect, in exchangepart, through confidentiality agreements with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies 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 subjectany breach, or that our trade secrets will not otherwise become known to terminal disclaimers requiring common ownership with patents owned (Patent Number 7,092,695 and Patent Number 7,251,471)or independently developed 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.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. Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
Seasonality Given the continued and steady increaseconsistency in recurring domestic monitoring revenues by customer throughout 2010,our recently completed fiscal years, there 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 slowerslowdown in the months of July and August. This wasWe believe that this is due to the unavailability of many judges, probation directorsjudicial and other key parolecorrections officials, who observe a traditional vacation season. Backlog
With the transformation of our supply chain operations and manufacturing capabilitiesseason during July through December 2009, the commercial availability of our newly modified and enhanced TrackerPAL™ II(e) devices created an intermittent backlog of units. Monthly backlogs for organic growth and new account implementation have averaged 150 devices from July through December 2009 as we have implemented and improved our internal repair and refurbishment capabilities in conjunction with our new world-class manufacturing partner and production capabilities at Inovar.
We view backlogs as undesirable, as they impair deployments, which necessarily reduces revenue. We continue to work on mitigating backlogs, maximizing demand fulfillment, and capitalizing on all available opportunities to secure recurring revenue streams. In a significant development after September 30, 2009, we authorized the initial manufacture of our first 3,000 TrackerPAL™ II(e) units, which we began delivering in mid-December 2009 and expect to continue to deliver over the next few months. We will use these units to replace any remaining TrackerPAL™ I units, as well as to support growth in existing accounts and in support of new domestic and international opportunities.
Environment
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
Employees As of September 30, 2010,March 25, 2015, we had 183180 full-time employees and 2220 part-time employees. None of the employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and management believes that the relations with employees are good. Properties Our headquarters and monitoring facility are housed in 8,106approximately 8,600 square feet of commercial office space located at 150 West Civic Center Drive, Sandy,405 South Main Street, Suite 700, Salt Lake City, Utah. Monthly leaseLease payments are approximately $16,200.$13,200 per month. This lease expires on November 30, 2013.August 31, 2016. In addition, we signed an additional lease to provide 6,152 square feet of warehousing and pallet shipping functions and capabilities in a facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $5,300. Management believes that these facilities are sufficient to meet our needs for$6,500; the foreseeable future.lease expired on August 31, 2014; however, we negotiated a lease extension through March 2015. GPS Global’s operations are housed in approximately 420 square meters of commercial office space located at Atir Yeda Street, Kfar-Saba, Israel. The monthly lease is approximately $600. The lease began on August 1, 2014 and expires on July 31, 2018.
Emerge Monitoring’s main operations are housed in approximately 2,800 square feet of commercial office space located at 1213 & 1215 Lakeview Court, Romeoville, IL. A lease for this office space began on August 1, 2014 and expires on July 31, 2017. Monthly lease payments are approximately $3,000 per month. In addition, Emerge also leases approximately 2,000 square foot facility in Indianapolis, Indiana. This lease was executed on January 1, 2014 and expires on December 31, 2018. Monthly lease payments for this facility are approximately $3,200. Track Group Analytics Limited's operations are located in approximately 1,700 square feet of office space in Dartmouth, Nova Scotia, Canada. The lease for this office space expires on December 31, 2014. Monthly payments are approximately $2,300 per month. The Company plans to continue utilizing this facility on a month to month basis until a new lease is secured. Legal Proceedings We are party to the following 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, v. David Ezell, et al. We have filed a claim against David Ezell and several related entities for breach of contract, unjust enrichment, conversion, and punitive damages, and seek approximately $290,810 in damages, penalties, attorneys fees, and other amounts to be proven at trial. The defendant has defaulted in responding to our claims, and the court has entered judgment against Mr. Ezell and his entities in excess of $1,000,000.
Aculis, Inc.Christopher P. Baker v. SecureAlert, Inc. Aculis, Inc.In February 2013, Mr. Baker filed a complaintsuit against us in the FourthThird Judicial District Court in and for UtahSalt Lake County, Utah, on June 7, 2010, alleging breachState of contract, unjust enrichment,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 claim for $208,889 in unpaid products and services, incremental topotential loss has been made as we believe the $4,840,891 we have already paid to Aculis. We filedprobability of incurring a Motion to Dismiss for Improper Venue or for Change of Venue and supporting memorandum on July 16, 2010. Aculis filed its Memorandum in Opposition to the Motion to Dismiss on August 5, 2010. Our reply memorandum was filed on August 16, 2010. We intend to vigorously defend our interests and to pursue appropriate counterclaims against Aculis.material loss is remote.
The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2010. You should read this table in conjunction with the “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and our consolidated financial statements and the related notes thereto:
| June 30, | | | 2010 | | Cash and cash equivalents | $ | 1,879,955 | | | | | | Long-term debt: | | | | Total long-term debt | $ | 574,529 | | | | | | Stockholders’ equity: | | | | Common Stock, $0.0001 par value: 600,000,000 shares authorized; 238,748,663 shares issued and outstanding | | 23,875 | | Series D Preferred Stock, $0.0001 par value, 50,000 shares authorized; 37,851 shares issued and outstanding | | 4 | | Additional paid-in capital | | 221,235,284 | | Accumulated deficit | | (216,075,643 | ) | Total stockholders’ equity | | 3,869,330 | | Total capitalization | $ | 27,933,594 | |
MARKET PRICE FOR OUR COMMON STOCKEQUITY AND RELATED STOCKHOLDERSHAREHOLDER MATTERS Market Information Our Common Stock tradesis traded on the OTC Bulletin BoardOTCQB under the symbol “SCRA”.“SCRA.” The following table sets forth the range of high and low bidsales 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, 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 | | | | | | | | | | | Fiscal Year Ended September 30, 2014 | | | | | | | First Quarter ended December 31, 2013 | | $ | 19.99 | | | $ | 17.29 | | Second Quarter ended March 31, 2014 | | $ | 19.65 | | | $ | 17.51 | | Third Quarter ended June 30, 2014 | | $ | 18.75 | | | $ | 14.60 | | Fourth Quarter ended September 30, 2014 | | $ | 19.45 | | | $ | 10.77 | | | | | | | | | | | Fiscal Year Ended September 30, 2015 | | | | | | | | | First Quarter ended December 31, 2014 | | $ | 17.50 | | | $ | 12.30 | |
Reverse Stock Split | | 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 | |
On February 28, 2013, our shareholders approved a reduction in the authorized share capital of the Company to 15,000,000 shares of Common Stock, and authorized a reverse split to reduce the outstanding shares of the Company at a ratio of 200-for-1, which was implemented on March 25, 2013. Share and per share information for the prior periods has been retroactively adjusted in this prospectus to reflect the effects of the reverse stock split.
Holders As of September 30, 2010, there wereMarch 25, 2015, we had approximately 3,500 1,049 holders of record of our Common Stock and 280,023,25510,150,617 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 51,740,451 262,603 shares of Common Stock. 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.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. During the fiscal years ended September 30, 2009 and 2008, we recorded $175 and $345,356 in stock dividends, respectively, payable on outstanding shares of Preferred Stock. Dilution The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of Common Stock are reserved for issuance upon exercise of purchase or conversion rights. The issuance of any shares of Common Stock for any reason will result in dilution of the equity and voting interests of existing stockholders.shareholders.
Transfer Agent and Registrar The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level,6201 15th Avenue, Brooklyn, New York, NY 11219. Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth information as of September 30, 2009, our most recently completed fiscal year, with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance. No equity securities have been authorized for issuance under plans that were not previously approved by security holders. Equity Compensation2012 SecureAlert, Inc. Stock Incentive Plan Information
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance | Equity compensation plans approved by security holders | | 10,000,000 | | $1.06 | | 7,487,286 |
The Selling Stockholders will receive all of the proceeds from the sale of any Resale Shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales.
The Selling Stockholders identified in this prospectus are offering up to 47,100,000 shares of our Common Stock in this prospectus (the Resale Shares).
The Resale Shares being offered by the Selling Stockholders in this prospectus are issued or issuable to the Selling Stockholders upon conversion of a total of 7,850 shares of our Series D Preferred acquired by the Selling Stockholders in a private placement.
The Selling Stockholders may offer the Resale Shares for resale from time to time pursuant to this prospectus. The Selling Stockholders may also sell, transfer or otherwise dispose of all or a portion of their Resale Shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering those shares. We may from time to time include additional Selling Stockholders in amendments to this prospectus.
The following table sets forth information, asBoard of November 22, 2010, with respect toDirectors has adopted the Selling Stockholders,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 2012 Plan. Under the 2012 Plan, 90,000 options or shares of Common Stock may be awarded. As of the date of this report, 35,332 shares of Common Stock and Series D Preferred owned by each Selling Stockholder, andoptions for the numberpurchase of Resale Shares that may be offered pursuant to this prospectus. Unless otherwise indicated below, to our knowledge each Selling Stockholder named in the table has sole voting and investment power with respect to the44,988 shares of Common Stock beneficially owned by it. As used in this prospectus,have been awarded under the term “Selling Stockholders” has the meaning set forth in the “PLAN OF DISTRIBUTION” section of this prospectus beginning on page 46. The information is based on information provided by or on behalf of the Selling Sto ckholders.2012 Plan. The following table includes information as of March 25, 2015 for our equity compensation plans: Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | | (a) | | | (b) | | | (c) | | Equity compensation plans approved by security holders | | | 262,603 | | | $ | 15.08 | | | | 9,680 | | Equity compensation plans not approved by security holders | | | - | | | | - | | | | | | Total | | | 262,603 | | | $ | 15.08 | | | | 9,680 | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2013 and the three months ended December 31, 2014, included elsewhere in this prospectus. Overview The Company markets and deploys offender management programs, combining patented GPS tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services. Our vision is to be the global market leader for delivering the most reliable offender management solutions, which leverage superior intervention capabilities and integrated communication technologies. We currently deliver the only offender management technology that effectively integrates GPS, Radio Frequency (“RF”) and an interactive 3-way voice communication system into a single piece device, deployable worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunity to be “free from prison”. This provides for greater public safety at a lower cost compared to incarceration or traditional resource-intensive alternatives.
Our flagship product line, ReliAlert, Shadow, and R.A.D.A.R., consists of devices and services customizable to provide secure reintegration solutions for various offender types, including domestic abusers, sexual predators, gang members, pre-trial defendants, alcohol abusers, or juvenile offenders. Our proprietary software, device firmware and processes accommodate agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions. Our devices are intelligent devices with integrated computer circuitry. They are constructed from case-hardened materials and are designed to promptly notify intervention monitoring centers of attempts to breach applicable electronic supervision terms or to remove or otherwise tamper with device elements. They are securely attached around an offender’s ankle with a tamper resistant strap (steel cabling with optic fiber). We also have a unique patented, dual-steel banded SecureCuff for high risk or high flight risk offenders who have qualified for electronic monitoring supervision, but who require an incremental level of security and supervision. Results of Operations Continuing Operations - Fiscal Year 2014 Compared to Fiscal Year 2013 Net Revenue During the fiscal year ended September 30, 2014, we had net revenue of $12,262,198 compared to net revenue of $15,641,062 for the fiscal year ended September 30, 2013, a decrease of $3,378,864, or approximately 22%. Of this revenue, $11,663,181 and $15,028,625 were from monitoring and other related services during the 2014 and 2013 period, respectively, a decrease of $3,365,444 (22%). This decrease resulted primarily from the completion of a contract with an international customer in fiscal 2013. Product revenue decreased $13,420 (2%) from $612,437 for the year ended September 30, 2013 to $599,017 for the year ended September 30, 2014. Cost of Revenue During the year ended September 30, 2014, cost of revenue totaled $5,499,093 compared to cost of revenue during the year ended September 30, 2013 of $8,030,168, a decrease of $2,531,075. This decrease resulted primarily from the completion of a contract with an international customer in fiscal 2013. We expect the cost of revenue as a percentage of revenue to decrease in the foreseeable future due to economies of scale, realized through lower cost devices, projected increases in revenue, further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs, and the use of more efficient supply channels.
Impairment costs for equipment and parts for the fiscal years ended September 30, 2014 and 2013 were $373,951 and $213,276, 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, 2014 and 2013, totaled $1,313,697 and $1,230,293, 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 revenue, excluding impairment of equipment and parts, as a percentage of revenue to decrease in the foreseeable future due to (a) economies of scale realized through projected increases in revenue, and (b) further development of lower cost devices and gained efficiencies in 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, 2014, gross profit totaled $6,763,105, or 55% of net revenues, compared to $7,610,894, or 49% of net revenue during the fiscal year ended September 30, 2013, a decrease of $847,789. Included in cost of revenue are costs attributable to impairment of inventory and monitoring equipment of $373,951 and $213,276 for fiscal years 2014 and 2013, respectively. These impairment costs from disposal and reduction in value of obsolete monitoring equipment are expenses we expect to decrease in future periods. Excluding impairment costs, adjusted gross profit for the fiscal year ended September 30, 2014 was $7,137,056 or 58% of net revenue, compared to $7,824,170 or 50% of net revenue, for the same period in 2013, a decrease of $687,114. Decreases in revenue from the completion of a large international project in fiscal 2013 led to the decrease in gross profit. Research and Development Expense During the fiscal year ended September 30, 2014, we incurred research and development expense of $1,605,662 compared to similar expense recognized during fiscal year 2013 totaling $987,934. These increased research and development costs were incurred to improve efficiency in the software, firmware and hardware of our products and services including the development of new and more efficient electronic monitoring devices and other research and development costs incurred by a new subsidiary acquired during the year ended September 30, 2014.
Selling, General and Administrative Expense During the fiscal year ended September 30, 2014, our selling, general and administrative expense totaled $12,891,151, compared to $7,679,124 for the fiscal year ended September 30, 2013. The increase of $5,212,027 is primarily the result of increases in legal, consulting, travel and other outside services expense of $2,262,076, in connection with preliminary work and preparation for a large international contract and for purchase expense related to the acquisition of two new subsidiaries during the second half of fiscal 2014. The Company also incurred payroll and payroll related expense of $1,308,259 and other operating expense $1,855,614 related to the Company’s new Chilean, Israeli and U.S. subsidiaries which were not a part of the consolidated entity at September 30, 2013. Other Income and Expense For the fiscal year ended September 30, 2014, interest expense was $1,290,289, compared to $17,048,519 for the fiscal year ended September 30, 2013. This decrease in interest expense resulted primarily from a reduction in convertible debentures and the acceleration of certain debt conversion features into Common Stock during the 2014 period. For the year ended September 30, 2014, other income was $624,001 compared to other expense of $279,174 for the year ended September 30, 2013. This increase in other income resulted primarily from a settlement agreement. Net Loss We had a net loss from for the fiscal year ended September 30, 2014 totaling $8,747,844 (approximately $0.88 per share), compared to a net loss of $17,915,711 (approximately $3.79 per share) for the fiscal year ended September 30, 2013. This decrease in the net loss is a result of a large decrease in interest expense offset by increases in operating and research and development expenses. Discontinued Operations - Fiscal Year 2014 compared to Fiscal Year 2013 Effective October 1, 2012, we sold all of the issued and outstanding capital stock of our subsidiaries, Midwest Monitoring & Surveillance, Inc. (“Midwest”) and Court Programs, Inc. (“Court Programs”) to each of the their former principals, effective October 2012 and January 2013, respectively. Since Midwest and Court Programs were a component of our consolidated entity, these sales require discontinued operations reporting treatment of the Midwest and Court Program operations. A summary of the operating results of discontinued operations for the fiscal years ended September 30, 2014 and 2013 is as follows:
| | 2014 | | | 2013 | | Revenues | | $ | - | | | $ | 477,298 | | Cost of revenues | | | - | | | | (163,487 | ) | Gross Profit | | | - | | | | 313,811 | | Selling, general and administrative expense | | | - | | | | (319,976 | ) | Loss from operations | | | - | | | | (6,165 | ) | Other expense | | | - | | | | (295 | ) | Net loss from discontinued operations | | $ | - | | | $ | (6,460 | ) |
Continuing Operations - Three months ended December 31, 2014, compared to three months ended December 31, 2013.
Revenue
For the three months ended December 31, 2014, the Company recognized revenue from operations of $4,620,619, compared to $2,659,294 for the three months ended December 31, 2013, an increase of $1,961,325 (74%). Of these revenues, $4,529,030 and $2,593,683, respectively, were from monitoring and other related services, an increase of $1,935,347 (75%). The increase was principally the result of sales generated by subsidiaries which were acquired during the prior fiscal year (see note 9), which contributed approximately $1.3 million in revenue, or 28% of total revenue during the three months ended December 31, 2014. For the three months ended December 31, 2014, international revenue was $1,255,501, compared to $775,130 for the three months ended December 31, 2013, an increase of $480,771 (62%). The increase in total revenue was principally due to revenue generated by our Chilean subsidiary and, to a lesser extent, from our newly acquired Canadian subsidiary. Our Chilean subsidiary had minimal activity during the period ended December 31, 2013. Product revenue increased $25,978 (40%) from $65,611 for the three months ended December 31, 2013, to $91,589 for the three months ended December 31, 2014. The increase was largely the result of sales generated by subsidiaries which were acquired during the prior fiscal year (see note 9). Due to the acquisitions made during the Company's fiscal year ended September 30, 2014, and in the most recently completed fiscal quarter, the Company anticipates that total revenue in subsequent periods will increase compared to the comparable periods in the prior fiscal year, and those increases will be material.
Cost of Revenue
During the three months ended December 31, 2014, cost of revenue totaled $2,045,167 compared to cost of revenue during the three months ended December 31, 2013 of $1,398,829, an increase of $646,338. The increase in cost of revenue was largely the result of costs incurred by subsidiaries which were acquired during the prior fiscal year (see note 9), including increased costs associated with heightened activity in our Chilean operations. Although management expects the costs of revenue to increase in subsequent periods due to the costs assocated with our recently acquired operations, the Company expects the cost of revenue as a percentage of revenue to decrease in the foreseeable future due to economies of scale realized through projected increases in revenue, further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs, and the use of more efficient supply channels.
Depreciation for the three months ended December 31, 2014 and 2013 totaled $228,050 and $190,992, respectively. Depreciation costs are based on a three to five year useful life for TrackerPAL™ and ReliAlert™® devices. Devices that are leased or retained by us for future deployment or sale are depreciated over three to five years. The Company believes this three to five 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.
Gross Profit and Margin
During the three months ended December 31, 2014, gross profit totaled $2,575,452, or 56% of net revenue compared to $1,260,465, or 47% of net revenue during the three months ended December 31, 2013.
Research and Development Expense
During the three months ended December 31, 2014, research and development expense totaled $464,178 compared to research and development expense for the three months ended December 31, 2013 totaling $319,570, an increase of $144,608. These research and development costs were incurred to improve efficiency in the software, firmware and hardware of our products and services.
Selling, General and Administrative Expense
During the three months ended December 31, 2014, selling, general and administrative expense totaled $3,739,681 compared to $2,171,447 for the three months ended December 31, 2013. The increase of $1,568,234 in selling general and administrative costs resulted from increases in payroll expense of $1,251,500, travel expense of $197,000, and operating expenses of the Company’s new Chilean, Israeli, Canadian and U.S. subsidiaries that were not a part of the consolidated entity at December 31, 2013. Selling, general and administrative expense is anticipated to increase in subsequent periods due to the Company's acquisitions; however, such expense as a percentage of total revenue should decrease in subsequent periods as the Company integrates the operations associated with the newly acquired subsidiaries.
Other Income and Expense For the three months ended December 31, 2014, interest expense was $683,941 compared to $43,918 for the three months ended December 31, 2013. This increase in interest expense resulted primarily from interest on the Company’s notes payable and facility agreement, none of which were outstanding during the same period in the prior year.
Net Loss
The Company had a net loss from continuing operations for the three months ended December 31, 2014 totaling $2,215,215 compared to a net loss of $1,270,193 for the three months ended December 31, 2013, an increase of $945,022. This increase in the net loss is a result of increases in operating expenses of the Company and its subsidiaries acquired during the prior year.
Liquidity and Capital Resources
Currently, we are unable to finance our business solely from cash flows from operating activities. During the year ended September 30, 2014, we supplemented cash flows to finance the business from borrowings under a credit facility and from the sale and issuance of debt and equity securities. No such borrowings or sales occurred during the three months ended December 31, 2014. Together with the receipt of $4.7 million in January 2015, available cash resources at December 31, 2014 are anticipated to meet our working capital requirements for the next twelve months.
As of December 31, 2014, we had unrestricted cash of $5,188,582 and a working capital surplus of $6,162,170, and, as of September 30, 2014, we had unrestricted cash of $11,101,822, compared to unrestricted cash of $3,382,428 as of September 30, 2013. As of September 30, 2014, we had a working capital surplus of $11,323,107, compared to a working capital surplus of $6,836,442 as of September 30, 2013. The increase in working capital in fiscal year 2014 primarily resulted from increases in cash on hand as a result of increases in inventory and proceeds from the Facility Agreement with Tetra House and subsequently assigned to Conrent Invest S.A.
We used cash of $2,777,233 for investing activities during the three months ended December 31, 2014, compared to $4,158,893 of cash used in investing activities in the three months ended December 31, 2013. During fiscal year 2014, we used $4,582,288 in cash from operating activities, compared to $838,910 of cash provided by operating activities during fiscal year 2013. The most significant change in cash from operations from 2013 to 2014 was the decrease in the certain non-cash accretion expense related to certain debt features which existed in 2013, but did not exist in 2014. We used $598,251 of cash for financing activities during the three months ended December 31, 2014, compared to $2,623,664 in cash provided for the three months ended December 31, 2013. Cash provided by financing activities was used to support operating activities during the three months ended December 31, 2013.
We used $12,837,121 of cash by investing activities during the fiscal year ended September 30, 2014, compared to $560,425 of cash used during fiscal year 2013. The increase in cash used by investing activities of $12,276,696 during fiscal year 2014 resulted primarily from cash payments related to the acquisition of subsidiaries during 2014, the payment of a bond required for an international subsidiary, and cash paid for purchases of property and equipment and leasehold improvements. Inflation We do not know whenbelieve that inflation has had a material impact on our historical operations or in what amounts any Selling Stockholder may offer Resale Shares for sale. Because (i) the Selling Stockholders may offer all or someprofitability. Critical Accounting Policies In Note 2, “Summary of the Resale Shares pursuant to this offering, (ii) there are currently no agreements, arrangements or understandings with respectSignificant Accounting Policies” to the sale of any of the Resale Shares, and (iii) the Selling Stockholder may acquire additional shares from us oraudited Consolidated Financial Statements included in the open market in the future, no definitive estimate as to the number of shares that will be held by each Selling Stockholder after the offering can be provided. The column captioned “Shares Beneficially Owned After this Offering” in the following table has been prepared on the assumption that all Resale Shares offered under this prospectus, willwe discuss those accounting policies that are considered to be sold to parties unaffiliated withsignificant in determining the Sel ling Stockholders.results of operations and our financial position. The Selling Stockholderspreparation 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 critical accounting policies discussed below in the preparation of our financial statements.
Inventory Reserves The nature of our business requires maintenance of sufficient inventory on hand at all times to meet the requirements of our customers. We record inventory and raw materials at the lower of cost, or market, which approximates actual cost. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things: ● | Current inventory quantities on hand; |
● | Product acceptance in the marketplace; |
● | 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; and (ii) product sales. Monitoring Services Monitoring services include two components: (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 (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 any time with 30 days’ notice. Under our standard leasing contract, the leased device becomes billable on the date of activation or 7 to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned. We recognize revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue. Product Sales We may sell monitoring devices in certain situations to our customers. In addition, we may sell equipment in connection with the building out and 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 hadbeing made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL, ReliAlert, Shadow or R.A.D.A.R. devices), customers may, but are not required to, enter into one of our monitoring service contracts. We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
We sell and install standalone tracking systems that do not require our ongoing monitoring. 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. However, on occasion, we enter into revenue transactions that have multiple elements. These may include different combinations of products or monitoring services that are included in a single billable rate. These products or monitoring services are delivered over time as the customer utilizes our services. For revenue arrangements that have multiple elements, we consider whether the delivered devices have standalone value to the customer, there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services, and the customer does not have a general right of return. Based on these criteria, we recognize revenue from the sale of devices separately from the monitoring services provided to the customer as the products or monitoring services are delivered. Other Matters We consider an arrangement with payment terms longer than our normal terms not to be fixed or determinable, and we recognize revenue when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days. We sell our devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices we sell to them. Generally, title and risk of loss pass to the buyer upon delivery of the devices. We estimate our product returns based on historical experience and maintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue. Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues. Impairment of Long-lived Assets We review our long-lived assets such as goodwill and intangibles for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair market value that is independent of other groups of assets. Allowance for Doubtful Accounts We must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material relationshipimpact on our financial position or results of operations upon adoption. Accounting for Stock-Based Compensation We recognize compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. We estimate the fair value of stock options using a Black-Scholes option pricing model which requires us to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock. Financial and Certain Pro Forma Information Regarding GPS Global At the time of the 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 financial 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 Exchange Act will be filed by amendment to this registration statement on Form S-1/A within the 71 days allowed.
Directors and Executive Officers The following table sets forth information about the members of our Board of Directors as of March 25, 2015: Name | | Age | | Position | David S. Boone | | | 54 | | Director | Guy Dubois | | | 56 | | Director | Rene Klinkhammer | | | 34 | | Director | Winfried Kunz | | | 49 | | Director | Dan L. Mabey | | | 63 | | Director | George F. Schmitt | | | 71 | | Director |
David S. Boone became a director of our Company on December 21, 2011. He has served in executive roles with a variety of publicly traded and start-up organizations including Kraft General Foods, Sears, PepsiCo, Safeway and Belo Corporation, as well as serving as the CFO of Intira Corporation. In addition, he has served as a consultant with the Boston Consulting Group. Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011, a NASDAQ traded company. He was the 2009 Ernst and Young Entrepreneur of the Year winner for Health Care in the Southwest Region. Mr. Boone serves on a number of private company boards and serves on the board of the Texas Kidney Foundation. Mr. Boone graduated from the University of Illinois, cum laude, in 1983 majoring in accounting. Mr. Boone is a Certified Public Accountant. He received his master’s degree in business administration from Harvard Business School in 1989. Mr. Boone serves on the Audit Committee and chairs the Finance Committee of our Board of Directors. The Nominating Committee considers Mr. Boone's financial experience and business experience to be an important qualification for his service on the Board and the Audit and Finance Committees.
Guy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director of Singapore-based Tetra House Pte. Ltd., a provider of consulting and advisory services worldwide; and a director of RNTS Media NV, a Luxembourg listed digital content developer and mobile application advertising monetization platform provider. Mr. Dubois is a former director and CEO of Gategroup AG, and held various executive leadership roles at Gate Gourmet Holding LLC. Mr. Dubois has held executive management positions at Roche Vitamins Inc. in New Jersey, as well as regional management roles in that firm’s Asia Pacific operations. Mr. Dubois also served the European Organization for Nuclear Research (CERN) team in Switzerland in various roles, including treasurer and chief accountant. Mr. Dubois also worked with IBM in Sweden as Product Support Specialist for Financial Applications. A Belgian citizen, Mr. Dubois holds a degree in financial science and accountancy from the Limburg Business School in Diepenbeek, Belgium. The Board believes that Mr. Dubois' extensive financial and operational experience is a tremendous asset to the Company as a member of the Board of Directors. 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. From July 2013 until September 2014, Mr. Klinkhammer worked for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. Since then, Mr. Klinkhammer has co-launched a family-owned venture, focusing on residential real estate developments and adjacent fields of business. Mr. Klinkhammer is a member of the Compensation Committee of our Board of Directors. The Nominating Committee considered Mr. Klinkhammer's finance background to be an important qualification for his service as a member of the Board. Winfried Kunz became a director on December 21, 2011. He studied Business Administration and Economics from 1984 -1989 at the Universities in Munich and Cologne. In 1985 he started working as a system analyst and from 1987 – 1998 as a management consultant for German, British and American companies in the information technology business, 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. Previously, from 2009 to 2011, Mr. Kunz worked with us withinas an investor. Mr. Kunz brings extensive experience in the information technology industry and his international business expertise, as well as his finance and operational expertise to the Board of Directors. Dan L. Mabey became a director on December 21, 2011. Mr. Mabey has acted as 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. Mr. Mabey is a member of the Nominating Committee. The Board of Directors considers Mr. Mabey's extensive international business experience to be an important qualification for his continuing service as a Board member.
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 serves as a Trustee of St. Mary’s College. 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. The Nominating Committee recognizes the benefit to the Board of Directors and to the Company of Mr. Schmitt's service as a member of the boards of directors of various companies and his extensive experience in the telecommunications industry.
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 eight times during fiscal year 2014. All directors attended at least 80% of the meetings of the Board and the committees of the Board of Directors, of which they are members. Director Independence The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including Rule 4200(a)(15). The Board determined, based on the NASDAQ Stock Market Rules, 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 by any parent or subsidiary of the Company; |
● | has accepted or has a family member who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service; |
● | is a family member of an individual who is, or at any time during the past three years was, employed by us as an executive officer; |
● | is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5 percent of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more; |
● | is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of our executive officers serve on the compensation committee of such other entity; or |
● | is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years. |
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 Track Group, 405 South Main Street, Suite 700, Salt Lake City, Utah 84111.
Committees of the Board of Directors The Board of Directors has three years other than their ownershipstanding committees: the Audit Committee, Compensation Committee, and Nominating 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 securitiesfinancial 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.trackgrp.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 fiscal year 2014 and all members of the Audit Committee attended at least 75% of the committee’s meetings.
Members of the Audit Committee as otherwise describedof September 30, 2014, are Messrs. Boone, Schmitt and Kunz. Each member of the Audit Committee satisfies, according to the full Board of Directors, the definition of independent director as established in the footnotesNASDAQ Stock Market Rules. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the 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, 2014 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 2014. 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 Stock Market Rules, including Rule 5605(d)(2)(A). 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.trackgrp.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 table belowgoals at the end of the plan year). The Committee reviews and makes recommendations to the Board with respect to new compensation incentive plans and equity-based plans; reviews and recommends the compensation of the Company’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of executive officers of the Company.
Nominating and Corporate Governance Committee 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 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 footnotescase of a vacancy on the Board of Directors, recommend a director to be elected by the Board to fill such vacancy. The Nominating Committee held one meeting during fiscal 2014. The Nominating Committee’s charter is available on our website, www.trackgrp.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.trackgrp.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.
Executive Officers The following table sets forth certain information regarding our principal executive officer and principal financial and accounting officer as of March 25, 2015: Name | | Age | | Position | | | | | | Executive Committee of Board of Directors | | | | Principal Executive Officer | John R. Merrill | | | 45 | | Chief 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. Biographies for Mr. Dubois and Boone appear under heading “Directors” above. John R. Merrill was appointed to Chief Financial Officer in April 2014. Mr. Merrill has held a variety of financial roles within public and private organizations including United Health Group, Clear Channel, IMG, and Sports Authority. From 2013 to 2014, Mr. Merrill was the CFO of TenXNetworks and IPVidTech.com, a start-up network hardware and business intelligence provider. From 2010 to 2013, Mr. Merrill worked as an advisor in the healthcare technology industry facilitating due diligence and integration of certain acquired companies. Prior to 2010, Mr. Merrill was the CFO of Park City Group, Inc. (NASDAQ: PCYG) and Prescient Applied Intelligence, Inc. (OTCQB: PPID) software-as-a-service providers of supply chain solutions for both retailers and their suppliers. He began his career with KPMG and holds a Bachelors and a Master’s in 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 percent of our Common Stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of these forms that were furnished to us, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2014 and that such filings were timely except the following: ● | Mr. Klinkhammer, a director, filed one late Form 4 reporting one transaction |
● | Mr. Schmitt, a director, filed three late Form 4s reporting three transactions |
● | Mr. Dubois, a director, filed one late Form 4 reporting one transaction |
● | Mr. Boone, a director, filed one late Form 4 reporting one transaction |
● | Mr. Mabey, a director, filed two late Form 4s reporting two transactions |
● | Mr. Kunz, a director, filed two late Form 4s reporting two transactions |
Compensation of Directors The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2014:
(a) | | (b) | | | (c) | | | (d) | | | (e) | | | | Fees earned | | | Stock awards | | | Option awards | | | Total | | Name | | ($)* | | | ($) | | | ($) | | | ($) | | | | | | | | | | | | | | | Winfried Kunz | | $ | 15,000 | | | $ | 15,000 | | | $ | 15,000 | | | $ | 45,000 | | George F. Schmitt | | $ | 15,000 | | | $ | 22,500 | | | $ | 8,991 | | | $ | 46,491 | | Rene Klinkhammer | | $ | 15,000 | | | $ | 30,000 | | | $ | - | | | $ | 45,000 | | David S. Boone | | $ | 30,000 | | | $ | 30,000 | | | $ | 30,000 | | | $ | 90,000 | | Dan L. Mabey | | $ | 15,000 | | | $ | 29,833 | | | $ | - | | | $ | 44,833 | | Guy Dubois | | $ | 30,000 | | | $ | - | | | $ | 346,276 | | | $ | 376,276 | |
*Fees earned by our non-employee directors will be paid in Common Stock or options to purchase Common Stock at the option of the director. A liability for these fees was included with accrued expenses at September 30, 2014. From October 2013 through May 2014, we accrued $2,500 per month, which amount was increased to $5,000 per month in June 2014, for each director to be issued in shares of Common Stock valued on the last date of the quarter. Alternatively, any director may elect to receive warrants with an exercise price at the current market price at the date of grant in the amount of three times the amount had the director elected to take shares, valued at the date of grant using the Black-Scholes valuation method. Additionally, the Chairman and Chairman of the Audit Committee accrue $10,000 per month rather than $5,000. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013.
Director Warrants
The following table lists the warrants to purchase shares of Common Stock held by each of our directors as of March 25, 2015: | Grant | Expiration | | Exercise | | | Number of | | | Compensation | | Name | Date | Date | | Price | | | Options | | | Expense | | | | | | | | | | | | | | Winfried Kunz | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/17 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/17 | | $ | 19.46 | | | | 1,140 | | | $ | 8,991 | | | 1/2/14 | 12/31/15 | | $ | 19.29 | | | | 1,172 | | | $ | 6,007 | | | | | | | | | | | | | | | | | George F. Schmitt | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/17 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | | | 10/1/13 | 9/30/17 | | $ | 19.46 | | | | 1,140 | | | $ | 8,991 | | | | | | | | | | | | | | | | | Guy Dubois | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 2,385 | | | $ | 11,682 | | | 4/16/13 | 4/15/17 | | $ | 9.00 | | | | 64,665 | | | $ | 324,932 | | | 7/1/13 | 6/30/17 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | | | 10/1/13 | 9/30/17 | | $ | 19.46 | | | | 2,280 | | | $ | 17,982 | | | 1/2/14 | 12/31/15 | | $ | 19.29 | | | | 2,344 | | | $ | 12,014 | | | 4/1/14 | 3/31/16 | | $ | 18.75 | | | | 2,432 | | | $ | 8,684 | | | 6/3/14 | 6/2/16 | | $ | 17.45 | | | | 51,576 | | | $ | 300,326 | | | 7/1/14 | 6/30/16 | | $ | 15.45 | | | | 2,647 | | | $ | 7,270 | | | 1/27/15 | 1/27/17 | | $ | 12.01 | | | | 14,988 | | | $ | 70,433 | | | | | | | | | | | | | | | | | David S. Boone | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/17 | | $ | 14.70 | | | | 4,083 | | | $ | 23,640 | | | 10/1/13 | 9/30/17 | | $ | 19.46 | | | | 2,280 | | | $ | 17,982 | | | 1/2/14 | 12/31/15 | | $ | 19.29 | | | | 2,344 | | | $ | 12,014 | | | | | | | | | | | | | | | | | Dan L. Mabey | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | | | | | | | | | | | | | | | Rene Klinkhammer | 3/22/13 | 3/21/17 | | $ | 12.58 | | | | 8,943 | | | $ | 43,809 | | | 7/1/13 | 6/30/17 | | $ | 14.70 | | | | 2,040 | | | $ | 11,811 | |
Reimbursement of Expenses We reimburse reasonable travel expenses of members of the Board of Directors for their attendance at Board meetings. 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, 2014 and 2013: (a) | our principal executive officer, consisting of the executive committee of the Board of Directors; 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, 2014 who had total compensation exceeding $100,000 (together, 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. |
( a ) | ( b ) | | ( c ) | | | ( d ) | | | ( e ) | | | ( f ) | | | ( g ) | | | ( h ) | | Name and | | | Salary | | | Bonus | | | Stock Awards | | | Option Awards | | | All Other Compensation | | | Total | | Principal Position | Year | | ( $ ) | | | ( $ ) | | | ( $ ) | | | ( $ ) | | | ( $ ) | | | ( $ ) | | | | | | | | | | | | | | | | | | | | | | Guy Dubois (1) | 2014 | | $ | - | | | $ | - | | | $ | - | | | $ | 346,276 | | | $ | - | | | $ | 346,276 | | Chairman and Acting Principal | 2013 | | $ | - | | | $ | - | | | $ | - | | | $ | 335,687 | | | $ | - | | | $ | 335,687 | | Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad D. Olsen (2) | 2014 | | $ | 325,056 | | | $ | - | | | $ | - | | | $ | - | | | $ | 32,515 | | | $ | 357,571 | | Former Chief Financial Officer | 2013 | | $ | 192,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,740 | | | $ | 200,740 | | | | | | | | | | | | | | | | | | | | | | | | | | | | John R. Merrill (3) | 2014 | | $ | 79,615 | | | $ | - | | | $ | - | | | $ | - | | | $ | 12,613 | | | $ | 92,228 | | Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel(4) | 2014 | | $ | 211,048 | | | $ | - | | | $ | - | | | $ | - | | | $ | 15,995 | | | $ | 227,043 | | Former Managing Director Global | 2013 | | $ | 168,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8,061 | | | $ | 176,061 | | Customer Service | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Mr. Dubois has been a member of the Executive Committee since October 2012 and currently serves as Chairman of the Board of Directors. |
(2) | Mr. Olsen served as our Chief Financial Officer from January 2010 through April 2014. Column (g) includes additional compensation for paid-time off, health, dental, life and vision insurance. |
(3) | Mr. Merrill has served as our Chief Financial Officer since April 2014. Column (g) includes additional compensation for paid-time off, health, dental, life and vision insurance. |
(4) | Mrs. Suckel served as Managing Director of Global Customer Service and Account Management of the Company from June 2008 through June 2014. Column (g) includes additional compensation for health, dental, life and vision insurance |
Narrative Disclosure to the Executive Compensation Table
Compensation Paid to the Members of the Executive Committee
Member of the Executive Committee and acting principal executive officer, Guy Dubois, was granted warrants equal to $300,326 for his additional work as a director and member of the Board’s Executive Committee during the year ended September 30, 2014 consisting of warrants to purchase 51,576 shares of Common Stock at an exercise price of $17.45 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 model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer. Merrill Employment Agreement
On November 19, 2014, the Company entered into a two-year employment agreement with John Merrill, our Chief Financial Officer (the “Merrill Employment Agreement”). Under the terms and conditions of the Merrill Employment Agreement, Mr. Merrill will receive an annual base salary of $180,000 and is eligible to participate in the Company’s Employee Bonus Plan and 2012 Equity Incentive Award Plan, wherein Mr. Merrill may earn a variable cash bonus and/or shares of the Company’s Common Stock based on individual performance and achieving specific Company milestones. Mr. Merrill is also entitled to participate in such life insurance, disability, medical, dental, retirement plans and other programs as may be made generally available from time to time by the Company for the benefit of similarly situated employees or its employees generally.
Outstanding Equity Awards at Fiscal Year-End 2014
Name | | Number of securities underlying unexercised options (#) exercisable | | | Number of securities underlying unexercised options (#) unexercisable | | | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | | | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Guy Dubois | | | 2,385 | | | | - | | | | - | | | $ | 12.580 | | 3/21/2015 | * | | - | | | | - | | | | - | | | | - | | | | | 64,665 | | | | - | | | | - | | | $ | 9.000 | | 4/15/2015 | * | | - | | | | - | | | | - | | | | - | | | | | 4,083 | | | | - | | | | - | | | $ | 14.700 | | 6/30/2015 | * | | - | | | | - | | | | - | | | | - | | | | | 2,280 | | | | - | | | | - | | | $ | 19.460 | | 9/30/2015 | * | | - | | | | - | | | | - | | | | - | | | | | 2,344 | | | | - | | | | - | | | $ | 19.290 | | 12/31/2015 | | | - | | | | - | | | | - | | | | - | | | | | 2,432 | | | | - | | | | - | | | $ | 18.750 | | 3/31/2016 | | | - | | | | - | | | | - | | | | - | | | | | 51,576 | | | | | | | | | | | $ | 17.450 | | 6/2/2016 | | | | | | | | | | | | | | | | | | | | 2,647 | | | | | | | | | | | $ | 15.450 | | 6/30/2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Chad D. Olsen | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | John R. Merrill | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Bernadette Suckel | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
* On February 27, 2015, the Board of Directors voted to extend the term of these options for an additional two years. The extended expiration dates have been reflected in the table under the heading “Securityin page 36 of this prospectus.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following table presents information regarding beneficial ownership as of March 25, 2015 (the “Table Date”), of our Common Stock by (i) each shareholder known to us to be the beneficial owner of more than five percent of our Common Stock; (ii) each of our Named Executive Officers serving as of the Table Date; (iii) each of our directors serving as of the Table Date; and Management” on page 27. To(iv) all of our knowledge,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 providedfurnished to us, bythat the Selling Stockholders, nonepersons and entities named in the table below have sole voting and dispositive power with respect to all securities they beneficially own. As of the Selling StockholdersTable Date, the applicable percentage ownership is a broker-dealer or an affiliatebased on 10,150,617 shares of Common Stock issued and outstanding. Beneficial ownership representing less than one percent of the issued and outstanding shares of a broker-dealer. class is denoted with an asterisk (“*”). Holders of Common Stock are entitled to one vote per share and holders of Series D Preferred are entitled to 30 votes per share and vote with the Common Stock shareholders on an as-converted basis. | | 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 | * | ______________ | | | | | | | | |
Name and Address of | | Common Stock | | Beneficial Owner (1) | | Shares | | | % | | | | | | | | | 5% Beneficial Owners: | | | | | | | Sapinda Asia Limited (2) | | | 5,127,853 | | | | 51 | % | Safety Invest S.A., Compartment Secure I (3) | | | 1,890,697 | | | | 19 | % | | | | | | | | | | Directors and Named Executive Officers: | | | | | | | | | David S. Boone (4) | | | 24,339 | | | | * | | Guy Dubois (5) | | | 147,400 | | | | 1 | % | Rene Klinkhammer (6) | | | 17,098 | | | | * | | Winfried Kunz (7) | | | 15,793 | | | | * | | Dan Mabey (8) | | | 16,436 | | | | * | | George F. Schmitt (9) | | | 24,641 | | | | * | | John R. Merrill | | | - | | | | * | | | | | | | | | | | All directors and executive officers as a group (7 persons) | | | 243,209 | | | | 2 | % |
*(1) | RepresentsExcept as otherwise indicated, the business address for these beneficial ownershipowners is c/o the Company, 405 South Main Street, Suite 700, Salt Lake City, Utah 84111. |
(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 less thanSafety 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 percentor more securitization transactions. |
(4) | Mr. Boone is a director and a member of outstandingthe Board of Directors’ executive committee. Includes 6,689 shares of the classCommon Stock owned of voting securities. As of November 22, 2010, there were 34,124record and 17,650 shares of Series D Preferred Stock issued and outstanding. |
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock issuable upon conversionexercise of stock purchase warrants. |
(5) | Mr. Dubois is a director and Chairman of the Series D Preferred, or subject to options or warrants that are currently convertible/exercisable or convertible/exercisable within 60 daysBoard of Directors; he is also a member of the dateexecutive committee of 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 purposeBoard 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 6,000Directors. Includes 147,400 shares of Common Stock.Stock issuable upon exercise of stock purchase warrants. |
(6) | Mr. Klinkhammer is a director. Includes 6,115 shares of Common Stock owned of record and 10,983 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | (7) | Mr. Kunz is a director. Includes 2,498 shares of Common Stock owned of record and 13,295 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | (8) | Mr. Mabey is a director. Includes 7,493 shares of Common Stock owned of record and 8,943 shares of Common Stock issuable upon exercise of stock purchase warrants. | | | (9) | Mr. Schmitt is a director. Includes 12,518 shares of Common Stock owned of record and 12,123 shares of Common Stock issuable upon exercise of stock purchase warrants. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Transactions 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. On February 1, 2013, we redeemed and terminated this royalty obligation in February 2013 for a total cost of $13.0 million using the proceeds of a $16.7 million loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). In addition to the $13.0 million used to terminate the Royalty Agreement, we used the remaining $3.7 million as operating capital during the 2013 fiscal year. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest under the loan, totaling $17,576,627, into 3,905,917 shares of Common Stock at a rate of $4.50 per share.
Revolving Loan Agreement
On February 1, 2013, the Company entered into a revolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, the Company may borrow up to $1,200,000 at an interest rate of 3% per annum for unused funds and 10% 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. The loan initially matured in June 2014. However, the maturity date of the note was extended and now matures in December 2015.
Related-Party Promissory Note On November 19, 2013, the Company borrowed $1,500,000 from Sapinda Asia. The unsecured note bears interest at a rate of 8% per annum and initially matured on November 18, 2014. However, the maturity date of the note was extended to November 19, 2015. As of September 30, 2014, the Company owed $1,500,000 of principal and $43,726 of accrued interest on the note.
Related-Party Service Agreement
During the fiscal year ended September 30, 2013, the Company entered into an agreement with Paranet Solutions, LLC to provide the following primary services: (i) procurement of hardware and software necessary to ensure that vital databases are available in the event of a disaster (backup and disaster recovery system); and (ii) 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, was the Chief Executive Officer of Paranet until August 2014.
As consideration for these services, the Company agreed to pay Paranet $4,500 per month, and during the year ended September 30, 2014 the Company paid $461,223 to Paranet. The arrangement can be terminated by either party for any reason upon ninety (90) days written notice to the other party.
Facility Agreement 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. On January 14, 2014 Tetra House assigned the Facility Agreement to Conrent Invest S.A. Since January 3, 2014, we have borrowed $25,000,000 under the Facility Agreement. The borrowed funds have been used for acquisitions and for general corporate purposes. 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.
Additional Related-Party Transactions and Summary of All Related-Party Obligations | | | | | | | | | | | | | | Loan from a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on December 30, 2015. | | | | | | | | | | | | | | | | | | Promissory note with a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on November 19, 2015. | | | | | | | | | | | | | | | | | | 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. | | | | | | | | | | | | | | | | | | Total related-party debt obligations | | | | | | | | | | | | | | | | | | Long-term debt, net of current portion | | | | | | | | |
On November 26, 2014 (the “Closing Date”), we entered into a the Purchase Agreement to purchase from the Selling Shareholders who, at the time, were the holders of all issued and outstanding shares and equity interests of G2 (the “G2 Shares”), the G2 Shares for an aggregate purchase price of up to CAD $4.6 million, of which CAD$2.0 million was paid in cash to the Selling Shareholders on the Closing Date, and the remaining purchase price is payable to the Selling Shareholders in shares of our common stock. The Shares registered herein, of which 35,000 are currently held by the Escrow Agent, are issuable as the remaining CAD$2.6 million purchase price in the Transaction, and are payable to Selling Shareholders as set forth below: | 35,000 of the Shares, valued at CAD$600,000 on the Closing Date, will be released by the Escrow Agent to the Selling Shareholders as follows: | | | | | 17,500 Shares will be released to the Selling Shareholders on the one-year anniversary of the Closing Date, or November 26, 2015; and | | | | | (2) | Assumes17,500 Shares will be released to the conversion and sale of allSelling Shareholders on the two-year anniversary of the Registered Shares. |
| (3) | 19,980,000 shares issuable upon conversion of 3,330 shares of Series D Preferred and 1,060,304 shares of Common Stock 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.Closing Date, or November 26, 2016. | | | | | (7) | 1,920,000 sharesThe remaining 115,000 Shares are issuable to the Selling Shareholders within two-years from the Closing Date, or on or before November 26, 2016, upon the achievement of Common Stock issued previously upon conversioncertain performance-based milestones identified in the Purchase Agreement. Any milestone that is achieved in accordance with the provisions Purchase Agreement will immediately vest and be payable to the Selling Shareholder (a “Vested Payment”), and will be paid by the delivery of sharesthat number of Series D PreferredShares as determined by the formula A ÷ B, where A = the Vested Payment, and 9,996 shares issued previously asB = the average closing trading price for our common 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.during the 15 consecutive trading days preceding the day that is four business days prior to the date the Vested Payment became vested, with each trading price converted to Canadian Dollars at the final currency exchange rate on such date. |
| (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 conversionFollowing the closing of the Transaction, G2’s executive leadership and employees were integrated within the Company but continue to operate from G2’s existing offices in Halifax, Nova Scotia, Canada,. We also agreed to file the registration statement of which this prospectus is a part, for the purpose 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 resaleShares issuable to Selling Shareholders as part of the Resale Shares by the Selling Stockholders. The Resale Shares are issuable to the Selling Stockholders upon conversionpurchase price of the Transaction. The shares of Series D Preferred heldcovered by them. As usedthis prospectus are referred to in this prospectus as 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. 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 writing of options on the shares of Common Stock, whether or not the options are listed on an options exchange; |
| · | one or more underwritten offerings on a firm commitment or best efforts basis; |
| · | any combination of any of these methods; or |
| · | any other method permitted pursuant to applicable law. |
The Selling Stockholders may distribute the securities from time to time in one or more transactions at a fixed price or prices (which may be changed from time to time), at market prices prevailing at the times of sale, at prices related to these prevailing market prices or at negotiated prices. The Selling Stockholders may effect these transactions by selling the Resale Shares to market-makers acting as principals or through broker-dealers or agents, and these persons may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or the purchasers of the securities for whom such persons may act as agents or to whom they sell as principals, or both (which compensation as to a particular 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 deliveryPurchase Agreement. A copy of the shares. These option, derivative and hedging transactions may require the delivery to a broker, dealer or other financial institution of shares offered under this prospectus, and that broker, dealer or other 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 StockPurchase 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.
This prospectus relates to the Shares of our Common Stock that may be offered and sold from time to time by the Selling Shareholders. We will be freely tradable innot receive any proceeds upon the handssale of personsthe Shares by the Selling Shareholders.
This prospectus relates to the possible resale by Selling Shareholders of the Shares, which were issued to the Selling Shareholders pursuant to the Purchase Agreement. The Selling Shareholders, may, from time to time, offer and sell pursuant to this prospectus any or all of the Shares. The Selling Shareholders may sell some, all or none of their Shares. We do not know how long the Selling Shareholders will hold the Shares before selling them, and we currently have no agreements, arrangements or understandings with the Selling Shareholders regarding the resale of any of the Shares. The following table presents information regarding the Selling Shareholders and the Shares they may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by the Selling Shareholders, and reflects their respective holdings of our equity securities as of March 25, 2015. The Selling Shareholders have represented to us that neither the Selling Shareholders nor any of their affiliates have held a position or office, or had any other thanmaterial relationship, with us or any of our predecessors or affiliates. As used in this prospectus, the term “Selling Shareholders” includes the persons listed below and any of their donees, pledgees, transferees or other successors in interest selling Shares received after the date of this prospectus from Selling Shareholders 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 10,150,617 shares of our Common Stock actually outstanding as of March 25, 2015.
| 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 | | | | | | | | | | | | | | | Tom Gilgan | 1,421 | * | - | 1,421 | * | Bruce Annand | 1,204 | * | - | 1,204 | * | Ron Stewart | 875 | * | - | 875 | * | The Gilgan 2011 Family Trust (3) | - | - | 60,900 | - | - | The Annand (2009) Family Trust (4) | - | - | 51,600 | - | - | The Stewart 2011 Family Trust (5) | - | - | 37,500 | - | - |
* Less than 1%.
Footnotes: (1) | Includes the Shares offered hereby. | | | (2) | Assumes the sale of all of the Shares offered hereby. | | | (3) | The Selling Shareholder, Tom Gilgan, trustee of The Gilgan 2011 Family Trust, has voting and/or dispositive power over these shares. | | | (4) | The Selling Shareholder, Bruce Annand, trustee of The Annand (2009) Family Trust, has voting and/or dispositive power over these shares. | | | (5) | The Selling Shareholder, Ron Stewart, trustee of The Stewart 2011 Family Trust, has voting and/or dispositive power over these shares. |
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 294,309,45210,150,617 shares are outstanding as of November 22, 2010.March 25, 2015. 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 actionMarch 25, 2015, 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.
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 to the Certificate, as amended and restated, the holders of the Series D Preferred are entitled to the following preferences and other rights.
Rank. The Series D Preferred ranks senior as to liquidation rights to the Company’s Common Stock, and all other classes and series of equity securities of the Company which by their terms do not rank senior to the Series D Preferred (collectively with the Common Stock, “Junior Stock”). The Series D Preferred is subordinate and ranks junior to all indebtedness of the Company.stock.
Payment of Dividends. Dividends declared by the Company are payable on the Series D Preferred on a pro rata basis with the Common Stock and all other equity securities of the Company ranking pari passu with the Common Stock as to the payment of dividends, before certain distributions are paid on, or declared and set apart for Junior Stock, other than the Common Stock. In addition, the Company is prohibited from declaring, paying or setting apart for payment any dividend or making any distribution on Junior Stock (other than dividends or distributions pay able in shares of the Junior Stock) unless, at the time of such dividend or distribution, the Company shall have paid all unpaid dividends on the outstanding shares of Series D Preferred. In addition, holders of the Series D Preferred are entitled to receive quarterly dividends accrued on March 31, June 30, September 30, and December 31 of each year, cumulative dividends on the Series D Preferred at the rate per share equal to eight percent (8%) per annum, payable in cash or shares of Common Stock at the sole discretion of the Company. If a dividend is paid in shares of Common Stock of the Company, the number of shares to be issued will be based on the average per share market price of the Common Stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be). Dividends are paid quarterly, no later than the thirtieth (30th) day following the end of the accrual period.
Voting Rights. Except as otherwise required by Utah law and in the Certificate, the Series D Preferred will vote with the Common Stock on an as-converted basis. Each share of Series D Preferred entitles the holder thereof to 6,000 votes. The Common Stock into which the shares of Series D Preferred are convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding Common Stock of the Company.
Liquidation Preference. Holders of the Series D Preferred also are entitled to preferences upon liquidation, dissolution or winding up of the Company, voluntary or involuntary, before any payment is made or any assets distributed to holders of any Junior Stock.
Conversion. Each holder of Series D Preferred has the right to convert the Series D Preferred into shares of Common Stock of the Company under certain circumstances. Each share of Series D Preferred is convertible into 6,000 shares of Common Stock, subject to adjustment as provided in the Certificate.
Optional Redemption. At any time on or after December 1, 2010, the Company has the right, exercisable at its option, to redeem from funds legally available therefore, all or any portion of the then-outstanding and unconverted shares of the Series D Preferred at a price and on the terms contained in the Certificate. Any redemption of less than all of the Series D Preferred shall be pro rata among the holders of the Series D Preferred based on the number of shares of Series D Preferred held by each holder of record at the time of such partial redemption.
Registration Rights
Although the Designation of Rights and Preferences of the Series D Preferred did not provide for registration rights under the Securities Act, the Company subsequently agreed to grant registration rights to three 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 shares underlying the Series D Preferred held by the three shareholders, no later than 90 days from April 13, 2010, the date of the investments. If the registration statement is not effective within 90 days, then until such time as a registration statement is effective with respect to the shares, or such time as the resale restrictions on the underlying shares can be removed, the Company agreed to pay a 16% dividend on the Series D Preferred held by these particular shareholders, instead of the standard 8% dividend rate on the preferred. If after one year and 15 days the resale restrictions on the underlying shares of common held by these holders are not removed, or a registration statement with respect to the shares is not then effective, as an additional penalty, the Company agreed to issue one additional share of Series D Preferred for each original share of Series D Preferred issued.
In connection with the purchase agreements by which all other cash investors of the Series D Preferred 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.
OurUtah Anti-Takeover Law and Articles and Bylaws Provisions Certain 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. We are registering the Shares issued to the Selling Shareholders to permit the resale of these Shares by the Selling Shareholders 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 Shareholders. The Shares may be sold or distributed from time to time by the Selling Shareholders 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 Shareholders; provided, however, that the Selling Shareholders are 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 Shareholders 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 Shareholders can presently estimate the amount of compensation that any agent will receive. The Selling Shareholders 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, suit or proceeding, civil or criminal, in which he or she is made a partyof the Shares by reasonthe Selling Shareholders and any other participating person. Regulation M may also restrict the ability of being or having been such director or officer, except in relation to matters as to which he or she shall be adjudged in such action, suit or proceeding to be liable for negligence or misconductany person engaged in the performancedistribution of duty;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 entity to make such other indemnification as shall be authorized by our shareholders.engage in market-making activities with respect to the Shares. As a result ofThis offering will terminate on the indemnification provisions described above and contained indate that all Shares offered by this prospectus have been sold by the Utah Revised Business Corporations Act, subject to certain limitations in the Utah Revised Business Corporation Act, weSelling Shareholders or may be permitted or compelled to provide indemnification and advancement of expenses to our directors, officers, agents, and employees when they are made parties to an investigation or legal action in connection with services performed at our request, including when such persons are alleged to have violatedsold by the Selling Shareholders without restriction under Rule 144(b)(1)(i) under the Securities Act. Insurance purchasedOur Common Stock is quoted on the OTCQB under the symbol “SCRA”.
The validity of the securities being offered by this prospectus has been passed upon for us by Disclosure Law Group of San Diego, California. The consolidated financial statements for the years ended September 30, 2014 and 2013 included in this prospectus and elsewhere in the registration statement have been audited by Eide Bailly, LLP, an independent registered public accounting firm, as indicated in their report with respect thereto, and is included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION We filed with the SEC a registration statement under the Securities Act for the Shares in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedules that were filed with the registration 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.
This section is based on current provisions of the Code, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis.
Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. This summary is not binding on the IRS, and the IRS is not precluded from adopting a contrary position.
This section does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each holder of shares of our Common Stock. This section does not address all aspects of U.S. Federal income taxation that may be relevant to any particular investor based on such investor’s individual circumstances. In particular, this section considers only U.S. holders and non-U.S. holders that hold shares of our Common Stock as capital assets and does not address the potential application of the alternative minimum tax or the U.S. Federal income tax consequences to investors that are subject to special treatment, including:
| · | taxpayers who have elected mark-to-market accounting; |
| · | tax-exempt organizations; |
| · | regulated investment companies; |
| · | real estate investment trusts; |
| · | financial institutions or “financial services entities;” |
| · | taxpayers who hold shares of our Common Stock as part of a straddle, hedge, conversion transaction or other integrated transaction; |
| · | controlled foreign corporations; |
| · | passive foreign investment companies; |
| · | certain expatriates or former long-term residents of the United States; and |
| · | U.S. holders whose functional currency is not the U.S. dollar. |
The following does not address any aspect of U.S. Federal gift or estate tax laws, or state, local or non-U.S. tax laws. In addition, the section does not consider the tax treatment of entities taxable as partnerships for U.S. Federal income tax purposes or other pass-through entities or persons who hold shares of our Common Stock through such entities. Prospective investors are urged to consult their tax advisors regarding the specific tax consequences to them of the acquisition, ownership or disposition of shares of our Common Stock in light of their particular circumstances.
Tax Consequences of Owning Shares of Our Common Stock
U.S. Holders
Dividends and Other Distributions on Shares of Common Stock
Distributions on shares of our Common Stock will constitute dividends for U.S. Federal income tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. Federal income tax principles. If a distribution exceeds the Company’s current or accumulated earnings and profits, the excess will be treated first as a tax-free return of capital and will reduce (but not below zero) the U.S. holder’s adjusted tax basis in the Common Stock, and any remaining excess will be treated as capital gain from a sale or exchange of the shares of Common Stock, subject to the tax treatment described below in “Disposition of Shares of Our Common Stock.”
Dividends received by a corporate U.S. holder generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions, and provided certain holding period requirements are met, dividends received by a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to capital gains for tax years beginning on or before December 31, 2010, after which the rate applicable to dividends is currently scheduled to change to the tax rate generally then applicable to ordinary income.
Disposition of Shares of Our Common Stock
Upon the sale, exchange, redemption or other disposition of shares of our Common Stock, a U.S. holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale, exchange or other disposition of the shares of our Common Stock and the U.S. holder’s adjusted tax basis in such stock. Generally, such gain or loss will be capital gain or loss. Any such capital gain or loss will be long term capital gain or loss if the U.S. holder’s holding period for the shares exceeds one year, and will otherwise be short-term capital gain or loss.
Non-U.S. Holders
Dividends and Other Distributions on Shares of our Common Stock
In general, any distributions made to a non-U.S. holder of shares of our Common Stock, to the extent paid out of current or accumulated earnings and profits of the Company (as determined under U.S. Federal income tax principles), will constitute dividends for U.S. Federal income tax purposes. Provided such dividends are not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, such dividends generally will be subject to withholding of U.S. Federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Any distribution not constituting a dividend will be treated first as a tax-free return of capital and will reduce (but not below zero) the non-U.S. holder’s adjusted tax basis in its shares of our Common Stock and any remaining excess will be treated as gain realized from the sale or other disposition of the Common Stock, as described under “Disposition of Common Stock” below.
Dividends paid to a non-U.S. holder that are effectively connected with such non-U.S. holder’s conduct of a trade or business within the United States generally will not be subject to U.S. withholding tax, provided such non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. Federal income tax at the same graduated individual or corporate rates applicable to U.S. holders. If the non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty.
A non-U.S. holder who wishes to claim the benefit of an applicable treaty rate for dividends will be required (a) to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if the Company Common Stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable U.S. Treasury regulations.
A non-U.S. holder eligible for a reduced rate of U.S. Federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. Federal income or withholding tax in respect of gain recognized on a sale, exchange or other disposition of shares of our Common Stock unless:
| · | the gain is effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States; |
| · | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or |
| · | the Company is or has been a “United States real property holding corporation” for U.S. Federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held shares of our Common Stock and, in the case where shares of our Common Stock are regularly traded on an established securities market, the non-U.S. holder has owned, directly or indirectly, more than 5% of shares of our Common Stock at any time within the shorter of the five-year period |
| · | preceding a disposition of shares of our Common Stock or such non-U.S. holder’s holding period for the shares of our Common Stock. |
Unless an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable U.S. Federal income tax rates. Any gain described in the first bullet point above of a non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Gain described in the second bullet point above (which may be offset by U.S. source capital losses) will be subject to a flat 30% U.S. Federal income tax.
With respect to the third bullet point above, there can be no assurance that shares of our Common Stock will be treated as regularly traded on an established securities market. The Company believes that it will be a “United States real property holding corporation” for U.S. Federal income tax purposes.
Character of Income, Gain, and Loss
For non-corporate U.S. holders, items of ordinary income and loss are subject to different tax rates than items of capital gain or loss. Ordinary income for non-corporate U.S. holders is generally taxable, for tax years beginning on or before December 31, 2010, at rates of up to 35%. For tax years beginning after December 31, 2010, the maximum ordinary income rate for non-corporate U.S. holders is scheduled to increase to 39.6%. Ordinary losses are generally deductible against all income and gain. Long term capital gains of non-corporate U.S. holders are currently subject to a reduced maximum tax rate of 15% for tax years beginning on or before December 31, 2010. After December 31, 2010, the maximum capital gains rate is scheduled to increase to 20%. The 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 LLP | F-2 | | | Consolidated Balance Sheets as of September 30, 20092014 and 20082013 | F-3 | | | Consolidated Statements of Operations for the fiscal years ended September 30, 20092014 and 20082013 | F-5F-4 | | | Consolidated Statements of Stockholders’ Equity (Deficit) for the fiscal years ended September 30, 20082014 and 20092013 | F-6F-5 | | | Consolidated Statements of Cash Flows for the fiscal years ended September 30, 20092014 and 20082013 | F-12F-7 | | | Notes to Consolidated Financial Statements | F-15F-9 | | | Condensed Consolidated Balance Sheets as of December 31, 2014 (unaudited) and September 30, 2014 | F-31 | | | Condensed Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013 (unaudited) | F-32 | | | Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and 2013 (unaudited) | F-33 | | | Notes to unaudited Condensed Consolidated Financial Statements | F-35 |
HANSEN, BARNETT & MAXWELL, P.C.
| | | A Professional Corporation | | Registered with the Public Company | CERTIFIED PUBLIC ACCOUNTANTS | | Accounting Oversight Board | 5 Triad Center, Suite 750 | | | Salt Lake City, UT 84180-1128 | | | Phone: (801) 532-2200 (801) 532-2200
Fax: (801) 532-7944
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.)dba Track Group
We have audited the accompanying consolidated balance sheets of SecureAlert, Inc., formerly known as RemoteMDx, Inc., and subsidiariesSubsidiaries (collectively the Company) as of September 30, 20092014 and 2008,2013 and the related consolidated statements of operations and other comprehensive loss, stockholders’ equity, (deficit), and cash flows for each of the years in the two-year period ended September 30, 2009.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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.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 audits provideprovides 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, 20092014 and 2008,2013 and the consolidated results of its operations, and its cash flows for each of the years in the two-year periodthen ended September 30, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| HANSEN, BARNETT & MAXWELL, P.C./s/ Eide Bailly LLP |
Eide Bailly LLP Salt Lake City, Utah January 12, 2010December 17, 2014
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED BALANCEBALANCE SHEETS AS OF SEPTEMBER 30, 20092014 AND 2008
| | | | | | | | Assets | | 2009 | | | 2008 | | Current assets: | | | | | | | Cash | | $ | 602,321 | | | $ | 2,782,953 | | Deposit held in escrow | | | - | | | | 500,000 | | Accounts receivable, net of allowance for doubtful accounts of $266,000 and $312,000, respectively | | | 1,441,648 | | | | 1,441,853 | | Receivables from related-party | | | - | | | | 55,385 | | Prepaid expenses and other | | | 275,390 | | | | 224,842 | | Inventory, net of reserves of $83,092 and $0, respectively | | | 603,329 | | | | - | | Total current assets | | | 2,922,688 | | | | 5,005,033 | | Property and equipment, net of accumulated depreciation of $2,525,180 and $1,937,710, respectively | | | 1,313,306 | | | | 1,581,558 | | Monitoring equipment, net of accumulated depreciation of $2,944,197 and $3,061,321, respectively | | | 1,316,493 | | | | 1,349,146 | | Goodwill | | | 2,468,081 | | | | 4,811,834 | | Intangible assets, net of amortization of $126,655 and $16,500, respectively | | | 496,346 | | | | 216,500 | | Other assets | | | 76,675 | | | | 46,626 | | Total assets | | $ | 8,593,589 | | | $ | 13,010,697 | |
2013 Assets | | 2014 | | | 2013 | | Current assets: | | | | | | | Cash | | $ | 11,101,822 | | | $ | 3,382,428 | | Accounts receivable, net of allowance for doubtful accounts of $4,070,000 and $3,968,000, respectively | | | 3,788,207 | | | | 3,721,964 | | Note receivable, current portion | | | 273,964 | | | | 176,205 | | Prepaid expenses and other | | | 1,226,054 | | | | 1,783,805 | | Inventory, net of reserves of $223,500 and $148,043, respectively | | | 1,248,264 | | | | 467,101 | | Total current assets | | | 17,638,311 | | | | 9,531,503 | | Property and equipment, net of accumulated depreciation of $2,292,521 and $2,092,221, respectively | | | 1,860,247 | | | | 318,201 | | Monitoring equipment, net of accumulated amortization of $1,251,551 and $1,183,346, respectively | | | 1,914,666 | | | | 1,236,696 | | Note receivable, net of current portion | | | - | | | | 28,499 | | Intangible assets, net of accumulated amortization of $2,818,894 and $1,256,647, respectively | | | 26,743,626 | | | | 15,413,920 | | Other assets | | | 3,150,428 | | | | 170,172 | | Goodwill | | | 6,577,609 | | | | - | | Total assets | | $ | 57,884,887 | | | $ | 26,698,991 | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | | 1,995,607 | | | | 348,074 | | Accrued liabilities | | | 2,413,557 | | | | 2,180,791 | | Dividends payable | | | - | | | | 9,427 | | Deferred revenue | | | - | | | | 8,674 | | Current portion of long-term related-party debt | | | - | | | | 60,000 | | Current portion of long-term debt, net of discount of $375,370 and zero, respectively | | | 1,906,040 | | | | 88,095 | | Total current liabilities | | | 6,315,204 | | | | 2,695,061 | | Stock payable - related party | | | 3,000,000 | | | | - | | Long-term related-party debt, net of current portion | | | 2,700,000 | | | | - | | Long-term debt, net of current portion and discount of $93,750 and zero, respectively | | | 25,868,361 | | | | 40,588 | | Other long-term liabilities | | | 85,275 | | | | - | | Total liabilities | | | 37,968,840 | | | | 2,735,649 | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 0 and 468 shares outstanding, respectively | | | - | | | | 1 | | common stock, $0.0001 par value: 15,000,000 shares authorized; 10,093,130 and 9,805,503 shares outstanding, respectively | | | 1,009 | | | | 981 | | Additional paid-in capital | | | 295,364,173 | | | | 290,391,697 | | Accumulated deficit | | | (275,177,181 | ) | | | (266,429,337 | ) | Accumulated other comprehensive loss | | | (271,954 | ) | | | - | | Total equity | | | 19,916,047 | | | | 23,963,342 | | Total liabilities and stockholders’ equity | | $ | 57,884,887 | | | $ | 26,698,991 | |
The
See accompanying notes are an integral part of theseto consolidated financial 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 AND COMPREHENSIVE LOSS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20092014 AND 20082013 | | 2014 | | | 2013 | | Revenues: | | | | | | | Products | | $ | 599,017 | | | $ | 612,437 | | Monitoring and other related services | | | 11,663,181 | | | | 15,028,625 | | Total revenues | | | 12,262,198 | | | | 15,641,062 | | | | | | | | | | | Cost of revenues: | | | | | | | | | Products | | | 251,385 | | | | 262,022 | | Monitoring and other related services | | | 4,873,757 | | | | 7,554,870 | | Impairment of monitoring equipment and parts (Note 2) | | | 373,951 | | | | 213,276 | | Total cost of revenues | | | 5,499,093 | | | | 8,030,168 | | | | | | | | | | | Gross profit | | | 6,763,105 | | | | 7,610,894 | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | Selling, general and administrative (including $801,820 and $430,618, respectively, of compensation expense paid in stock, stock options / warrants or as a result of amortization of stock-based compensation) | | | 12,891,151 | | | | 7,679,124 | | Research and development | | | 1,605,662 | | | | 987,934 | | Settlement expense | | | 14,291 | | | | 360,000 | | Loss from operations | | | (7,747,999 | ) | | | (1,416,164 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | Loss on disposal of equipment | | | (36,533 | ) | | | (2,949 | ) | Interest income | | | 368,434 | | | | - | | Interest expense | | | (1,290,289 | ) | | | (17,048,519 | ) | Currency exchange rate gain (loss) | | | (609,914 | ) | | | (145,612 | ) | Other income, net | | | 624,001 | | | | 279,174 | | Net loss from continuing operations | | | (8,692,300 | ) | | | (18,334,070 | ) | Gain on disposal of discontinued operations | | | - | | | | 424,819 | | Net loss from discontinued operations | | | - | | | | (6,460 | ) | Net loss before tax | | | (8,692,300 | ) | | | (17,915,711 | ) | Income tax | | | (55,544 | ) | | | - | | Net loss Company | | | (8,747,844 | ) | | | (17,915,711 | ) | Dividends on preferred stock | | | (14,585 | ) | | | (1,042,897 | ) | Net loss attributable to common shareholders | | | (8,762,429 | ) | | | (18,958,608 | ) | Foreign currency translation adjustments | | | (271,954 | ) | | | - | | Comprehensive loss | | $ | (9,034,383 | ) | | $ | (18,958,608 | ) | Net loss per common share, basic and diluted from continuing operations | | $ | (0.88 | ) | | $ | (3.79 | ) | Net income per common share, basic and diluted from discontinued operations | | $ | - | | | $ | 0.09 | | Weighted average common shares outstanding, basic and diluted | | | 9,951,000 | | | | 4,832,000 | |
| 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 | |
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’STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20082013 AND 2009 | | 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 | |
2014
| | 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 | | | | 141,756 | | | | - | | | | 141,758 | | Debt | | | - | | | | - | | | | 4,607,361 | | | | 462 | | | | 20,732,657 | | | | - | | | | 20,733,119 | | Dividends from Series D Preferred stock | - | | | | - | | | | 181,832 | | | | 18 | | | | 1,663,979 | | | | - | | | | 1,663,997 | | Board of director fees | - | | | | - | | | | 3,661 | | | | - | | | | 47,500 | | | | - | | | | 47,500 | | Cash | | | - | | | | - | | | | (159 | ) | | | - | | | | (1,995 | ) | | | - | | | | (1,995 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 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 | | | $ | 981 | | | $ | 290,391,697 | | | $ | (266,429,337 | ) | | $ | 23,963,342 | |
TheSee accompanying notes are an integral part of theseto consolidated financial statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20082013 AND 2009 | | | | | 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 | ) |
2014
| | Preferred Stock | | | Common Stock | | | Additional | | | | | | Accumulated Other | | | | | | | Series D | | | | | | | | | Paid-in | | | Accumulated | | | Comprehensive | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Loss | | | Total | | Balance as of October 1, 2013 | | | 468 | | | | 1 | | | | 9,805,503 | | | | 981 | | | | 290,391,697 | | | | (266,429,337 | ) | | | - | | | $ | 23,963,342 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | (207 | ) | | | - | | | | 16,907 | | | | 2 | | | | (2 | ) | | | - | | | | | | | | - | | Acquisitions of subsidiaries | | - | | | | - | | | | 236,469 | | | | 24 | | | | 4,499,976 | | | | | | | | | | | | 4,500,000 | | Services | | | - | | | | - | | | | 15,343 | | | | 2 | | | | 243,016 | | | | - | | | | | | | | 243,018 | | Exercise of options and warrants | - | | | | - | | | | 10,646 | | | | 1 | | | | 7,999 | | | | - | | | | | | | | 8,000 | | Dividends from Series D Preferred stock | - | | | | - | | | | 1,252 | | | | - | | | | 24,012 | | | | - | | | | | | | | 24,012 | | Board of director fees | | | - | | | | - | | | | 7,010 | | | | 1 | | | | 127,499 | | | | - | | | | | | | | 127,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting of stock options | | | - | | | | - | | | | - | | | | - | | | | 254,487 | | | | - | | | | | | | | 254,487 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock offering costs | | | - | | | | - | | | | - | | | | - | | | | (34,735 | ) | | | - | | | | | | | | (34,735 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred dividends | | | - | | | | - | | | | - | | | | - | | | | (14,585 | ) | | | - | | | | | | | | (14,585 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid for repurchase of Series D Preferred Stock | | | (261 | ) | | | (1 | ) | | | - | | | | - | | | | (312,008 | ) | | | | | | | | | | | (312,009 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for Board of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Director fees | | | - | | | | - | | | | - | | | | - | | | | 176,816 | | | | - | | | | | | | | 176,816 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (271,954 | ) | | | (271,954 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,747,844 | ) | | | | | | | (8,747,844 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2014 | | | - | | | $ | - | | | | 10,093,130 | | | $ | 1,009 | | | $ | 295,364,173 | | | $ | (275,177,181 | ) | | $ | (271,954 | ) | | $ | 19,916,047 | |
TheSee accompanying notes are an integral part of theseto consolidated financial 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 | |
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.Contents
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, 20092014 AND 20082013 | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | Net loss | | $ | (8,747,844 | ) | | $ | (17,915,711 | ) | Gain on sale of subsidiaries | | | - | | | | (424,819 | ) | Loss from discontinued operations | | | - | | | | 6,460 | | Loss from continuing operations | | | (8,747,844 | ) | | | (18,334,070 | ) | Adjustments to reconcile net income to net cash used in operating activities: | | | | | | Depreciation and amortization | | | 2,457,991 | | | | 2,414,270 | | Common stock issued for services | | | 801,820 | | | | 141,760 | | Accretion of debt discount and benficial conversion feature | | | 286,399 | | | | 15,954,355 | | Bad debt expense | | | 125,961 | | | | - | | Vesting and re-pricing of stock options | | | - | | | | 160,301 | | Fractional shares of common stock paid in cash | | | - | | | | (1,996 | ) | Impairment of monitoring equipment and parts | | | 373,951 | | | | 213,276 | | Issuance of warrants to related parties | | | - | | | | 128,559 | | Loss on disposal of property and equipment | | | 3,710 | | | | 4,740 | | Loss on disposal of monitoring equipment and parts | | | - | | | | 84,805 | | Change in assets and liabilities net of assets and liabilities acquired: | | | | | | | | | Accounts receivable, net | | | (193,030 | ) | | | (652,749 | ) | Notes receivable | | | (25,244 | ) | | | 63,978 | | Inventories | | | (1,727,400 | ) | | | 186,913 | | Prepaid expenses and other assets | | | 604,506 | | | | 107,576 | | Accounts payable | | | 1,466,905 | | | | (1,473,530 | ) | Accrued expenses | | | (1,339 | ) | | | 2,186,618 | | Deferred revenue | | | (8,674 | ) | | | (345,896 | ) | Net cash (used in) provided by operating activities | | | (4,582,288 | ) | | | 838,910 | | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | Purchase of property and equipment | | | (544,126 | ) | | | (50,682 | ) | Purchase of monitoring equipment and parts | | | - | | | | (509,743 | ) | Leasehold improvements | | | (1,330,068 | ) | | | - | | Payments for other assets | | | (3,163,802 | ) | | | - | | Cash acquired through acquisition | | | 195,058 | | | | - | | Payment related to acquisition | | | (8,050,167 | ) | | | - | | Proceeds from notes receivable | | | 55,984 | | | | - | | Net cash used in investing activities | | | (12,837,121 | ) | | | (560,425 | ) | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | Borrowings on related-party notes payable | | | 1,200,000 | | | | 2,800,000 | | Principal payments on related-party notes payable | | | (60,000 | ) | | | - | | Proceeds from notes payable | | | 25,750,000 | | | | - | | Principal payments on notes payable | | | (1,407,524 | ) | | | (299,276 | ) | Proceeds from issuance of common stock | | | 8,000 | | | | - | | Repurchase of Series D Convertible Preferred stock | | | (312,008 | ) | | | - | | Debt offering costs | | | (34,735 | ) | | | - | | Net cash provided by financing activities | | | 25,143,733 | | | | 2,500,724 | | | | | | | | | | | Effect of exchange rate changes on cash | | | (4,930 | ) | | | - | | | | | | | | | | | Cash flow from discontinued operations: | | | | | | | | | Net cash provided by operating activities | | | - | | | | 126,715 | | Net cash provided by investing activities | | | - | | | | - | | Net cash provided by financing activities | | | - | | | | 18,475 | | Net cash provided by discontinued operations | | | - | | | | 145,190 | | | | | | | | | | | Net increase (decrease) in cash | | | 7,719,394 | | | | 2,924,399 | | Cash, beginning of year | | | 3,382,428 | | | | 458,029 | | Cash, end of year | | $ | 11,101,822 | | | $ | 3,382,428 | |
| | | | | | | | | 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 | |
The accompanying notes are an integral part of these statements.
F-12See accompanying notes to consolidated financial statements.
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20092014 AND 20082013
| | | 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 | | | - | |
| | 2014 | | | 2013 | | Cash paid for interest | | $ | 193,019 | | | $ | 238,080 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | Issuance of common stock in connection with Series D preferred stock dividends | | | 24,012 | | | | 1,663,997 | | Series D Preferred stock dividends earned | | | 14,585 | | | | 1,042,897 | | Issuance of warrants for accrued Board of Director fees | | | 477,142 | | | | 272,500 | | Issuance of common shares for settlement of debt | | | - | | | | 20,733,118 | | Issuance of common shares from the conversion of shares of Series D Preferred Stock | | | - | | | | 189 | | Issuance of debt to repurchase royalty agreement | | | - | | | | 11,616,984 | | Issuance of stock for the acquisition of a subsidiary | | | 4,500,000 | | | | - | | Accretion of debt discount and beneficial conversion feature | | | - | | | | 15,954,355 | |
The accompanying notes are an integral part of these statements.
F-13See accompanying notes to 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 | | | - | |
SECUREALERT, INC., FORMERLY KNOWN AS REMOTEMDX, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALFINANCIAL STATEMENTS
(1) | Organization and Nature of Operations |
General SecureAlert, Inc., formerly known as RemoteMDx, Inc., and subsidiaries (DBA Track Group) (collectively, the “Company”“Company”) markets, monitors and leases TrackerPAL™ReliAlert™, Shadow and R.A.D.A.R. devices. The TrackerPAL™ isThese 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™ and Shadow 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 incurred recurring net losses and negative cash flows from operating activities for the fiscal years ended September 30, 2009 and 2008. In addition, the Company has accumulated deficits of $205,765,496 and $182,683,996 as of September 30, 2009 and 2008, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In order for the Company to continue as a going concern, it must generate positive cash flows from operating activities and obtain the necessary funding to meet its projected capital investment requirements. Management’s plans with respect to this uncertainty include raising additional capital from the issuance of preferred stock and expanding its market for its TrackerPAL™ portfolio of products. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.
To lessen the Company’s cash burden and to raise additional capital, subsequent to September 30, 2009, the Company entered into agreements to issue 15,986 shares of Series D Convertible Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.
(2) | Discontinued Operations |
During the fiscal year ended September 30, 2008, the Company divested its majority ownership interest of the diagnostic stain business conducted by a former subsidiary ActiveCare, Inc., formerly known as Volu-Sol Reagents Corporation (“ActiveCare”). The Company completed the divestiture by distributing its remaining interest (approximately 17% of the common stock) in ActiveCare during the fiscal year ended September 30, 2009. This transaction was treated as a pro-rata nonreciprocal transfer to owners as required by the nonmonetary transactions topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC). This resulted in $1,550,081 recorded as additional paid in capital to the Company.
The Company’s consolidated financial statements have been reclassified to segregate operating results of the discontinued operations for all periods presented. Prior to reclassification, the discontinued operations were reported in the stain operating segment. The summary of net sales and operating results from discontinued operations for the fiscal years ended September 30, 2009 and 2008, respectively, are as follows:
| | 2009 | | | 2008 | | Net sales | | $ | - | | | $ | 608,024 | | Loss from discontinued operations | | $ | - | | | $ | (414,112 | ) |
(3) | Summary of Significant Accounting Policies |
Principles of Consolidation The accompanying consolidated financial statements include the accounts of SecureAlert, Inc., formerly known as RemoteMDx, Inc. (DBA Track Group) and its subsidiaries, SecureAlert Monitoring Inc., formerly known as SecureAlert, Inc.,subsidiaries. Additionally, during the fiscal year ended September 30, 2013, the Company formed a Chilean subsidiary and 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, During the “Company”)year ended September 30, 2014, the Company acquired two additional subsidiaries (see Note 3 “Acquisitions” below). 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 consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuredisclosures of contingent assets and liabilities atas of the date of the financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period.period presented. Actual results could differ from thesethose estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, certain assumptions related to the recoverability of intangible and long-lived assets, and fair market values of certain assets and liabilities.
Business Combinations
Business combinations are accounted for under the provisions of ASC 805-10, Business Combinations (ASC 805-10), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the contingent consideration is recorded at its probable fair value at the acquisition date. Any changes in fair value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information about facts and circumstances that existed at the acquisition date and that we obtained during the measurement period. Changes in fair value of contingent consideration resulting from events after the acquisition date, such as performance measures, are recognized in earnings.
Foreign currency translation
The Chilean Peso and Israeli New Shekel are the functional currencies of Track Group – Chile and Track Group – Israel. Their respective balance sheets have been translated into USD at the exchange rate prevailing at the balance sheet date. Their respective statements of operations have been translated into USD using the average exchange rates prevailing during the periods of each statement. The corresponding translation adjustments are part of accumulated other comprehensive income and are shown as part of shareholders’ equity. Goodwill represents costs in excess of purchase price over the fair value of the assets of businesses acquired, including other identifiable intangible assets. Other Intangible Assets
Other intangible assets principally consist of patents, royalty purchase agreements, developed technology acquired, customer relationships, trade name and capitalized website development costs. The Company accounts for other intangible assets in accordance with generally accepted accounting principles and does not amortize intangible assets with indefinite lives. The Company’s intangible assets with finite useful lives are amortized over their respective estimated useful lives which range from two to ten years. The Company’s intangible assets are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate possible impairment. 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: | | 2014 | | | % | | | 2013 | | | % | | | | | | | | | | | | | | | Customer A | | $ | - | | | | 0 | % | | $ | 5,252,960 | | | | 33 | % | | | | | | | | | | | | | | | | | | Customer B | | $ | 1,501,940 | | | | 12 | % | | $ | 1,622,327 | | | | 10 | % | | | | | | | | | | | | | | | | | | Customer C | | $ | 1,431,854 | | | | 12 | % | | $ | 1,514,581 | | | | 9 | % |
No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2014 or 2013. Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2014 and 2013, respectively, are shown in the table below: | | 2014 | | | % | | | 2013 | | | % | | | | | | | | | | | | | | | Customer A | | $ | 892,897 | | | | 17 | % | | $ | 892,897 | | | | 24 | % | | | | | | | | | | | | | | | | | | Customer B | | $ | 499,040 | | | | 10 | % | | $ | 732,163 | | | | 20 | % | | | | | | | | | | | | | | | | | | Customer C | | $ | 419,523 | | | | 8 | % | | $ | 887,233 | | | | 24 | % |
Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts. Subsequent to the fiscal year ended September 30, 2014, the Company received $387,483 from Customer B and $518,137 from Customer C 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$10,572,702 and $0$3,128,187 of cash deposits in excess of federally insured limits as of September 30, 20092014 and 2008,2013, 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. 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, 2014, the outstanding balance of the note was $156,323 and $15,211 of accrued interest.
Inventory
Inventory is valued at the lower of the cost or market. Cost is determined using the first-in, first-out (“FIFO”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 $153,633 and $211,555 during the fiscal years ended September 30, 2014 and 2013, respectively.
Inventory consists of productsraw materials that are available for sale and raw materials used in the manufacturing of TrackerPAL™ReliAlert™, Shadow, and other tracking devices. Completed TrackerPAL™ReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of September 30, 20092014 and 2008,2013, respectively, inventory consisted of the following:
| | 2009 | | | 2008 | | | 2014 | | | 2013 | | Raw materials | | $ | 686,421 | | | $ | - | | | Raw materials, work-in-process and finished goods inventory | | | $ | 1,471,764 | | | $ | 615,144 | | Reserve for damaged or obsolete inventory | | | (83,092 | ) | | | - | | | | (223,500 | ) | | | (148,043 | ) | Total inventory, net of reserves | | $ | 603,329 | | | $ | - | | | $ | 1,248,264 | | | $ | 467,101 | |
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, 20092014 and 2008,2013, respectively:
| | 2009 | | | 2008 | | | 2014 | | | 2013 | | Equipment, software, tooling, and other fixed assets | | $ | 2,742,537 | | | $ | 2,472,076 | | | Equipment, software and tooling | | | $ | 2,571,450 | | | $ | 2,002,576 | | Automobiles | | | 305,658 | | | | 287,736 | | | | 33,466 | | | | 33,466 | | Building and land | | | 377,555 | | | | 377,555 | | | Leasehold improvements | | | 127,912 | | | | 102,190 | | | | 1,294,386 | | | | 127,162 | | Furniture and fixtures | | | 284,824 | | | | 279,711 | | | | 253,466 | | | | 247,218 | | Total property and equipment | | | 3,838,486 | | | | 3,519,268 | | | Total property and equipment before accumulated depreciation | | | | 4,152,768 | | | | 2,410,423 | | Accumulated depreciation | | | (2,525,180 | ) | | | (1,937,710 | ) | | | (2,292,521 | ) | | | (2,092,221 | ) | Property and equipment, net of accumulated depreciation | | $ | 1,313,306 | | | $ | 1,581,558 | | | $ | 1,860,247 | | | $ | 318,201 | |
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, 2014 and 2013, the Company disposed of net property and equipment of $3,710 and $4,740, respectively.
Depreciation expense for the fiscal years ended September 30, 20092014 and 20082013 was $677,016$276,355 and $638,138,$231,853, respectively.
Monitoring Equipment
Monitoring equipment as of September 30, 2009 and 2008 is as follows:
| | 2009 | | | 2008 | | Monitoring equipment | | $ | 4,260,690 | | | $ | 4,410,467 | | Less accumulated depreciation | | | (2,944,197 | ) | | | (3,061,321 | ) | Monitoring Equipment, net | | $ | 1,316,493 | | | $ | 1,349,146 | |
The Company began leasing monitoring equipment to agencies for offender tracking in April 2006 under operating lease arrangements. The monitoring equipment is depreciated using the straight-line method over an estimated useful life of 3three years. Monitoring equipment as of September 30, 2014 and 2013 is as follows:
| | 2014 | | | 2013 | | Monitoring equipment | | $ | 3,166,217 | | | $ | 2,420,042 | | Less: accumulated amortization | | | (1,251,551 | ) | | | (1,183,346 | ) | Monitoring equipment, net of accumulated depreciation | | $ | 1,914,666 | | | $ | 1,236,696 | |
Amortization expense for the fiscal years ended September 30, 20092014 and 20082013 was $1,300,783$844,172 and $1,082,648,$1,230,293, respectively. These expenses were classified as a cost of revenues.
Assets Monitoring equipment to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the fiscal years ended September 30, 20092014 and 2008,2013, the Company disposed ofand impaired lease monitoring equipment and parts of $2,319,530$209,757 and $570,948,$296,526, respectively. In addition, the Company recognized $220,318 of impairment expense for future impairment of monitoring equipment during the year ended September 30, 2014. 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 from Midwest Monitoring & Surveillance, Inc. by $2,343,753 and from Bishop Rock Software by $460,827, Inc. for a total impairment expense of $2,804,580.
Revenue Recognition
The Company’s revenue has historically been from two sources: (i) monitoring services; (ii) monitoring device and other(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 anytimeany time with 30 daysdays’ 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.
Monitoring Device Product Sales
Although not the focus of the Company’s business model, the
The 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.delivered.
Other Matters The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days, and normal payment terms for device sales are between 120 and 180 days. The Company sells its devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
Geographical Information
The Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for the fiscal years ended September 30, 2014 and 2013, are as follows: | | Fiscal Years Ended | | | | September 30, | | | | 2014 | | | 2013 | | United States of America | | $ | 9,268,430 | | | $ | 7,179,043 | | Latin American countries | | | - | | | | 5,252,960 | | Caribbean countries and commonwealths | | | 2,933,794 | | | | 3,136,908 | | Other foreign countries | | | 59,974 | | | | 72,151 | | Total | | $ | 12,262,198 | | | $ | 15,641,062 | |
The long-lived assets, net of accumulated depreciation and amortization, used in the generation of revenues by geographic area as of September 30, 2014 and 2013, were as follows:
| | Net Property and Equipment | | | Net Monitoring Equipment | | | | 2014 | | | 2013 | | | 2014 | | | 2013 | | United States of America | | $ | 611,095 | | | $ | 318,201 | | | $ | 1,645,137 | | | $ | 878,823 | | Latin American countries | | | 1,168,406 | | | | - | | | | 237,667 | | | | - | | Caribbean countries and commonwealths | | | - | | | | - | | | | - | | | | 351,138 | | Other foreign countries | | | 80,746 | | | | - | | | | 31,862 | | | | 6,735 | | Total | | $ | 1,860,247 | | | $ | 318,201 | | | $ | 1,914,666 | | | $ | 1,236,696 | |
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 20092014 and 20082013 were for theto further develop our TrackerPAL and ReliAlert portfolio of products and services, as well as other research and development of SecureAlert’s TrackerPAL™ device and associated services.costs incurred by a new subsidiary acquired during fiscal year 2014. For the fiscal years ended September 30, 20092014 and 2008,2013, research and development expenses were $1,777,873$1,605,662 and $4,811,128,$987,934, respectively. Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2009,2014 and 2008,2013 was $76,793$60,505 and $209,389,$30,782, 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 | |
stock.
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, 2014 and September 30, 2013, 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,warrnats to purchase shares of the Company's Common Stock, par value $0.0001 per share (“Common Stock”), and shares issuable upon conversion of preferred stock. As of September 30, 20092014 and 2008,2013, there were 75,789,348347,251 and 21,846,412604,006 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, 2014 and 2013 consisted of the following:
| | 2014 | | | 2013 | | | | | | | | | Conversion of Series D Preferred stock | | | - | | | | 14,040 | | Exercise of outstanding Common Stock options and warrants | | | 305,251 | | | | 427,966 | | Exercise and conversion of outstanding Series D Preferred stock warrants | | | 42,000 | | | | 162,000 | | Total Common Stock equivalents | | | 347,251 | | | | 604,006 | |
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 our financial statements and disclosures.
In May 2009, the FASB issued guidance which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Topic sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in our financial statements, (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Topic should be applied to the accounting and disclosure of subsequent events. This Topic does not apply to subsequent events or transactions that are within the scope of other applicable accounting standards that provide different guidance on the accounting treatment for subsequent events or transactions. This Topic was effective for interim and annual periods ending after June 15, 2009, which was September 30, 2009 for us. The adoption of this Topic did not have a material impact on our financial statements and disclosures.
In June 2009, the FASB issued guidance which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Topic, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This Topic identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP and arranged these sources of GAAP in a hierarchy for users to apply accordi ngly. This Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Topic did not have a material impact on our disclosure of theCompany's consolidated financial statements.
In June 2009,May 2014, the Financial Accounting Standards Board (“FASB”) issued additionalASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which improvesan entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the relevance, representational faithfulness,revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and comparabilityinterim periods therein, using either of the information thatfollowing transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting entity provides inperiod with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our financial statements about a transferpending adoption of financial assets; the effects of a transferASU 2014-09 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 ourconsolidated financial statements and disclosures.have not yet determined the method by which we will adopt the standard.
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,August 2014, 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 evidenceASU No. 2014-15, Presentation of the fair value for the undelivered element in order for a delivered itemFinancial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to be treatedContinue as a separate unit of accounting, and 2) eliminates the residual methodGoing Concern. This standard sets forth management’s responsibility to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annualevaluate, each reporting period, beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidancewhether there is retroactively appliedsubstantial doubt about our ability to the begi nning of the year of adoption. We are currently assessing the future impact of this new accounting updatecontinue as a going concern, and if so, 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 guidanceprovide related footnote disclosures. The standard 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 aannual 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 earlier2016 and interim andperiods within 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, 2009,2016. We are currently evaluating this new standard and fiscal years within those fiscal yearsafter adoption, we will incorporate this guidance in our assessment of going concern.
On March 12, 2014, the Company entered into a Share Purchase Agreement (the “SPA”) to purchase from Eli Sabag, an individual resident of the State of Israel (“Seller”), all of the issued and outstanding shares (“Shares”) of GPS Global Tracking and Surveillance System Ltd., a company formed under the laws of and operating in the State of Israel (“GPS Global”). The SPA contained customary representations and warranties and covenants, including provisions for arrangements outstandingindemnification, subject to the limitations described in the SPA. Subsequent to the closing, the Seller and certain key employees of GPS Global entered into employment agreements and continue to operate GPS Global. The SPA also granted the Seller the right for a three-year period following the closing, to nominate one director to serve on the Registrant’s board and on GPS Global’s board of directors. The closing of the transaction, which occurred on April 1, 2014, was subject to customary closing conditions. The purchase price for the Shares was $7,811,404, payable in cash and shares of Registrant’s Common Stock as follows: ● | Cash to Seller of $311,404 at the closing; |
● | Shares of Registrant’s Common Stock valued at $7,500,000, delivered to Seller as follows: |
● | Common Stock valued at $1,600,000 delivered to Seller at the closing. |
● | Common Stock valued at $2,900,000, delivered to an escrow agent (“Bank”) to be released by Bank to Seller after six months from the closing, conditioned upon Registrant’s verification that GPS Global’s global positioning satellite (“GPS”) products (the “Devices”) meet expected operating specifications; |
● | Common Stock valued at $1,000,000, the number of shares to be determined by dividing $1,000,000 by the weighted average closing price of the Registrant’s Common Stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Seller by Registrant within 30 days of certification that GPS Global has sold or leased a minimum of 1,500 of its Devices under revenue-generating contracts; and |
● | Common Stock valued at $2,000,000, the number of shares to be determined by dividing $2,000,000 by the weighted average closing price of the Registrant’s Common Stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Seller by Registrant within 30 days of certification that GPS Global has sold or leased a minimum of 2,500 of its Devices under revenue-generating contracts, in addition to the 1,500 Devices previously mentioned (i.e., a minimum of 4,000 Devices sold or leased). |
As described above, shares of Common Stock valued at $3,000,000 may be payable based on sales of the GPS devices sold or leased. Management determined that it was probable that sales of GPS devices would exceed the number of units specified in the SPA, and has therefore, recognized a Stock Payable liability for the entire $3,000,000 value of common shares payable.
The total purchase price for the GPS Global acquisition was allocated to the net tangible and intangible assets based upon their fair values as of March 31, 2014 as set forth below. The excess of the beginningpurchase price over the net assets was recorded as goodwill. Goodwill recognized from this acquisition is not tax deductible. This acquisition provided the Company with additional research and development capabilities and enhanced technology which are expected to benefit current and future products.
The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date (in thousands).
| | (000's) | | Purchase Price | | $ | 7,811 | | Current assets | | | 217 | | Inventory | | | 17 | | Property and equipment | | | 47 | | Monitoring equipment | | | 48 | | Other non-current assets | | | 21 | | Intangible assets | | | 4,856 | | Tradename | | | 192 | | Accounts payable and accrued expenses | | | (215 | ) | Loan payable | | | (753 | ) | Goodwill | | | 3,381 | | Total fair value of assets acquired | | $ | 7,811 | |
On June 2, 2014, the Company entered into on (not outstanding) or after the beginninga Stock Purchase Agreement (the “Emerge SPA”) to purchase from BFC Surety Group, Inc. all of the first reporting periodissued and outstanding shares and equity interests of Emerge Monitoring, Inc., a Florida corporation (“Emerge”), which is the direct owner of all of the issued and outstanding equity interests of Emerge Monitoring II, LLC, a Florida limited liability company and wholly-owned subsidiary of Emerge (“Emerge LLC”), and a majority (65%) of the equity interest of Integrated Monitoring Systems, LLC, a Colorado limited liability company and subsidiary of Emerge LLC. The Emerge SPA contains customary representations and warranties and covenants, including provisions for indemnification, subject to the limitations described in the Emerge SPA. Certain key employees of the acquired entities continued to operate the acquired entities following the closing. During June 2014, the Company also committed to purchase the remaining 35% minority equity interest of Integrated Monitoring Systems, LLC. This purchase occurred during July 2014.
The purchase price for the Emerge acquisition was $7,739,167, all of which was paid in cash. The total purchase price for the Emerge acquisition was allocated to the net tangible and intangible assets based upon their fair values as of June 1, 2014 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. Goodwill recognized as a result of this acquisition is fully deductible for tax purposes. This acquisition provided the Company with significant customer relationships, an experienced sales and management team and additional alcohol monitoring product offerings. The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date (in thousands).
Inventory | | $ | 451 | | Property and equipment | | | 227 | | Other assets | | | 109 | | Developed technology | | | 1,600 | | Customer contracts/relationships | | | 1,860 | | Tradename/Trademarks | | | 110 | | Liabilities | | | 30 | | Goodwill | | | 3,382 | | Total fair value of assets acquired | | $ | 7,739 | |
Subsequent to September 30, 2014, the Company entered into a share purchase agreement (“G2 Agreement”) with Track Group Analytics Limited, a company formed under the laws of the providence of Nova Scotia (“G2”), all issued and outstanding shares and equity interests of G2 for an aggregate purchase price of up to CAD$4.6 million, of which CAD$2.0 million was paid in cash to the Shareholders at closing. See Note 14, “Subsequent Events” below for a more detailed description of the G2 acquisition. As of the date that beginsthese consolidated financial statements were issued, the Company was in the process of determining the value of assets and liabilities acquired in connection to this acquisition. Summary of Pro-forma Information (Unaudited)
The pro-forma information below for the year ended September 30, 2014 and 2013 gives effect to the acquisitions as if they had occurred on or after June 15, 2009. Certain transition disclosures are also required. Early applicationOctober 1, 2012. The pro-forma financial information is not permitted. The adoptionnecessarily indicative of this guidance is not expected to significantly impact ourthe results of operations and financial positio n. if the acquisitions had been effective as of this date. | | For the Year Ended | | | | September 30, | | | | Unaudited | | | | 2014 | | | 2013 | | | | | | | | | Revenues | | | 16,445,410 | | | | 18,668,162 | | Loss from operations | | | (8,617,692 | ) | | | (2,388,277 | ) | Net loss attributable to the Company | | | (8,924,681 | ) | | | (19,413,822 | ) | Basic income per share | | | (1.11 | ) | | | (3.80 | ) | Diluted income per share | | | (1.11 | ) | | | (3.80 | ) | Net loss attributable to common shareholders | | | (8,939,266 | ) | | | (20,456,519 | ) | Basic income per share | | | (0.88 | ) | | | (4.00 | ) | Diluted income per share | | | (0.88 | ) | | | (4.00 | ) |
(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.2014 and 2013:
| | 2014 | | | 2013 | | Accrued royalties | | $ | - | | | $ | 714,400 | | Accrued payroll, taxes and employee benefits | | | 822,847 | | | | 473,179 | | Accrued consulting | | | 267,300 | | | | 317,300 | | Accrued taxes - foreign and domestic | | | 203,941 | | | | 262,880 | | Accrued settlement costs | | | 52,000 | | | | 76,000 | | Accrued board of directors fees | | | 120,000 | | | | 68,090 | | Accrued other expenses | | | 374,298 | | | | 65,903 | | Accrued legal costs | | | 6,454 | | | | 57,001 | | Accrued cellular costs | | | 25,000 | | | | 55,000 | | Accrued outside services | | | 23,562 | | | | 33,022 | | Accrued warranty and manufacturing costs | | | 14,031 | | | | 30,622 | | Accrued interest | | | 504,124 | | | | 27,394 | | Total accrued expenses | | $ | 2,413,557 | | | $ | 2,180,791 | |
(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, 2014 and 2013. These transactions consist mainly of financing transactions and consulting arrangements.service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Related-Party Line of CreditRoyalty Agreement
AsOn August 4, 2011, with an effective date of September 30, 2009,July 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen Container Corp., a corporation organized under the Company owed $76,022 underlaws of the Commonwealth of Puerto Rico (“Borinquen”) to purchase Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a line-of-credit agreement with ADP Management, an entity owned and controlled by Mr. Derrick,Puerto Rico corporation (“ISS”) in consideration of 310,000 shares of our Common Stock, valued at the Company’s Chief Executive Officer. Outstanding amountsmarket price on the linedate of credit accrue interestthe Royalty Agreement at 11%$16.40 per annumshare, 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 are due upon demand.monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. On February 1, 2013, we redeemed and terminated this royalty obligation in February 2013 for a total cost of $13.0 million using the proceeds of a $16.7 million loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). In addition to the $13.0 million used to terminate the Royalty Agreement, we used the remaining $3.7 million as operating capital during the 2013 fiscal year. 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,debt discount. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in part, by $272,281connection with the Loan in the amount of expenses owed to ADP Management that are reimbursable by the Company.$17,576,627 into 3,905,917 shares of Common Stock at a rate of $4.50 per share. Revolving Loan Agreement
As of September 30, 2008, the Company owed $542,804 to ADP Management under a line-of-credit agreement. During the year ended September 30, 2008, the line of credit increased $1,318,433 due to a monthly management fee owed to ADP Management, including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP Management that are reimbursable by the Company of $618,433, and $700,000 in cash. The Company made cash repayments during the year of $975,641.
Related-Party Notes Payable
In November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief Executive Officer of the Company. The unsecured note payable accrues interest at 15% and was due and payable upon the Company receiving cash proceeds of $1,000,000 or more from the sale of common stock or other additional financing activities orOn February 4, 2009, whichever comes first. The Company paid to Mr. Derrick a loan origination fee of $50,000 in cash and 100,000 shares of restricted common stock. In February 2009, Mr. Derrick loaned an additional $500,000 to the Company resulting in a total of $1,500,000 due to Mr. Derrick. The Company and Mr. Derrick agreed to extend the due date of the full obligation to February 26, 2010. As of September 30, 2009, the Company owed $1,500,000 plus $12,197 in accrued interest to Mr. Derrick. Subsequent to September 30, 2009, the Company and Mr. Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D Preferred stock.
In September 2008, the Company borrowed $250,000 from Randy Olshen, the former President of SecureAlert. The unsecured note payable accrued interest at 11%. As of September 30, 2009, this note was paid in full.
Foreclosure Liability
In July 2009,1, 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 interest rate of 3% per annum for unused funds and 10% per annum for borrowed funds. As of September 30, 2013, no advances have been made under this loan and the Company had accrued $23,868 in interest liability on the Revolving Loan. 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 unrelated entityinternational customer.The loan initially matured in June 2014; however, the amount of $1,000,000 payable onnote was extended and now matures in December 31, 2010.2015.
Related-Party Promissory Note 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 15%8% per annum paid quarterly. As additional consideration forand initially matured on November 18, 2014. The note initially matured in November 2014. However, 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 sharesmaturity date of the Company’s common stock it owns. In August 2009, the Company defaulted on the loan because it failednote was subsequently extended 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.November 2015. As of September 30, 2009,2014, the Company accr ued $775,000 asowed $1,500,000 of principal and $43,726 of accrued interest on the note. Related-Party Service Agreement
During the fiscal year ended September 30, 2013, the Company entered into an agreement with Paranet Solutions, LLC to provide the following primary services: (i) procurement of hardware and software necessary to ensure that vital databases are available in the event of a “foreclosure liability” to recorddisaster (backup and disaster recovery system); and (ii) 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 obligation to repayExecutive Committee, was the 5,000,000 sharesChief Executive Officer of common stock to ADP Management. Subsequent to September 30, 2009,Paranet until August 2014. As consideration for these services, the Company agreed to issue 833 shares of Series D Preferred stockpay Paranet $4,500 per month. The arrangement can be terminated by either party for any reason upon ninety (90) days written notice to ADP Management as payment this liability.the other party. During the years ended September 30, 2014 and 2013, the Company paid Paranet $461,223 and $8,552, respectively.
Related-Party Series A 15% Debenture
On May 1, 2009, the Company issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an employee of the Company for $250,000 in cash. In addition to the rights and terms of the debenture, the entity received one-year warrants to purchase 2,200,000 shares of the Company common stock at an exercise price of $0.25 per share valued at $43,926. As of September 30, 2009, the outstanding balance owed on the debenture was $250,000 plus $9,452 in accrued interest. Subsequent to September 30, 2009, the Company agreed to issue 250 shares of Series D Preferred stock in exchange for the debenture of $250,000.
Consulting Arrangements
The Company agreed to pay consulting fees to ADP Management for assisting the Company to develop its new business direction and business plan and to provide introductions to strategic technical and financial partners. Under the terms of this agreement, ADP Management was paid a consulting fee of $40,000 per month and the Company agreed to reimburse the expenses incurred by ADP Management (including the salaries of certain of our officers) in the course of performing services under the consulting arrangement. Effective April 1, 2008, ADP Management reduced the consulting fee from $40,000 to $20,000 per month to reflect the resignation of Mr. Dalton as the Company’s President.
The ADP Management agreement also requires ADP Management to pay the salary of Mr. Derrick as Chief Executive Officer and Chairman of the Board of Directors of the Company. The Board of Directors, which at the time did not include Mr. Derrick, approved both of these arrangements.Loan
During the fiscal year ended September 30, 2008,2012, 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 duringborrowed $500,000 from a former officer. During the fiscal yearsyear 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 noteestablished terms for $2,700,000 in orderthis loan which created a debt discount of $500,000 which was immediately recorded as interest expense to purchase TrackerPAL™ units. The note, at the lender’s option, may convert into shares of the Company’s common stock at a conversion price of $0.22 per share. The note bears interest at 8% per annum and matures on January 15, 2010. Interest is due monthly and the principal is due at maturity. The fair market value of the common stock was $0.23 per share on the date the Company entered into the agreement resulting inaccount for a beneficial conversion feature of $122,727. This was recorded as a debt discount and will be expensed overto reflect an adjustment in the lifeconversion rate from $11.00 to $4.50 to equal the conversion rate of the note. As of September 30, 2009,Loan to redeem the outstanding balance dueroyalty. During fiscal year 2013, this debt 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 convert the note and the total outstanding accrued interest of $98,414converted into 2,149111,112 shares of Series D Preferred stock.Common Stock.
(9) | Senior Secured Convertible Notes |
During the year ended September 30, 2009, the Company issued senior secured convertible notes of $3,549,631 to unrelated parties. The proceeds were used to pay off the Company’s line of credit. The interest rate is 15% per annum and the notes mature on March 13, 2010. Interest is due monthly and the principal is due at maturity. These notes may convert into shares of the Company’s common stock at a conversion price of $0.20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share, or into shares of the SecureAlert’s common stock at the fair market value of the stock at the conversion date. The Company determined that the embedded conversion features of the notes were 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 | Related-Party Convertible Debenture #1
During the fiscal year ended September 30, 2009,2012, the Company received $4,400,000 in cashborrowed $500,000 from a director with an interest rate of 8% per annum. The debenture was to mature on December 17, 2012 and secured by the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company. As of September 30, 2009, the total outstanding balancedomestic patents of the debentures was $4,506,750. The terms of these debentures are as follows: 1) 15% interest per annum. Interest is due quarterly and principal is due at maturity, 2) 18-month maturity, 3) for every $1 invested into the debenture the holder received 1 share of the Company’s common stock, and 4) at the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0.20 per share or into shares at a reduced conversi on rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the notes were subject to derivative accounting treatment (see Note 11). This resulted in a debt discount valued at $3,130,423. Additionally, with the issuance of these notes, the Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000 warrants valued at $43,926 recorded as a debt discount. This discount will be expensed over the life of the debentures.
In September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per share to an investor. Shortly following the transaction, the market price of the Company’s common stock fell to approximately $0.20 per share. The Company agreed upon the investor’s investment of an additional $3,000,000 (included in the $4,506,750 discussed in the paragraph above) in the Series A 15% debenture that the Company would issue 9,796,636 additional shares of its common stock to the investor. Furthermore, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt 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.
(12) | Facility Agreement 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. On January 14, 2014 Tetra House assigned the Facility Agreement to Conrent Invest S.A. Since January 3, 2014, we have borrowed $25,000,000 under the Facility Agreement. The borrowed funds have been used for acquisitions and for general corporate purposes. 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.
Additional Related-Party Transactions and Summary of All Related-Party Obligations | | 2014 | | | 2013 | | Loan from a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on December 30, 2015. | | $ | 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, 2015. | | | 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 | | | - | | | | (60,000 | ) | Long-term debt, net of current portion | | $ | 2,700,000 | | | $ | - | |
(6) Debt Obligations |
Debt obligations as of September 30, 20092014 and 20082013, consisted of the following:
| | September 30, | | | | 2009 | | | 2008 | | SecureAlert Monitoring, Inc. | | | | | | | Unsecured note payable to a former subsidiary bearing interest at 5%. This note was paid in full during the fiscal year ended September 30, 2009. | | $ | - | | | $ | 598,793 | | | | | | | | | | | Unsecured notes payable to former SecureAlert stockholders, with interest at 5%, payable in installments of $80,000 per month paid in full as of September 30, 2009. | | | - | | | | 169,676 | | | | | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on June 9, 2011. | | | 12,228 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 12%. The note matures on February 1, 2010. | | | 8,728 | | | | - | | | | | | | | | | | SecureAlert, Inc. | | | | | | | | | Unsecured promissory note with an entity bearing an interest rate of 15%. The note matures on December 31, 2010. Interest is paid quarterly and the principal due at maturity. Debt discount at year end was $525,665. | | | 474,335 | | | | - | | | | | | | | | | | Court Programs, Inc. | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 6.04% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 225,000 | | | | 229,100 | | | | | | | | | | | Unsecured revolving lines of credit with two banks, with interest rates between 6.60% and 13.49%. | | | 16,500 | | | | 48,499 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 30,751 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | 1,492 | | | | 16,028 | | | | | | | | | | | Capital leases with an effective interest rate 14.89% that matures in January 2011. | | | 14,898 | | | | - | |
| | September 30, | | | September 30, | | | | 2014 | | | 2013 | | Unsecured facility agreement with an entity whereby the Company may borrow up to $25 million bearing 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. A $750,000 origination fee or 3% on the total amount under the agreement was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of September 30, 2014, the remaining debt discount was $468,750. | | $ | 24,531,250 | | | $ | - | | The Company entered into an agreement whereby the Company was granted a non-exclusive, irrevocable, perpetual and royalty-free license to certain patents with an entity. The Company agreed to pay $4,500,000 over two years or $187,500 per month through February 2016. | | | 3,187,500 | | | | - | | Note issued in connection with the acquisition of a subsidiary and matures in December 2014. | | | 9,630 | | | | 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. | | | 46,021 | | | | 59,266 | | Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.06%, due June 2014. This loan was paid off in February 2014 | | | - | | | | 5,306 | | Related notes payable for $1.5 million and $1.2 million, due December 31, 2015 and November 19, 2015, respectively | | | 2,700,000 | | | | - | | Total debt obligations | | | 30,474,401 | | | | 128,683 | | Less current portion | | | (1,906,040 | ) | | | (88,095 | ) | Long-term portion of related party debt | | | (2,700,000 | ) | | | - | | Long-term debt, net of current portion | | $ | 25,868,361 | | | $ | (40,588 | ) |
| | | | | | | | | 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 | |
The following table summarizes the Company’s future maturities of debt and related party obligations as of September 30, 2014: Fiscal Year | | Total | | 2015 | | $ | 1,906,040 | | 2016 | | | 28,548,192 | | 2017 | | | 4,444 | | 2018 | | | 4,450 | | 2019 & thereafter | | | 11,275 | | | | | | | Total | | $ | 30,474,401 | |
The following table summarizes the Company’s capital lease obligations included in the schedules of debt and debt obligations above as of September 30, 2014:
Fiscal Year | | Total | | 2015 | | $ | 21,409 | | 2016 | | | 4,442 | | 2017 | | | 4,444 | | 2018 | | | 4,450 | | Thereafter | | | 11,275 | | Total minimum lease payments | | | 46,020 | | Less: amount representing interest | | | (10,351 | ) | Present value of net minimum lease payments | | | 35,669 | | Less: current portion | | | (4,440 | ) | Obligation under capital leases - long-term | | $ | 31,229 | |
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 | |
As of September 30, 2014 and 2013, the Company had total capital lease obligations of $35,669 and $59,266, the current portion being $4,440 and $31,576, respectively. At September 30, 2014 and 2013, accumulated amortization of assets under capital lease was $55,473 and $40,932, respectively.
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's Board of Directors has the authority to amend the Company's Articles of Incorporation, without further stockholdershareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series A 10 %D Convertible Non-Voting Preferred Stock
The Company has designated 40,00085,000 shares of preferredits stock as Series A 10% Convertible Non-VotingD Preferred stock ("(“Series AD Preferred stock"”). During the year ended September 30, 2009, all 19 outstanding2014 and 2013, the Company did not issue any additional new shares of Series AD Preferred, Stock converted into 9,306however the Company exchanged 207 shares of Series D Preferred for 16,907 shares of Common Stock. Additionally, the Company’s common stock. There were no conversionsCompany repurchased 261 shares of Series D Preferred for $312,008 during the year ended September 30, 2008.
Dividends
The Series A Preferred stock was entitled to dividends at the rate2014. As a result of 10% per year on the stated value of the Series A Preferred stock (or $200 per share), payable in cash, additional shares of Series A Preferred stock, or common shares of RemoteMDx at the discretion of the Board of Directors. Dividends were fully cumulative and accrued from the date of original issuance to the holders of record as recorded on the books of the Company at the record date or date of declaration if no record date is set. During the fiscal years ended September 30, 2009 and 2008, the Company recorded $175 and $423 in dividends on Series A Preferred stock, respectively.
Series B Convertible Preferred Stock
The Company designated 2,000,000 shares of preferred stock as Series B Convertible Preferred stock ("Series B Preferred stock"). Each share of Series B Preferred stock was convertible into shares of common stock at an initial rate of $3.00 per share of common. The Company has issued shares of common stock or securities convertible into common stock for consideration per share less than $3.00 per share. The conversion rate automatically adjusted to a price equal to the aggregate consideration received by the Company for that issuance divided by the number of shares of common stock issued. During the fiscal years ended September 30, 2009 and 2008, 10,999 and 2,000 shares of Series B Preferred stock converted into 10,999 and 15,000 shares of common stock, respectively. As of September 30, 2009,these transactions, there were no shares of Series BD Preferred stock outstanding.outstanding at September 30, 2014.
Series D Convertible Preferred Stock
In November 2009, the Company designated 50,000 shares of preferred stock as Series D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred stock”). Subsequent to the fiscal year ended September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in consideration for the conversion of $15,723,204 of debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.
Dividends The Series D Preferred stock is entitled to dividends at the rate equal to eight percent (8%)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 stockCommon Stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stockCommon Stock of the Company, the number of shares to be issued is based on the average per share market price of the common stockCommon 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 year ended September 30, 2014 and 2013, the Company issued 1,249 and 181,832 shares of Common Stock to pay $24,012 and $1,663,997 of accrued dividends on the Series D Preferred earned during the nine months ended March 31, 2014 and 2013, respectively.
Convertibility Each share of Series D Preferred stock may be converted into 6,000thirty (30) shares of common stockCommon Stock, commencing after ninety90 days fromafter the date of issue.
Voting Rights During the year ended September 30, 2014 and Liquidation Preference
The holders2013, 207 and 48,295 shares of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders, including the election of directorswere converted into 16,907 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 of1,894,283 shares of common stock the Company is authorized to issue and on the proposalCommon Stock, respectively. As of a reduction in the numberSeptember 30, 2014, there were no shares 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 holdingoutstanding.
Redemption
On January 16, 2014, the equivalent of 60 percentCompany sent out notices to Series D Preferred shareholders regarding the Company’s election under the Amended and Restated Designation of the issuedRights and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of the date of this report, there were 25,186Preferences to redeem 261 shares of Series D Preferred stock outstanding. As a consequence of these voting rights, the holdersat 120% of the aggregate original investment of $260,007 through the payment of cash totaling $312,008. The redemption date was February 13, 2014.
Series D Preferred Stock Warrants As of September 30, 2014, 42,000 warrants to purchase Series D Preferred stock mayat an exercise control over these issues regardlessprice of the interests of the remaining stockholders. Additionally, the holders are entitled to a liquidation preference equal to their original investment amount.
In the event of the liquidation, dissolution or winding up of the affairs of the Company (including in connection with a permitted sale of all or substantially all of the Company’s assets), whether voluntary or involuntary, the holders of shares of Series D Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its stockholders, an amount$16.67 per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalizationwere issued and the like with respect to the Series D Preferred Stock.
(14) | SecureAlert Preferred Stock |
SecureAlert, Inc. Series A Preferred Shares
During the fiscal year ended September 30, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. to establish 3,590,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred stock (“SecureAlert Monitoring Series A Preferred stock”).
Dividends
The holders of shares of SecureAlert Monitoring Series A Preferred stock were entitled to receive quarterly dividends out of any of SecureAlert 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. In 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.
outstanding. During the fiscal years ended September 30, 20092014 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 2,2632013, no shares of Series D Preferred stock.or 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.Common 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, 2009,2014, the Company issued 54,484,728287,627 shares of common stock.Common Stock. Of these shares, 9,30616,907 shares were issued upon conversion of 19207 shares of Series A Preferred stock; 10,999 shares were issued upon conversion of 10,999 shares of Series B Preferred stock; 5,400,000 shares were issued to settle lawsuits and obligations; 25,953,016 shares were issued in connection with debt; 2,254,121D Preferred; 15,343 shares were issued for services rendered to the Company valued at $728,874; 3,007,286$243,018; 236,469 shares valued at $4,500,000 were issued in connection with the acquisition of a subsidiary; 10,646 shares valued at $8,000 were issued upon the exercise of options and warrants; 1,252 shares were issued to purchase Bishop Rockpay dividends from Series D Preferred of $24,012; and to extend an option to purchase the remaining percentage of ownership of Midwest; and 17,850,0007,010 shares were issued for net cash proceedsto pay Board of $3,250,000.Director fees of $127,500.
During the fiscal year ended September 30, 2008,2013, the Company issued 28,541,1756,709,021 shares of common stock.Common Stock. Of these shares, 15,0001,894,283 shares were issued upon conversion of 2,00048,295 shares of Series B Preferred stock; 325,000 shares were issued upon settlement of a lawsuit; 360,000 shares were issued for debt; 9,135,000D Preferred; 21,884 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 $141,758; 4,607,361 shares were issued in connection with the acquisitiondebt and accrued interest of Midwest and Court Programs; 825,893 shares were issued for SecureAlert Series A Preferred stock dividends; 7,434,249$20,733,119; 181,832 shares were issued to redeem SecureAlertpay dividends from Series AD Preferred stock;of $1,663,997; and 3,618,8143,661 shares were issued from the exerciseto pay Board of options and warrants.Director fees of $47,500.
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 Plan”“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 years ended September 30, 2014 and 2013, there were no options were issued under this 2012 Plan. During the year ended September 30, 2009, the Company granted 4,931,214 options2014, we issued 8,787 shares of Common Stock 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 | |
plan. As of September 30, 2009, 21,658,8312014, 44,657 shares of Common Stock were available for future grants under the 25,248,165 outstanding options2012 Plan. All Options and warrants were vested.
During the fiscal year ended September 30, 2009, the Company issued 4,931,214 options and warrants to purchase common stock as follows: 2,200,000 in connection with the settlement of debt; 1,213,500 granted to consultants for services; 875,000 to employees; and 642,714 in connection with the purchase of Bishop Rock. All the options and warrants issued during the year vested over the year or immediately. The exercise prices range from $0.09 to $0.30 per share. The exercise price for the options granted during the fiscal year ended September 30, 2009 were based upon the quoted market price of the Company’s shares on the date of grant. No options or warrants were exercised during the fiscal year ended September 30, 2009.Warrants
During the fiscal year ended September 30, 2008,2014, the Company issued 6,752,869 commongranted 69,356 warrants to members of its Board of Directors, valued at $391,578. The Company also granted 15,000 warrants to an employee valued at $76,880. As of September 30, 2014, $200,218 of compensation expense associated with unvested stock options and warrants as follows: 1,670,000 in connection with the saleissued previously to members of common stock, 1,725,000 to employees (275,000 have vested and 1,450,000 are unvested), 1,169,869 to consultants, and 2,188,000 to the Board of Directors. The exercise prices range from $0.59 to $4.05 per share. The exercise price forDirectors will be recognized over the options granted duringnext year.
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’s sharesBoard of Directors will be recognized over the next year.
The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2014 and 2013 using the Black-Scholes model, respectively: | | Fiscal Years Ended | | | | September 30, | | | | 2014 | | | 2013 | | Expected cash dividend yield | | | - | | | | - | | Expected stock price volatility | | | 0 | % | | | 108 | % | Risk-free interest rate | | | 0.65 | % | | | 0.18 | % | Expected life of options | | 1.05 Years | | 1.38 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 | A summary of the compensation-based options and warrants activity for the fiscal years ended September 30, 2014 and 2013 is presented below:
As of | | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Outstanding as of September 30, 2012 | | | 336,782 | | | $ | 28.00 | | | | | | | Granted | | | 143,937 | | | $ | 11.18 | | | | | | | Expired | | | (52,754 | ) | | $ | 76.97 | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2013 | | | 427,965 | | | $ | 16.12 | | | | | | | Granted | | | 84,356 | | | $ | 18.04 | | | | | | | Expired | | | (141,177 | ) | | $ | 17.50 | | | | | | | Exercised | | | (65,893 | ) | | $ | 18.04 | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2014 | | | 305,251 | | | $ | 15.71 | | 1.05 years | | $ | 487,402 | | Exercisable as of September 30, 2014 | | | 270,867 | | | $ | 15.49 | | 0.97 years | | $ | 487,402 | |
The fiscal year end intrinsic values are based on a September 30, 2008, deferred compensation in connection with common stock2014 closing price of $14.70 per share. The intrinsic value of 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 expenseexercised during the fiscal year ended September 30, 2009. Additionally, the Company recorded deferred compensation expense of $384,667 related to common stock and warrants issued and fully expensed throughout the fiscal year, resulting in a total of $2,595,933 of deferred compensation expense recorded during the fiscal year ended September 30, 2009.2014 was $191,916.
The issuance of common stock and warrants during the fiscal year ended September 30, 2009 valued at $384,667 is outlined as follows:
| · | 1,000,000 shares of common stock issued to an entity for services valued at $200,000 or $0.20 per share. | | · | 900,000 shares of common stock issued to three individuals for paying down the Company’s line of credit valued at $108,000, or $0.12 per share. |
| · | 100,000 shares of common stock issued to an officer of the Company in connection with debt (Note 7: Related-Party Notes Payable) valued at $30,000, or $0.30 per share. | | · | 213,500 unregistered warrants to an individual for rendering services to the Company valued at $46,667. |
As of September 30, 2009, deferred compensation to be expensed in future periods was $1,287,406.
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the fiscal years ended September 30, 20092014 and 2008,2013, the Company incurred net losses of $22,761,102 and $49,339,637, respectively, for income tax purposes.purposes of $8,419,359 and $3,427,372, 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, 2009,2014, the Company had net carryforwards available to offset future taxable income of approximately $158,807,000$203,000,000 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, 2014, approximately $66,000,000 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, 2014, 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, 2014. The deferred income tax assets (liabilities) were comprised of the following as of September 30:for the periods indicated:
| | Fiscal Years Ended | | | | September 30, | | | | 2014 | | | 2013 | | Net loss carryforwards | | $ | 50,933,000 | | | $ | 72,208,000 | | Accruals and reserves | | | 281,000 | | | | 1,562,000 | | Contributions | | | 8,000 | | | | 8,000 | | Depreciation | | | 79,000 | | | | 42,000 | | Stock-based compensation | | | 5,980,000 | | | | 5,880,000 | | Valuation allowance | | | (57,282,000 | ) | | | (79,700,000 | ) | Customer advances | | | 1,000 | | | | - | | Total | | $ | - | | | $ | - | |
| | | 2009 | | | | 2008 | | Net loss carryforwards | | $ | 53,994,000 | | | $ | 45,367,000 | | Accruals and reserves | | | 101,000 | | | | (99,000 | ) | Contributions | | | 1,000 | | | | 3,000 | | Valuation allowance | | | (54,096,000 | ) | | | (45,271,000 | ) | | | $ | - | | | $ | - | |
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the fiscal years ended September 30, 20092014 and 20082013 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, | | | | 2014 | | | 2013 | | Federal income tax benefit at statutory rate | | $ | 2,863,000 | | | $ | 6,091,000 | | State income tax benefit, net of federal income tax effect | | | 278,000 | | | | 591,000 | | Change in estimated tax rate and gain (loss) on non-deductible expenses | | | (5,000 | ) | | | (5,556,000 | ) | Loss of operating loss for IRC Sec 382 limitation | | | (24,738,000 | ) | | | - | | Loss of operating loss for entities sold | | | - | | | | 778,000 | | Change in valuation allowance | | | 21,602,000 | | | | (348,000 | ) | 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 began recognizing a liability for value-added taxes which will be due upon collection. The liability for these value added taxes at September 30, 2014 was $74,184.
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, 2011 through September 30, 2014.
(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. 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 setvigorously. No accrual for May of 2011, and trial is set for late 2011. We have not accrued anya potential loss has been made as management believes the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.remote.
RemoteMDx,Christopher P. Baker v. SecureAlert, Inc. v. Satellite Tracking In February 2013, Mr. Baker filed suit against the Company in the Third Judicial District Court in and for Salt Lake County, State of People, L.L.C. (a/k/Utah. Mr. Baker asserts that the Company breached a STOP, LLC):2006 consulting agreement with him and claims damages of not less than $210,000. The Company filed a patent infringement suit against STOP indisputes the United States District Court forplaintiff’s claims and will defend the Central District of California on May 2, 2008. The Company has asserted that STOP infringes United States Patent No. 7,330,122case vigorously. No accrual 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. The Company has not accrued any potential loss has been made as management believes the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.remote.
Informal Inquiry.SecureAlert, Inc. v. Derrick Brooks and STOP, LLC In March 2008,. On February 21, 2014, the Company was advised by letter fromfiled a complaint in the U.S. Securities and Exchange Commission (“SEC”),Third Judicial District Court, Salt Lake District Office, that it has begunCounty, 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, the Company entered into a settlement agreement with STOP and all of the claims between the Company and STOP in the litigation have been dismissed with prejudice. On April 9, 2014, Mr. Brooks filed an informal inquiry regarding the Company. The inquiry, among other items, relates toanswer denying the Company’s revenue recognition policyclaims and documents, relationshipasserting counterclaims for constructive discharge, interference with stockholders,contract, interference with prospective economic relations and business. The SEC has advised the Company in its correspondence that this informal inquiry should not be construed as an indication that any violation of law has occurred, nor should it be consideredblacklisting. On February 6, 2015 we entered into a reflection upon any person, entity, or security. The Company voluntarily disclosed this inquiry in its Quarterly Report on Form 10-Q for the fiscal qua rter ended March 31, 2008. There were no material developments in this matter during the fiscal year ended September 30, 2009.settlement agreement with Mr. Brooks and all claims between us and Mr. Brooks and all counterclaims by Mr. Brooks have been dismissed.
Operating Lease Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2009:2014:
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 | | | | | | 2015 | | $ | 299,121 | | 2016 | | | 269,149 | | 2017 | | | 109,069 | | Thereafter | | | 89,718 | | | | | | | Total | | $ | 767,057 | |
The total contractualoperating lease obligations of $1,463,094$767,057 consist of the following: $1,324,432$721,037 from facilities operating leases and $138,662$46,020 from equipment leases. During the fiscal years ended September 30, 20092014 and 2008,2013, the Company paid approximately $487,000$381,156 and $536,000,$350,073, 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. During the year ended September 30, 2013, the Company negotiated a settlement of 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, each party provided the other with a reciprocal license for future patents awarded the respective party. The Company also agreed to pay the entity a total of $4,500,000 in 24 equal monthly installments of $187,500 in exchange for the granting of a non-exclusive, irrevocable, perpetual and royalty-free license to certain patents held by the entity.
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 submitted documentation to comply with the country’s requirements; and the audit was finalized during the year ended September 30, 2014. The same international taxing authority selected additional importation documents to be audited for the year ended September 30, 2014 The Company has submitted documentation to comply with the country’s requirements. As of the date of this report, the audit results and potential penalties (if any) 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. The costsell to a former principal all of the Company duringissued 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.
There were no assets and liabilities of Midwest and Court Programs reported as discontinued operations for the fiscal years ended September 30, 20092014 and 20082013, respectively.
The following is a summary of the operating results of discontinued operations for the fiscal years ended September 30, 2014 and 2013: | | 2014 | | | 2013 | | Revenues | | $ | - | | | $ | 477,298 | | Cost of revenues | | | - | | | | (163,487 | ) | Gross profit | | | - | | | | 313,811 | | Selling, general and administrative expense | | | - | | | | (319,976 | ) | Loss from operations | | | - | | | | (6,165 | ) | Other expense | | | - | | | | (295 | ) | Net loss from discontinued operations | | $ | - | | | $ | (6,460 | ) |
(13) Intangible Assets
The following table summarizes the activity of intangible assets for the years ended September 30, 2014 and 2013, respectively:
2014 | | Weighted Average Useful Life (yrs) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Patent & royalty agreements | | | 7.99 | | | $ | 21,170,565 | | | $ | (2,405,668 | ) | | $ | 18,764,897 | | Developed technology | | | 8.97 | | | | 6,190,083 | | | | (318,054 | ) | | | 5,872,029 | | Customer relationships | | | 7.7 | | | | 1,860,000 | | | | (81,447 | ) | | | 1,778,553 | | Trade name | | | 9.64 | | | | 291,486 | | | | (13,725 | ) | | | 277,761 | | Website | | | 3 | | | | 50,386 | | | | - | | | | 50,386 | | Total | | | | | | | 29,562,520 | | | | (2,818,894 | ) | | | 26,743,626 | | | | | | | | | | | | | | | | | | | 2013 | | Weighted Average Useful Life (yrs) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Patent & royalty agreements | | | 5.86 | | | $ | 16,670,567 | | | $ | (1,256,647 | ) | | $ | 15,413,920 | | Total | | | | | | | 16,670,567 | | | | (1,256,647 | ) | | | 15,413,920 | |
The intangible assets summarized above were purchased on various dates from January 2010 through June 2014. The assets have useful lives ranging from six to ten years. Amortization expense for the years ended September 30, 2014 and 2013 was approximately $2,422,541$1,563,416 and $2,940,000,$929,108, respectively. The following table summarizes the future maturities of amortization of intangible assets as of September 30, 2014: Fiscal Year | | | | 2015 | | | 2,352,735 | | 2016 | | | 2,352,735 | | 2017 | | | 2,352,735 | | 2018 | | | 2,388,505 | | 2019 | | | 2,332,236 | | Thereafter | | | 14,964,680 | | Total | | | 26,743,626 | |
Goodwill – During the year ended September 30, 2014, the Company recognized goodwill as a result of acquisitions discussed in the Acquisitions footnote. In accordance with accounting principles generally accepted in the United States of America the Company does not amortize goodwill. These amounts are includedprinciples require the Company to periodically perform tests for goodwill impairment, at least annually, or sooner if evidence of possible impairment arises. The Company evaluated the goodwill for impairment as of September 30, 2014. Based on the evaluation made, the Company concluded that no impairment of goodwill was necessary.
Goodwill, as of September 30 consisted of the following: | | September 30, | | | | 2014 | | | 2013 | | Balance - beginning of year | | $ | - | | | $ | - | | Additions resulting from acquisitions: | | | | | | | | | Acquisition of GPS Global Tracking & Surveillance, Ltd. | | | 3,381,000 | | | | - | | Acquisition of Emerge Monitoring, Inc. | | | 3,381,754 | | | | - | | Foreign currency translation adjustment | | | (185,145 | ) | | | | | Balance - end of year | | | 6,577,609 | | | | - | |
(14) Subsequent Events
The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2014, the following events occurred:
On November 26, 2014 (the “Closing Date”), the Company entered into a Share Purchase Agreement (the “G2Agreement”) to purchase from the existing Shareholders of G2 all issued and outstanding shares and equity interests of G2 (collectively the “Shares”) for an aggregate purchase price of up to CAD$4.6 million (the “G2Acquisition”), of which CAD$2.0 million was paid in costcash to the Shareholders on the Closing Date. Pursuant to the terms and conditions of sales.the Agreement, the remainder of the purchase price will be paid as follows: (i) CAD$600,000 will be paid to the Shareholders in shares of Common Stock of which one-half of the shares will be issued on the one-year anniversary of the Closing Date and the remaining one-half will be issued on the two-year anniversary of the Closing Date; and (ii) the remaining CAD$2.0 million will be paid to the Shareholders in shares of Common Stock periodically, over the course the two-year period beginning on the Closing Date, upon the achievement of certain milestones set forth in the G2 Agreement. The G2 Agreement also provides for customary representations, warranties and covenants, including provisions for indemnification, and is subject to customary closing conditions. Following the G2 Acquisition, G2’s executive leadership and employees will be integrated with the Company but will operate from G2’s existing offices in Halifax, Nova Scotia, Canada. The Company issued 38,499 shares of Common Stock subsequent to September 30, 2014 in connection to this acquisition. As of the date that these consolidated financial statements were issued, the Company was in the process of determining the value of assets and liabilities acquired in connection to this acquisition. SECUREALERT, INC. AND SUBSIDIARIES Assets | | December 31, 2014(Unaudited) | | | | | Current assets: | | | | | | | | | | | | | | | | Accounts receivable, net of allowance for doubtful accounts of $4,070,000, respectively | | | | | | | | | Notes receivable, current portion | | | | | | | | | Prepaid expenses and other current assets | | | | | | | | | Inventory, net of reserves of $225,900 and $223,500, respectively | | | | | | | | | | | | | | | | | | Property and equipment, net of accumulated depreciation of $2,486,779 and $2,292,521, respectively | | | | | | | | | Monitoring equipment, net of accumulated amortization of $1,449,671 and $1,251,551, respectively | | | | | | | | | Intangible assets, net of accumulated amortization of $3,389,500 and $2,818,894, respectively | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current portion of long-term related-party debt | | | | | | | | | Current portion of long-term debt, net of discount of $9,529 and $375,370, respectively | | | | | | | | | Total current liabilities | | | | | | | | | Stock payable - acquisitions | | | | | | | | | Long-term portion of related party debt, net of current portion | | | | | | | | | Long-term portion of debt, net of current portion and discount of $375,000 and $93,750, respectively | | | | | | | | | Other long-term liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 0 shares outstanding | | | | | | | | | Common stock, $0.0001 par value: 15,000,000 shares authorized; 10,131,629 and 10,093,130 shares outstanding, respectively | | | | | | | | | Additional paid-in capital | | | | | | | | | Accumulated other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | | | | | | | |
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. |
The accompanying notes are an integral part of these condensed consolidated statements.
| 2) | On November 2, 2009, the Company’s Board of Directors designated 50,000 shares Series D Preferred stock. The shares accrue dividends at a rate of 8% per annum and may be paid in cash or additional shares of Series D Preferred stock. See note 13. Subsequent to September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock. |
Subsequent events have been evaluated through January 12, 2010, the date these financial statements were issued. No events, other than the events described above, required disclosure.
Index to Consolidated Financial Statements
| Page | | | Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009 (Unaudited) | F-38 | | | Condensed Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2010 and 2009 (Unaudited) | F-40 | | | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (Unaudited) | F-41 | | | Notes to Condensed Consolidated Financial Statements (Unaudited) | F-43 |
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (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 | |
| | | Three Months Ended December 31, | | | | | 2014 | | | 2013 | | Revenues: | | | | | | | | | | | $ | | | | | | | Monitoring and other related services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Monitoring and other related services | | | | | | | | | Impairment of monitoring equipment and parts (Note 13) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general and administrative expense | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Currency exchange rate gain (loss) | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | Net loss from continuing operations | | | | ) | | | | | | | | | | | | | | Dividends on Series D Preferred | | | | | | | | ) | Net loss attributable to common stockholders | | $ | | ) | | | | | Foreign currency translation adjustments | | | | ) | | | | | | | $ | | ) | | | | | Net loss per common share, basic and diluted from continuing operations | | $ | | | | | | | | | | | | | | | | Weighted average common shares outstanding, basic and diluted | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated statements.
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS – ContinuedSTATEMENTS OF CASH FLOWS (Unaudited)
| | June 30, 2010 | | | September 30, 2009 | | Liabilities and Stockholders’ Equity (Deficit) | | | | | | | Current liabilities: | | | | | | | Bank line of credit | | $ | 1,000,000 | | | $ | 252,600 | | Accounts payable | | | 2,431,785 | | | | 2,339,786 | | Accrued liabilities | | | 1,497,126 | | | | 3,506,680 | | Dividends payable | | | 579,892 | | | | - | | Deferred revenue | | | 30,941 | | | | 56,858 | | Settlement liability | | | 975,000 | | | | - | | SecureAlert Monitoring Series A Preferred stock redemption obligation | | | 148,995 | | | | 3,148,943 | | Current portion of related-party line of credit and notes | | | 200,000 | | | | 1,576,022 | | Promissory notes payable, net of debt discount of $0 and $41,556, respectively | | | - | | | | 2,008,444 | | Senior secured note payable, net of debt discount of $0 and $529,109, respectively | | | 150,000 | | | | 2,890,522 | | Current portion of Series A 15% debentures, net of debt discount of $0 and $1,272,189, respectively | | | - | | | | 2,127,811 | | Derivative liability | | | - | | | | 1,219,426 | | Current portion of long-term debt | | | 886,424 | | | | 272,493 | | Total current liabilities | | | 7,900,163 | | | | 19,399,585 | | Series A 15% debentures, net of debt discount of $0 and $549,531, respectively, net of current portion | | | - | | | | 557,219 | | Long-term related party line of credit and notes, net of current portion | | | 55,245 | | | | - | | Long-term debt, net of current portion, net of debt discount of $0 and $525,665, respectively | | | 519,284 | | | | 1,009,606 | | Total liabilities | | | 8,474,692 | | | | 20,966,410 | | | | | | | | | | | Stockholders’ equity (deficit): | | | | | | | | | SecureAlert, Inc. stockholders’ equity (deficit): | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 50,000 shares designated; 37,851 and zero shares outstanding, respectively (aggregate liquidation preference of $28,857,253) | | | 4 | | | | - | | Common stock, $0.0001 par value: 600,000,000 shares authorized; 238,748,663 and 210,365,988 shares outstanding, respectively | | | 23,875 | | | | 21,037 | | Additional paid-in capital | | | 221,235,284 | | | | 194,659,044 | | Subscription receivable | | | (50,000 | ) | | | - | | Deferred compensation | | | (1,092,943 | ) | | | (1,287,406 | ) | Accumulated deficit | | | (216,075,643 | ) | | | (205,765,496 | ) | Total SecureAlert, Inc. stockholders’ equity (deficit) | | | 4,040,577 | | | | (12,372,821 | ) | Non-controlling interest | | | (171,247 | ) | | | - | | Total equity (deficit) | | | 3,869,330 | | | | (12,372,821 | ) | Total liabilities and stockholders’ equity (deficit) | | $ | 12,344,022 | | | $ | 8,593,589 | |
| | Three Months Ended December 31 | | | | 2014 | | | 2013 | | Cash flows from operating activities: | | | | | | | | | | | | | | | | Adjustments to reconcile net loss to net cash used and provided by in operating activities: | | | | | | | | | Depreciation and amortization | | | | | | | | | Vesting of stock options and warrants granted for services | | | | | | | | | Issuance of common stock for services | | | | | | | | | Amortization of debt discount | | | | | | | | | Issuance of warrants with related parties | | | | | | | | | Impairment of monitoring equipment and parts | | | | | | | | | Loss on disposal of monitoring equipment and parts | | | | | | | | | Change in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prepaid expenses and other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used in operating activities | | | | | | | | | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | Purchase of property and equipment | | | | | | | | | Purchase of monitoring equipment and parts | | | | | | | | | Cash paid for purchase of subsidiary and other investments | | | | | | | | | Cash deposit in escrow to secure international bond | | | | | | | | | Net cash used in investing activities | | | | | | | | | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | Borrowings on related-party notes payable | | | | | | | | | Proceeds from exercise of options and warrants | | | | | | | | | Principal payments on related party notes payable | | | | | | | | | Principal payments on notes payable | | | | | | | | | Net cash provided (used) by financing activities | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | Cash, beginning of period | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three months ended June 30, | | | Nine months ended June 30, | | | | 2010 | | | 2009 | | | 2010 | | | 2009 | | Revenues: | | | | | | | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | | $ | 225,380 | | | $ | 493,595 | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | | | 9,056,757 | | | | 8,985,386 | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | | | 9,282,137 | | | | 9,478,981 | | Cost of revenues: | | | | | | | | | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | | | 27,140 | | | | 246,310 | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | | | 5,348,448 | | | | 8,049,230 | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | | | 5,375,588 | | | | 8,295,540 | | Gross profit | | | 1,363,765 | | | | 788,143 | | | | 3,906,549 | | | | 1,183,441 | | Operating expenses: | | | | | | | | | | | | | | | | | Selling, general and administrative (including $120,174, $281,604, $1,068,352 and $2,355,600, respectively, of compensation expense paid in stock or stock options / warrants) | | | 2,703,819 | | | | 3,178,333 | | | | 8,931,801 | | | | 11,078,059 | | Settlement expense | | | - | | | | 23,046 | | | | 1,150,000 | | | | 23,046 | | Research and development | | | 490,258 | | | | 431,201 | | | | 1,161,539 | | | | 1,277,102 | | Impairment of goodwill | | | - | | | | - | | | | 204,735 | | | | - | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | | | (7,541,526 | ) | | | (11,194,766 | ) | Other income (expense): | | | | | | | | | | | | | | | | | Currency exchange rate loss | | | (672 | ) | | | - | | | | (8,756 | ) | | | - | | Loss on disposal of equipment | | | - | | | | - | | | | (8,713 | ) | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | | | (21,263 | ) | | | 20,449 | | Interest income | | | 86 | | | | 8,215 | | | | 13,227 | | | | 11,658 | | Interest expense (including $88,247, $1,099,707, $3,006,297, $1,929,306, respectively, of interest expense paid in stock) | | | (229,582 | ) | | | (1,255,103 | ) | | | (3,840,232 | ) | | | (2,790,006 | ) | Acquisition option extension cost | | | - | | | | (147,566 | ) | | | - | | | | (347,066 | ) | Derivative valuation gain (loss) | | | - | | | | (1,014,045 | ) | | | 200,534 | | | | (1,014,045 | ) | Other income, net | | | 1,811 | | | | 196,568 | | | | 121,855 | | | | 1,276,319 | | Net loss | | | (2,054,238 | ) | | | (5,032,308 | ) | | | (11,084,874 | ) | | | (14,037,457 | ) | Net loss attributable to non-controlling interest | | | 12,645 | | | | - | | | | 121,741 | | | | - | | Net loss attributable to SecureAlert, Inc. | | | (2,041,593 | ) | | | (5,032,308 | ) | | | (10,963,133 | ) | | | (14,037,457 | ) | Dividends on Series A and D Preferred stock | | | (579,892 | ) | | | - | | | | (939,371 | ) | | | (175 | ) | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485 | ) | | $ | (5,032,308 | ) | | $ | (11,902,504 | ) | | $ | (14,037,632 | ) | Net loss per common share, basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.06 | ) | | $ | (0.08 | ) | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | | | | 215,230,000 | | | | 173,137,000 | |
The accompanying notes are an integral part of these statements.
SECUREALERT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Nine Months Ended June 30, | | | | 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 | |
The accompanying notes are an integral part of these statements.
ECUREALERT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
| | Three Months Ended December 31, | | | | 2014 | | | 2013 | | | | | | | | | | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | Issuance of common stock in connection with Series D Preferred stock dividends | | | | | | | | | Series D Preferred stock dividends earned | | | | | | | | | Issuance of common stock in connection with the acquisition of a subsidiary | | | | | | | | |
| | | Nine Months Ended June 30, | | | | | 2010 | | | | 2009 | | Cash paid for interest | | $ | 1,088,120 | | | $ | 1,121,715 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of shares of common stock in exchange for shares of Series B Preferred stock | | $ | - | | | $ | 2 | | Issuance of shares of common stock and warrants in exchange for deferred consulting services and financing costs | | | - | | | | 384,667 | | Accrual of Series A Preferred stock dividends | | | - | | | | 175 | | Issuance of shares of common stock for subscription receivable | | | - | | | | 250,000 | | Issuance of shares of common stock for accounts payable | | | - | | | | 550,000 | | Discount from issuance of convertible debt | | | - | | | | 4,114,052 | | Cancellation of common stock issued | | | - | | | | 175 | | Acquisition of monitoring equipment through issuance of debt | | | - | | | | 2,770,000 | | Stock and options issued in connection with acquisition of Bishop Rock Software, Inc. | | | - | | | | 856,522 | | Issuance of common stock to settle notes payable and accrued interest | | | - | | | | 187,793 | | Line of credit paid through the issuance of Senior convertible notes | | | - | | | | 3,549,630 | | Acquisition of property and equipment through issuance of debt | | | - | | | | 38,991 | | Issuance of 5,160,858, and 0 shares of common stock for payment of SecureAlert Monitoring, Inc. Series A Preferred stock contingency payments | | | 609,772 | | | | - | | Note payable issued to acquire monitoring equipment and property and equipment | | | 190,487 | | | | - | | Issuance of 3,150,000 and 0 stock options, respectively, for deferred consulting | | | 347,397 | | | | - | | Issuance of shares of Series D Convertible Preferred stock for conversion of debt, accrued liabilities and interest | | | 16,884,874 | | | | - | | Issuance of dividends payable on Series D Convertible Preferred stock | | | 939,371 | | | | - | | Note payable issued to acquire remaining shares of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 1,049,631 | | | | - | | Liabilities forgiven as part of acquisition of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 330,262 | | | | - | | Non-controlling interest assumed through acquisition of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | 335,086 | | | | - | | Conversion effect on derivative liability | | | 1,018,892 | | | | - | | Issuance of 150,000 shares of common stock to purchase an additional 2.145% ownership of Midwest Monitoring & Surveillance, Inc. | | | 18,000 | | | | - | | Issuance of 19,896,000 of common stock from the conversion of 3,316 shares of Series D Preferred stock | | | 1,990 | | | | - | | Issuance of 2,925,817 shares of common stock in connection with Series D Preferred stock dividends | | | 359,479 | | | | - | | Accrued liabilities issued for Midwest Monitoring & Surveillance ownership | | | 144,000 | | | | - | | Subscription receivable issued for Series D Preferred stock | | | 50,000 | | | | - | | Patent acquired through accrued liability | | | 50,000 | | | | - | |
The accompanying notes are an integral part of these condensed consolidated statements. SECUREALERT, INC. AND SUBSIDIARIESSUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) | (1) BASIS OF PRESENTATION |
The unaudited interim condensed consolidated financial information of SecureAlert, Inc. (formerly RemoteMDx, Inc.), dba TrackGroup, and subsidiaries (collectively, the “Company”“Company”, “SecureAlert”, or “SecureAlert”“Track Group”) 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, 2014, and results of its operations for the three and nine months ended June 30, 2010December 31, 2014 and 2009.2013. These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009.2014. The results of operations for the three and nine months ended June 30, 2010December 31, 2014 may not be indicative of the results for the fiscal year ending September 30, 2010.2015.
The Company has incurred recurring net losses and negative cash flows from operating activities. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In order for the Company to achieve successful operations, the Company must generate positive cash flows from operating activities and obtain the necessary funding to meet its projected capital investment requirements.
Management’s plans with respect to this uncertainty include raising additional capital from the issuance of preferred stock and expanding its market for its TrackerPAL™ portfolio of products. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.
(3) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of SecureAlert and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation.
(4)(3) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009,From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB issued additional guidance”) 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.operations upon adoption.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled to in exchange for those goods or services. The Company evaluated subsequent events throughstandard also will require enhanced disclosures to enable users of financial statements to understand the datenature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited. We are currently evaluating the accompanying condensedimpact this ASU will have on our consolidated financial statements were issued.statements.
(5)In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating this new standard and after adoption, we will incorporate this guidance in our assessment of going concern.
(4) IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. 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. DuringThe Company recorded $55,080 and $75,000 of impairment expenses related to monitoring equipment for the ninethree months ended June 30, 2010December 31, 2014 and 2009, the Company impaired goodwill from the purchase2013, respectively.
(6) REVENUE RECOGNITION(5) BUSINESS COMBINATIONS
The Company’s revenue has historically been from two sources: (i) monitoring services; (ii) monitoring deviceCompany accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and other product sales.
Monitoring Services
Monitoring services include two components: (a) lease contractsany non-controlling interest in whichthe acquiree; and establishes the acquisition date as the fair value measurement point. Accordingly, the Company provides monitoring servicesrecognizes assets acquired and leases devices to distributors or end usersliabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the Company retains ownershipacquiree, based on fair value estimates as of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use the Company’s monitoring services.
The Company typically leases its devices under one-year contracts with customers that opt to use the Company’s monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under the Company’s standard leasing contract, the leased device becomes billable on the date of activation or up to 7 days fromacquisition. In accordance with ASC 805, 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 paymentsand measures goodwill as d eferred revenue.
Monitoring Device Product Sales
Although not the focus of the Company’s business model,acquisition date, as the Company sells its monitoring devices in certain situations. In addition, the Company sells home security and Personal Emergency Response Systems (“PERS”) units. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with the Company. The Company recognizes revenue on monitoring services for customer s that have previously purchased devices at the end of each month that monitoring services have been provided.
Multiple Element Arrangements
The majority of the Company’s revenue transactions do not have multiple elements. On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services). For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have stand alone value to the customer; (ii) there is objective and reliable evidenceexcess 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, ifconsideration paid over the fair value of the undelivered element exists,identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company agrees to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain negotiated future goals, such as targeted earnings levels. The Company records contingent consideration based on its estimated fair value does not exist for one or more delivered elements, then revenueas of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward and likely achievement of certain targets on which issuance of the contingent consideration is recognized usingbased. Any differences between the residual method. Underacquisition-date fair value and the residual method as applied to these particular transactions, thechanges in fair value of the undelivered element (the monitoring services) is deferred andcontingent consideration subsequent to the remaining portion ofacquisition date are recognized in current period earnings until the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteria are met.settled.
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.(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company estimates its product returns based on historical experienceChilean Peso, New Israeli Shekel and maintains an allowance for estimated returns, which isthe Canadian Dollar are used as functional currencies of the operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the exchange rate prevailing at December 31, 2014. Comprehensive loss includes net loss as currently reported under U.S. GAAP and other comprehensive loss. Other comprehensive loss considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net loss, but rather are reported as a 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 aseparate component of cost of revenues.stockholders’ equity.
(7) GEOGRAPHIC INFORMATION
During the three months ended December 31, 2014, the Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products and services. The revenues recognized by geographic area for the three months ended December 31, 2014 and 2013, are as follows:
| | Three Months Ended December 31, | | | | 2014 | | | 2013 | | | | | | | | | | | | | | | | | | | | Caribbean countries and commonwealths | | | | | | | | | | | | | | | | | | | | | | | | | | |
The long-lived assets, net of accumulated depreciation, used in the generation of revenues by geographic area as of December 31, 2014 and September 30, 2014, were as follows:
| | Net Property and Equipment | | | Net Monitoring Equipment | | | | December 31, 2014 | | | September 30, 2014 | | | December 31, 2014 | | | September 30, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Caribbean countries and commonwealths | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(8) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS"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"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 stockCommon 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, 2014 and 2009,2013, there were 274,113,290323,251 and 76,128,791466,094 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 stockCommon Stock equivalents outstanding as of June 30, 2010,December 31, 2014 and 2013 consisted of 227,106,000the following: | | December 31, 2014 | | | December 31, 2013 | | Conversion of Series D Preferred | | | - | | | | 24,503 | | Exercise of outstanding common stock options and warrants | | | 281,251 | | | | 399,591 | | Exercise and conversion of outstanding Series D Preferred warrants | | | 42,000 | | | | 42,000 | | Total common stock equivalents | | | 323,251 | | | | 466,094 | |
GPS Global
On March 12, 2014, the Company entered into a Share Purchase Agreement (the “GPS Global SPA”) to purchase from Eli Sabag, an individual resident of the State of Israel, all of the issued and outstanding shares of common stock fromGPS Global Tracking and Surveillance System Ltd., a company formed under the potential conversionlaws of 37,851and operating in the State of Israel (“GPS Global”). The GPS Global SPA contained customary representations and warranties and covenants, including provisions for indemnification, subject to the limitations described in the agreement. Subsequent to the closing, the Mr. Sabag and certain key employees of GPS Global entered into employment agreements and continue to operate GPS Global. The GPS Global SPA also granted Mr. Sabag the right for a three-year period following the closing to nominate one director to serve on the Company’s board and on GPS Global’s board of directors. The closing of the transaction, which occurred on April 1, 2014, was subject to customary closing conditions. Subsequently, the Company changed the name of GPS Global to Track Group International Ltd.
The purchase price for the issued and outstanding shares of outstanding Series D Convertible Preferred Stock, 3,329,125 shares of common stock from the potential conversion of $417,855 of debtGPS Global is $7,811,404, payable in cash 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.Company's Common Stock as follows: ● | Cash to Mr. Sabag of $311,404 at the closing; |
● | Shares of the Company's Common Stock valued at $7,500,000, delivered to Mr. Sabag as follows: |
| ● | Common stock valued at $1,600,000 delivered to Mr. Sabag at the closing; |
| ● | Common stock valued at $2,900,000, delivered to an escrow agent to be released by Bank to Mr. Sabag after six months from the closing, conditioned upon the Company's verification that GPS Global’s global positioning satellite (“GPS”) products (the “Devices”) meet expected operating specifications; |
| ● | Common stock valued at $1,000,000, the number of shares to be determined by dividing $1,000,000 by the weighted average closing price of the Company’s Common Stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Mr. Sabag within 30 days of certification that GPS Global has sold or leased a minimum of 1,500 of its Devices under revenue-generating contracts; and |
| ● | Common stock valued at $2,000,000, the number of shares to be determined by dividing $2,000,000 by the weighted average closing price of the Company’s Common Stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Mr. Sabag within 30 days of certification that GPS Global has sold or leased a minimum of 2,500 of its Devices under revenue-generating contracts, in addition to the 1,500 Devices previously mentioned (i.e., a minimum of 4,000 Devices sold or leased). |
(8) STOCK-BASED COMPENSATIONAs described above, shares of Common Stock valued at $3,000,000 may be payable based on sales of the GPS Global devices sold or leased. Management determined that it was probable that sales of GPS Global devices would exceed the number of units specified in the SPA, and has therefore, recognized a Stock Payable liability for the entire $3,000,000 value of common shares payable.
The total purchase price for the GPS Global acquisition was allocated to the net tangible and intangible assets based upon their fair values as of March 31, 2014 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. This acquisition provided the Company with additional research and development capabilities and enhanced technology which are expected to benefit current and future products.
ForThe following table summarizes the nine months endedfair values of the assets and liabilities assumed at the acquisition date of GPS Global (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable and accrued expenses | | | | | | | | | | | | | | | Total fair value of assets acquired | | | | |
Emerge
On June 30, 2010 and 2009,2, 2014, the Company calculated compensation expenseentered into a Stock Purchase Agreement (the “ Emerge SPA”) to purchase from BFC Surety Group, Inc. all of $67,406the issued and $67,406 respectively relatedoutstanding shares and equity interests of Emerge Monitoring, Inc., a Florida corporation (“Emerge”), which is the direct owner of all of the issued and outstanding equity interests of Emerge Monitoring II, LLC, a Florida limited liability company and wholly-owned subsidiary of Emerge (“Emerge LLC”), and a majority (65%) of the equity interest of Integrated Monitoring Systems, LLC, a Colorado limited liability company and subsidiary of Emerge LLC (the “Emerge Acquisition”). The Emerge SPA contains customary representations and warranties and covenants, including provisions for indemnification, subject to the vestinglimitations described in the agreement. Certain key employees of stock options granted in prior years.the acquired entities continued to operate the acquired entities following the closing. During June 2014, the Company also committed to purchase the remaining 35% minority equity interest of Integrated Monitoring Systems, LLC, which was completed during the fiscal year ended September 30, 2014.
The purchase price for the Emerge Acquisition was $7,739,167, all of which was paid in cash during the year ended September 30, 2014. The total purchase price for the Emerge Acquisition was allocated to the net tangible and intangible assets based upon their fair valuevalues as of each stock option grant is estimatedJune 1, 2014 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. The Emerge Acquisition provided the Company with significant customer relationships, an experienced sales and management team and additional alcohol monitoring product offerings. The following table summarizes the fair values of the assets and liabilities assumed at the Emerge Acquisition date (in thousands). | | | | | | | | | | | | | | | | | | | | Customer contracts/relationships | | | | | | | | | | | | | | | Total fair value of assets acquired | | | | |
Track Group Analytics Limited
On November 26, 2014 (the “Closing Date”), the Company entered into a Share Purchase Agreement (the “TGA Purchase Agreement”) to purchase from the existing shareholders of Track Group Analytics Limited, formerly G2 Research Limited (“TGA”), all issued and outstanding shares and equity interests of TGA for an aggregate purchase price of up to CAD$4.6 million (the “TGAAcquisition”), of which CAD$2.0 million was paid in cash to the TGA shareholders on the Closing Date. Pursuant to the terms and conditions of the TGA Purchase Agreement, the remainder of the purchase price will be paid as follows: (i) CAD$600,000 will be paid to the former TGA shareholders in shares of Common Stock of which one-half of the shares will be issued on the one-year anniversary of the Closing Date and the remaining one-half will be issued on the two-year anniversary of the Closing Date; and (ii) the remaining CAD$2.0 million will be paid to the former TGA shareholders in shares of Common Stock periodically, over the course the two-year period beginning on the Closing Date, upon the achievement of certain milestones set forth in the TGA Purchase Agreement. The TGA Purchase Agreement also provides for customary representations, warranties and covenants, including provisions for indemnification, and is subject to customary closing conditions. As of December 31, 2014, the Company had issued 38,499 shares of Common Stock in connection to this acquisition.
The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date (in thousands). | | | | | | | | | | Accounts payable and accrued expenses | | | | | | | | | | | | | | | Total fair value of assets acquired | | | | |
Summary of grant usingUnaudited Pro-Forma Information
The unaudited pro-forma information below for the Black-Scholes option-pricing model. The Company granted no stock options to employees during the ninethree months ended June 30, 2010December 31, 2014 and 1,517,714 during2013 gives effect to each of the nine months ended June 30, 2009, valued at $274,650.acquisitions described herein as, if the acquisitions had occurred on October 1, 2012. The expected lifepro-forma financial information is not necessarily indicative of stock options represents the periodresults of time thatoperations if the stock options granted are expected to be outstanding based on historical exercise trends. acquisitions had been effective as of this date. | | Three Months Ended December 31, | | | | 2014 | | | 2013 | | | | $ | | | | $ | | | | | | | | | | | | Net loss attributable to the Company | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss attributable to common shareholders | | | | | | | | | | | | | | | | | | | | | | | | | | |
(10) PREPAID AND OTHER EXPENSES The expected volatility iscarrying amounts reported in the balance sheets for prepaid expenses and other current assets approximate their fair market value based on the historical price volatilityshort-term maturity of common stock.these instruments. As of December 31, 2014 and September 30, 2014, the outstanding balance of prepaid and other expenses was $1,007,068 and $1,226,054, respectively. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life$1,007,068 as of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected lifeDecember 31, 2014 is comprised primarily of the stock options.
A summary of stock option activity for the nine months ended June 30, 2010 is presented below:prepayments toward inventory purchases, deposits and other prepaid expenses.
| | 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)(11) INVENTORY
Inventory is valued at the lower of the cost or market. Cost is determined using the first-in, first-out (“FIFO”FIFO”) method. Market is determined based on the estimated net realizable value, which generally is the itemitem’s selling price. Inventory is periodically reviewed in order to identify obsolete, or damaged items or impaired values.items.
Inventory consists of productsraw materials that are available for sale and raw materials used in the manufacturing of TrackerPAL™ReliAlert™, Shadow, and other tracking devices, completed ReliAlert™, R.A.D.A.R. and other tracking devices. Completed TrackerPAL™Tracking devices deployed are reflected in Monitoring Equipment. As of June 30, 2010December 31, 2014 and September 30, 2009,2014, respectively, inventory consisted of the following: | | June 30, 2010 | | | September 30, 2009 | | Raw materials | | $ | 475,797 | | | $ | 686,421 | | Reserve for damaged or obsolete inventory | | | (124,725 | ) | | | (83,092 | ) | Total inventory, net of reserves | | $ | 351,072 | | | $ | 603,329 | |
| | December 31, | | | September 30, | | | | 2014 | | | 2014 | | Raw materials, work-in-process, and finished goods | | | | | | | | | Reserve for damaged or obsolete inventory | | | | ) | | | | | Total inventory, net of reserves | | | | | | | | |
(10)(12) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2010December 31, 2014 and September 30, 2009,2014, were as follows: | | | December 31, | | September 30, | | | | June 30, 2010 | | | September 30, 2009 | | | 2014 | | 2014 | | Equipment, software and tooling | | $ | 2,453,221 | | | $ | 2,742,537 | | | | | | | | | Automobiles | | | 308,611 | | | | 305,658 | | | | | | | Building and land | | | 377,555 | | | | 377,555 | | | Leasehold improvements | | | 127,912 | | | | 127,912 | | | | | | | Furniture and fixtures | | | 284,824 | | | | 284,824 | | | | | | | | | Property and equipment, before accumulated depreciation | | | 3,552,123 | | | | 3,838,486 | | | Total property and equipment before accumulated depreciation | | | | | | | Accumulated depreciation | | | (2,208,208 | ) | | | (2,525,180 | ) | | | | | | | | | | | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | 1,343,915 | | | $ | 1,313,306 | | | | | | | | |
Depreciation expense for the ninethree months ended June 30, 2010December 31, 2014 and 20092013 was $311,150$170,907 and $527,917,$47,175, 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 the property. Any gains or losses are recognized in the results of operations. During the ninethree months ended June 30, 2010 and 2009,December 31, 2014 the Company disposeddid not dispose of property and equipment with a net book value of $24,221 and $0, respectively.equipment.
(11)
(13) MONITORING EQUIPMENT
Monitoring equipment as of June 30, 2010December 31, 2014 and September 30, 2009,2014, was as follows:
| June 30, 2010 | | | September 30, 2009 | Monitoring equipment | | $ | 5,432,285 | | | $ | 4,260,690 | | Less: accumulated depreciation | | | (3,200,324 | ) | | | (2,944,197 | ) | Total | | $ | 2,231,961 | | | $ | 1,316,493 | |
| | December 31, | | | September 30, | | | | 2014 | | | 2014 | | | | | | | | | | | Less: accumulated depreciation | | | | | | | | | Monitoring equipment, net of accumulated depreciation | | | | | | | | |
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 to five years.
Depreciation expense related to monitoring equipment for the ninethree months ended June 30, 2010December 31, 2014 and 20092013 was $642,609$228,050 and $1,106,380,$190,992, respectively. Additionally, the Company reserved $275,398 for future monitoring equipment impairment, of which $55,080 was recognized as impairment expense during the three months ended December 31, 2014. These expenses were classified as ahave been recognized in 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.sell the assets. During the ninethree months ended June 30, 2010December 31, 2014 and 2009,2013, the Company disposedrecorded in cost of revenues disposal of lease monitoring equipment and parts with a net book value of $60,016$12,575 and $33,519,$10,771, respectively.
(14) INTANGIBLE ASSETS
The following table summarizes the activity of intangible assets for the first fiscal quarter ended December 31, 2014: | | December 31, 2014 | | | September 30, 2014 | | Other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets, net of accumulated amortization | | | | | | | | |
The intangible assets summarized above were purchased on various dates from January 2010 through December 2014. The assets have useful lives ranging from three to ten years. Amortization expense for the three months ended December 31, 2014 and 2013 was $470,993 and $221,632, respectively. (12)(15) GOODWILL AND
The following table summarizes the activity of goodwill at December 31 and September 30, 2014, respectively:
| | December 31, | | | September 30, | | | | 2014 | | | 2014 | | Beginning balance | | $ | 6,577,609 | | | $ | - | | Additions resulting from acquisitions: | | | | | | | | | Acquisition of GPS Global Tracking & Surveillance, Ltd. | | | - | | | | 3,381,000 | | Acquisition of Emerge Monitoring, Inc. | | | - | | | | 3,381,754 | | Acquisition of Track Group Analytics Limited | | | 4,037,267 | | | | - | | Foreign currency translation adjustment | | | (159,423 | ) | | | (185,145 | ) | Ending balance | | $ | 10,455,453 | | | $ | 6,577,609 | |
Goodwill was recognized in connection to acquisition transactions in accordance with ASC 805. The Company performs an impairment test for goodwill annually or more frequently if indicators of potential impairment exist. No impairment of goodwill had been recognized through December 31, 2014.
(16) OTHER INTANGIBLE ASSETS
As of June 30, 2010,December 31, 2014 and 2013, the Company had recorded goodwilloutstanding balance of other assets was $3,739,925 and intangible$3,150,428, respectively. The $3,739,925 balance of other assets related to the acquisitionis comprised largely of controlling interest of Midwest, Court Programs, and Bishop Rock Software and patent purchases as follows:
| | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | Total | | Goodwill | | $ | 1,421,995 | | | $ | 2,756,461 | | | $ | - | | | $ | - | | | $ | 4,178,456 | | Other intangible assets | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | - | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | - | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | - | | | | 6,000 | | Patent license agreement | | | - | | | | - | | | | - | | | | 50,000 | | | | 50,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | - | | | | 8,000 | | Total other intangible assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 50,000 | | | | 673,001 | | Accumulated amortization | | | (22,667 | ) | | | (26,150 | ) | | | (185,855 | ) | | | - | | | | (234,672 | ) | Other intangible assets, net of accumulated amortization | | | 99,333 | | | | 84,850 | | | | 204,146 | | | | 50,000 | | | | 438,329 | | Total goodwill and other intangible assets, net of amortization | | $ | 1,521,328 | | | $ | 2,841,311 | | | $ | 204,146 | | | $ | 50,000 | | | $ | 4,616,785 | |
Midwest Monitoring & Surveillance
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$3.1 million performance bond for an additional 12 months, theinternational customer. The Company paid a fee (toanticipates this restricted cash will 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)unrestricted and waived the payment of $10,000 owedavailable 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 endedon 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 of amortization expense on intangible assets for Court Programs during the nine months ended June 30, 2010 resulting in a total accumulated amortization of $26,150 and net intangible assets of $84,850.
Bishop Rock Software
Effective January 14, 2009, the Company purchased a 100% ownership interest, including a voting interest, in Bishop Rock Software, Inc., a California corporation, (“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at $0.23 per share ($657,176), options to purchase 642,714 shares of the Company’s common stock with an exercise price of $0.09 per share for a value of $114,383 using the Black-Scholes calculation, and $79,268 in debt for a total purchase price of $850,827. The total consideration of $850,827, less crime-scene correlation software recorded as an asset for $390,001, resulted in goodwill of $460,827. During the fiscal year ended September 30, 2009, the Company recorded an impairment expense of $460,827, resulting in no more remaining goodwi ll.
The Company recorded $95,500 of amortization expense on intangible assets for Bishop Rock Software during the nine months ended June 30, 2010, resulting in a total accumulated amortization of $185,855 and net intangible assets of $204,146.
Patent
On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to Company a non-exclusive license under U.S. Patent No. 6,405,213 and any and all patents issuing from continuation, continuation-in-part, divisional, reexamination and reissues thereof and along with all foreign counterparts, to make, have made, use, sell, offer to sell and import covered products in SecureAlert’s present and future business. The license granted shall continue for so long as any of the licensed patents have enforceable rights. The license granted is not assignable or transferable except for sublicenses within the scope of its license to the Company’s subsidiaries.
The Company agreed to pay $50,000 as consideration for the use of this patent. Of the $50,000, $25,000 was paid during the three months ended June 30, 2010 and the balance is due by January 29, 2011. Since the Company has not yet begun utilizing this patent and is in the process of determining its useful life, no amortization was recorded in connection with the license for the nine months ended June 30, 2010.
Supplemental Pro Forma Results of Operations
The following tables present the pro forma results of operations for the three and nine months ended June 30, 2010 and 2009, as though the Bishop Rock Software acquisition and the remaining ownership of Court Programs had been completed as of the beginning of each period presented:
| | Three months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 86,384 | | | $ | 75,451 | | Monitoring services | | | 2,992,842 | | | | 3,133,518 | | Total revenues | | | 3,079,226 | | | | 3,208,969 | | Cost of revenues: | | | | | | | | | Products | | | 5,088 | | | | 28,891 | | Monitoring services | | | 1,710,373 | | | | 2,391,935 | | Total cost of revenues | | | 1,715,461 | | | | 2,420,826 | | Gross profit | | | 1,363,765 | | | | 788,143 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $120,174 and $281,604, respectively, of compensation expense paid in stock or stock options / warrants) | | | 2,703,819 | | | | 3,178,333 | | Settlement expense | | | - | | | | 23,046 | | Research and development | | | 490,258 | | | | 431,201 | | Loss from operations | | | (1,830,312 | ) | | | (2,844,437 | ) | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (672) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | 4,431 | | | | 24,060 | | Interest income | | | 86 | | | | 8,215 | | Interest expense (including $88,247 and $1,099,707, respectively, of interest expense paid in stock) | | | (229,582) | | | | (1,255,103) | | Acquisition option extension cost | | | - | | | | (147,566) | | Derivative valuation loss | | | - | | | | (1,014,045) | | Other income (expense), net | | | 1,811 | | | | 196,568 | | Net loss | | | (2,054,238) | | | | (5,032,308) | | Net loss attributable to non-controlling interest | | | 12,645 | | | | - | | Net loss attributable to SecureAlert, Inc. | | | (2,041,593) | | | | (5,032,308) | | Dividends on Series A and D Preferred stock | | | (579,892) | | | | - | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (2,621,485) | | | $ | (5,032,308) | | Net loss per common share, basic and diluted | | $ | (0.01) | | | $ | (0.03) | | Weighted average common shares outstanding, basic and diluted | | | 222,468,000 | | | | 191,962,000 | |
| | Nine months ended June 30, | | | | 2010 | | | 2009 | | Revenues: | | | | | | | Products | | $ | 225,380 | | | $ | 493,595 | | Monitoring services | | | 9,056,757 | | | | 8,986,068 | | Total revenues | | | 9,282,137 | | | | 9,479,663 | | Cost of revenues: | | | | | | | | | Products | | | 27,140 | | | | 246,310 | | Monitoring services | | | 5,348,448 | | | | 8,049,230 | | Total cost of revenues | | | 5,375,588 | | | | 8,295,540 | | Gross profit | | | 3,906,549 | | | | 1,184,123 | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $1,068,352 and $2,355,600, respectively, of compensation expense paid in stock or stock options / warrants) | | | 8,931,801 | | | | 11,238,788 | | Settlement expense | | | 1,150,000 | | | | 23,046 | | Research and development | | | 1,161,539 | | | | 1,277,102 | | Impairment of goodwill | | | 204,735 | | | | - | | Loss from operations | | | (7,541,526 | ) | | | (11,354,813) | | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (8,756) | | | | - | | Loss on disposal of equipment | | | (8,713) | | | | - | | Redemption of SecureAlert Monitoring Series A Preferred | | | (21,263) | | | | 20,449 | | Interest income | | | 13,227 | | | | 11,658 | | Interest expense (including $3,006,297 and $1,929,306, respectively, of interest expense paid in stock) | | | (3,840,232) | | | | (2,790,006) | | Acquisition option extension cost | | | - | | | | (347,066) | | Derivative valuation gain (loss) | | | 200,534 | | | | (1,014,045) | | Other income (expense), net | | | 121,855 | | | | 1,276,319 | | Net loss | | | (11,084,874) | | | | (14,197,504) | | Net loss attributable to non-controlling interest | | | 121,741 | | | | - | | Net loss attributable to SecureAlert, Inc. | | $ | (10,963,133) | | | $ | (14,197,504) | | Dividends on Series A and D Preferred stock | | | (939,371) | | | | (175) | | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (11,902,504) | | | $ | (14,197,679) | | Net loss per common share, basic and diluted | | $ | (0.06) | | | $ | (0.08) | | Weighted average common shares outstanding, basic and diluted | | | 215,230,000 | | | | 173,137,000 | |
5, 2018. (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)(17) ACCRUED EXPENSES
Accrued expenses consisted of the following as of June 30, 2010December 31, 2014 and September 30, 2009:2014: | | December 31, | | | September 30, | | | | 2014 | | | 2014 | | | | | | | | | | | Accrued taxes - foreign and domestic | | | | | | | | | | | | | | | | | | Accrued payroll, taxes and employee benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued board of directors fees | | | | | | | | | | | | | | | | | | | | | | | | | | | Accrued warranty and manufacturing costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(18) 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 | |
Debt obligations as of December 31, 2014 and September 30, 2014, respectively, are comprised of the following: | | December 31 | | | September 30, | | | | 2014 | | | 2014 | | Unsecured facility agreement with an entity whereby the Company may borrow up to $25 million bearing 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. A $750,000 origination fee or 3% on the total amount under the agreement was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of December 31, 2014, the remaining debt discount was $375,000. | | | | | | | | | The Company entered into an agreement whereby the Company was granted a non-exclusive, irrevocable, perpetual and royalty-free license to certain patents with an entity. The Company agreed to pay $4,500,000 over two years or $187,500 per month through February 2016. | | | | | | | | | Note issued in connection with the acquisition of a subsidiary and matured in December 2014. | | | | | | | | | Capital leases with effective interest rates that range between 8.51% and 17.44%. Leases mature between June 2015 and November 2015. | | | | | | | | | Related notes payable for $1.5 million and $1.2 million, due December 31, 2015 and November 19, 2015, respectively (See note 9 below). | | | | | | | | | Notes payable assumed in conjunction with the G2 acquisition, net of $9,529 discount. | | | | | | | | | Non-interest bearing notes payable to a governmental agency assumed in conjunction with the G2 acquisition. | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-term portion of related party debt | | | | | | | | | Long-term debt, net of current portion | | | | | | | | |
(15) | CONVERTIBLE PROMISSORY NOTE | The following table summarizes the Company’s future maturities of debt obligations as of December 31, 2014:In connection to the G2 acquisition (See note 9), the Company assumed three notes payable to the Atlantic Canada Opportunities Agency (ACOA). These notes are non-interest bearing notes and are payable in monthly increments ranging from $3,125 to $4,125, as specified in each of the notes. (19) RELATED-PARTY TRANSACTIONS On January 15, 2009,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. On February 1, 2013, we redeemed and terminated this royalty obligation for a total cost of $13.0 million using the proceeds of a $16.7 million loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). Sapinda Asia owned approximately 44.8% of our issued and outstanding shares of Common Stock at December 31, 2014. In addition to the $13.0 million used to terminate the Royalty Agreement, we used the remaining $3.7 million as operating capital during the 2013 fiscal year. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest under the loan, totaling $17,576,627, into 3,905,917 shares of Common Stock at a rate of $4.50 per share. On February 1, 2013, the Company entered into a revolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, the Company may borrow up to $1,200,000 at an unsecured convertible promissory noteinterest rate of 3% per annum for $2,700,000unused funds and 10% per annum for borrowed funds. On October 24, 2013, the Company drew down the full $1,200,000 for use in order to purchase TrackerPAL™ units.a performance bond as required under a contract with an international customer. The note, atloan initially matured in June 2014. However, the lender’s option, may convert into sharesmaturity date of the Company’s common stock at a conversion pricenote was extended and now matures in December 2015. As of $0.22 per share. The note bearsDecember 31, 2014, the Company owed $1,200,000 of principal and $158,514 of accrued 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 datenote.
Related-Party Promissory Note On November 19, 2013, 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 promissoryborrowed $1,500,000 from Sapinda Asia Ltd. The unsecured 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 |
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 plusbears interest at a rate of 12%8% per annum maturingand initially matured on July 13, 2011 (see Note 20). DuringNovember 18, 2014. However, the nine months ended June 30, 2010maturity date of the note was extended to November 19, 2015. As of December 31, 2014, the Company owed $1,500,000 of principal and the Senior Secured Convertible Note holder$133,808 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 Service Agreement
(17) | SERIES A 15% DEBENTURES |
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: (i) 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 (ii) 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, was the Chief Executive Officer of Paranet until August 2014. As consideration for these services, the Company issued debenturesagreed to a consultant inpay Paranet $4,500 per month, and during the principal amount of $106,750three months ended December 31, 2014 the Company paid $60,612 to Paranet. The arrangement can be terminated by either party for services renderedany reason upon ninety (90) days written notice to the Company. As of June 30, 2010other party. 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 September 30, 2009, the total outstanding balance of the debentures was $0 and $4,506,750, respectively.acquisitions purposes. The debentures earnedloan bears interest at a rate of 15% interest8% per annum, payable in arrears semi-annually, with interest due quarterly and principal due at maturity 18 months after issuance. In addition, for every $1 invested in the debenture the holder received one share of the Company’s common stock. At the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0 .20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the debentures were subject to derivative accounting treatment (see Note 18). This resulted in a debt discount valued at $3,130,423. Additionally, with the issuance of these debentures, the Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000 warrants valued at $43,926 recorded as a debt discount. This discount was expensed over the life of the debentures.
In September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per share to an investor. Shortly following the transaction, the market price of the Company’s common stock fell to approximately $0.20 per share. The Company agreed upon the investor’s investment of an additional $3,000,000 (included in the $4,506,750 discussed in the paragraph above) in the Series A 15% debenture that the Company would issue 9,796,636 additional shares of its common stock to the investor. Furthermore, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt discount resulting in a tot al $3,130,423 in a debt discount to be amortized over the life of the debentures. During the nine months ended June 30, 2010, the Company amortized $1,821,720 of this debt discount and recorded it as interest expense. On January 13, 2010 the holders of debentures of $4,718,197 inall principal and accrued and unpaid interest converted this debt into a totaldue on January 3, 2016. In addition, we agreed to pay Tetra House an arrangement fee equal to 3% of 4,723 shares of Series D Preferred stock. As of June 30, 2010the aggregate maximum amount under the loan. On January 14, 2014 Tetra House assigned the Facility Agreement to Conrent Invest S.A. Since January 3, 2014, we have borrowed $25,000,000 under the Facility Agreement. The borrowed funds have been used for acquisitions and September 30, 2009, the debt discount balance was $0 and $1,821,720, respectively.for general corporate purposes.
(18) DERIVATIVES
The Company does not hold or issue derivative instruments for trading purposes. However, the Company had convertible notes and debentures that contained embedded derivative features that required separate valuation from the convertible instruments during the nine months ended June 30, 2010. The Company recognized these derivatives as liabilities on its balance sheet, and measured them at their estimated fair value, and recognized changes in their estimated fair value in earnings (losses) in the period of change. As of June 30, 2010 and September 30, 2009, the derivative liabilities had a fair value of $0 and $1,219,426, respectively, resulting in a derivative valuation gain of $200,534 for the nine months ended June 30, 2010.
The Company did not have any derivatives as of June 30, 2009.
(19) DEBT OBLIGATIONS
Debt obligations as of June 30, 2010 and September 30, 2009, consisted of the following:
| | June 30, 2010 | | | September 30, 2009 | | SecureAlert Monitoring, Inc. | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on June 9, 2011. | | $ | 7,803 | | | $ | 12,228 | | | | | | | | | | | Note payable for testing equipment with an interest rate of 8%. The note is secured by testing equipment. The note matures on December 31, 2011. | | | 14,241 | | | | - | | | | | | | | | | | Unsecured note payable with an interest rate of 12%. The note matured on February 1, 2010. | | | - | | | | 8,728 | | | | | | | | | | | Note payable for computer equipment with an interest rate of 10%. The note is secured by computer equipment. The note matures on December 18, 2012. | | | 16,806 | | | | - | | | | | | | | | | | Note payable for computer equipment with an interest rate of 12.364%. The note is secured by computer equipment. The note matures on June 28, 2013. | | | 85,342 | | | | - | | SecureAlert, Inc. | | | | | | | | | Unsecured promissory note with an entity bearing an interest rate of 15%. The note matures on December 31, 2010. Interest was paid quarterly and the principal due at maturity. Note was converted to Series D Preferred Stock on January 13, 2010 (see Note 21). | | | - | | | | 474,335 | | | | | | | | | | | Secured promissory note with an individual with an interest rate of 12%. The note matures on July 13, 2011. | | | 649,631 | | | | - | |
Court Programs, Inc. | | | | | | | Unsecured revolving line of credit with a bank with an interest rate of 9.24%. | | | 12,500 | | | | 16,500 | | | | | | | | | | | Note payable due to the Small Business Administration (“SBA”). Note bears interest at 4% and matures on April 6, 2037. The note is secured by monitoring equipment. | | | 221,260 | | | | 225,000 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle purchased. Interest rate is 7.09% and is due in June 2014. | | | 26,397 | | | | 30,751 | | | | | | | | | | | Unsecured note payable with an interest rate of 8%. | | | - | | | | 1,492 | | | | | | | | | | | Capital lease with an effective interest rate 14.89% that matures in January 2011. | | | 6,878 | | | | 14,898 | | | | | | | | | | | Capital lease with an interest rate of 14.12% that matures on November 15, 2012. | | | 24,820 | | | | - | |
Additional Related-Party Transactions and Summary of All Related-Party Obligations F-55
| | December 31, 2014 | | | Sept. 30, 2014 | | | | | | | | | Loan from a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on December 30, 2015. | | $ | 1,200,000 | | | $ | 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, 2015. | | | 1,500,000 | | | | 1,500,000 | | Total related-party debt obligations | | | 2,700,000 | | | | 2,700,000 | | Less current portion | | | (2,700,000 | ) | | | - | | Long-term debt, net of current portion | | $ | - | | | $ | 2,700,000 | |
Each of the foregoing related-party transactions was reviewed and approved by disinterested and independent members of the Company's Board of Directors. 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) 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, theThe Company has designated 50,00085,000 shares of preferredits stock as Series D Convertible Preferred stock $0.0001 par value per share (“Series D Preferred stock””). During the ninethree months ended JuneDecember 31, 2014 and 2013, the Company did not issue any additional new shares of Series D Preferred. During the fiscal year ended September 30, 2010,2014, the Company issuedexchanged 207 shares of Series D Preferred for 16,907 shares of Common Stock. Additionally, the Company repurchased 261 shares of Series D Preferred for $312,008 during the fiscal year ended September 30, 2014. As a totalresult of 17,174these transactions, there were no shares of Series D Preferred stock in consideration for the conversion of $16,910,753 of debt, accrued liabilities and interest and issued 23,993 shares under securities purchase agreements for $11,996,500 in cash, of which $50,000 has not yet been received and has been recorded as a subscription receivable. In connection with the raise of capital, the Company paid $4,331,200 of fees and reimbursable expenses resulting in net proceeds of $7,615,300 to the Company. As of June 30, 2010, there were 37,851 Series D Preferred shares outstanding.outstanding at December 31, 2014.
Dividends The Series D Preferred stock is entitled to dividends at athe rate equal to eight percent (8%)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 stockCommon Stock at the sole discretion of the boardBoard of directors.Directors. If a dividend is paid in shares of common stockCommon Stock of the Company, the number of shares to be issued is based on the average per share market price of the common stockCommon 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, the Company issued 2,925,817483 shares of the Company’s co mmon stockCommon Stock to pay $359,479 of accrued dividends. Subsequent to June 30, 2010, the Company issued 4,693,307 shares of common stock to pay $578,048$9,427 of accrued dividends on the Series D Preferred earned during the three months ended June 30, 2013. As there were no shares of Series D Preferred outstanding at December 31, 2014, the Company did not issue any shares for the third fiscal quarter.payment of dividend during that period.
Convertibility Each share of Series D Preferred stock may be converted into 6,000thirty (30) shares of common stockCommon Stock, commencing after ninety90 days fromafter the date of issue. During the ninethree months ended June 30, 2010, 3,316December 31, 2014 and 2013, no shares of Series D Preferred stock were converted into 19,896,000 shares of common stock. SubsequentCommon Stock. During fiscal year 2013, the Company entered into an employment agreement with an officer. In addition, the officer and the Company mutually agreed that the conversion of the Series D Preferred held by the officer will convert into Common Stock at a rate of 155% of each share’s original investment; provided that the officer must convert all of his Series D Preferred before the next annual shareholder meeting of the Company. As of December 31, 2014, there were no Series D Preferred outstanding.
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 37,851 shares of Series D Preferred stock outstanding were able to be converted into common stock due to the terms outlined in the Certificate of Designation of Series D Convertible Preferred Stock and certain forbearance agreements obtained by the Company whereby the holders agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company. The amendment was filed on June 30, 2010 and became effective on July 3, 2010.
Voting Rights and Liquidation Preference
The holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. In addition, on the issues of an increase in the number of shares of common stock the Company is authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series D Preferred stock may vote as a class holding the equivalent of 60 percent of the issued and outstanding shares of the common stock, regardless of the number of shares then outstanding. As of the date of this report, there were 34,633 shares of Series D Preferred stock outstanding. As a consequence of these voting rights, the holders of the Series D Preferred stock may exercise control over these issues regardless of the interests of the remaining stockholders. Additionally, the holders are entitled to a liquidation preference equal to theiraggregate original investment amount. There are presently no plans to seek approval on either of these issues.
In$260,007 through the eventpayment of the liquidation, dissolution or winding up of the affairs of the Company (including in connection with a permitted sale of all or substantially all of the Company’s assets), whether voluntary or involuntary, the holders of shares of Series D Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its stockholders, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.cash totaling $312,007. The redemption date was February 13, 2014.
Series D Preferred Stock Warrants During the nine months ended June 30, 2010, the Company issued and vested
As of December 31, 2014, 42,000 warrants to purchase a total of 4,000 Series D Preferred stock at an exercise price of $500.00$500 per share.share were issued and outstanding. During the three months ended December 31, 2014, no Series D Preferred warrants were issued or exercised. Subsequent to December 31, 2014, the Company purchased all 42,000 warrants to purchase Series D Preferred (see note 25). (21) COMMON STOCK
Common Stock Issuances
During the three months ended December 31, 2014, the Company issued the following shares of Common Stock:
On November 25, 2014, and in connection to the G2 acquisition (See note 9), 38,599 shares of Common Stock were issued.
(22) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholders on December 21, 2011, the shareholders approved the 2012 Equity Compensation Plan (the “2012 Plan”). 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, 2014 and 2013, respectively, no options were issued under this 2012 Plan. As of December 31, 2014, 44,657 shares of Common Stock were available for future grants under the 2012 Plan. All Options and Warrants
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company did not grant options or warrants to purchase common or preferred stock during the three months ended December 31, 2014. During the three months ended December 31, 2013, the Company granted 6,840 shares of Common Stock. These warrants vested immediately and expire two years from grant date. The Company recorded $75,082 and $53,947 of expense for the three months ended December 31, 2014 and 2013, respectively, related to the issuance and vesting of all stock options and warrants.
The option and warrant grants for three months ended December 31, 2013 were valued using the Black-Scholes option-pricing model as if the shares were converted into common stock. The related expense associated with these four-year warrants was $2,700,447 based upon the following inputs: volatility of 110.71%, risk free rate of 1.67%, exercise price of $0.08, and market price on grant date of $0.14. The warrants were issued in connection with a financial advisory service agreement to restructure debt and raise additional capital.weighted-average assumptions:
As of June 30, 2010, the holders of the 4,000 warrants agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company, which was July 3, 2010.
SecureAlert Monitoring, Inc. (formerly SecureAlert, Inc.) Series A Preferred Shares
During the fiscal year ended September 30, 2007, and pursuant to board of directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. (“SMI”) to designate 3,590,000 shares of preferred stock as Series A Convertible Redeemable Non-Voting Preferred stock (“SMI Series A Preferred stock”).
On March 24, 2008, SMI redeemed all outstanding shares of SMI Series A Preferred stock in exchange for 7,434,249 shares of the Company’s common stock valued at $8,549,386. The former SMI Series A stockholders were entitled to receive quarterly contingency payments through March 23, 2011, based on a rate of $1.54 per day times the number parolee contracts calculated in days during the quarter, payable in either cash or common stock at the Company’s option. The Company is to make quarterly adjustments as necessary to reflect the difference between the estimated and actual contingency payments to the former SMI Series A stockholders.
During the nine months ended June 30, 2010, certain former holders of SMI Series A Preferred stock agreed to convert an aggregate of $2,490,142 of the future and past contingency payments otherwise payable with respect to the redemption of the SMI Series A Preferred stock in exchange for 2,492 shares of Series D Preferred stock. As of June 30, 2010 and September 30, 2009, the Company accrued $148,995 and $3,148,943, respectively, for future and past contingency payments due to former SMI Series A stockholders.
During the nine months ended June 30, 2010 and 2009, the Company recorded an expense (income) of $21,263 and ($20,449), respectively, to reflect the change between the estimated and actual contingency payments. During the nine months ended June 30, 2010, the Company issued 5,160,858 shares of common stock to satisfy $609,772 in contingency payments on SMI Series A Preferred stock and issued 229 shares of Series D Preferred stock to convert future contingency payments for two individuals, valued at $229,000.
(22) COMMON STOCK
On June 30, 2010, the Company filed an amendment to its Articles of Incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Amendment increases the number of shares of common stock the Company is authorized to issue from 250,000,000 to 600,000,000 shares. Under applicable Utah law, the Amendment was effective July 3, 2010. This increase of authorized shares has been reflected in the condensed consolidated balance sheets as of June 30, 2010 and September 30, 2009.
During the nine months ended June 30, 2010, the Company issued 28,382,675 shares of common stock as follows: | | Three Months Ended December 31 | | | | 2014 | | | 2013 | | Expected cash dividend yield | | | | | | | | | Expected stock price volatility | | | | | | | | | | | | | | | | | | Expected life of options/warrants | | | | | | |
| · | 5,160,858 shares of common stock, valued at $609,772,(1) This information was deemed not applicable (N/A) since no options or warrants to former SMI Series A Preferred stockholders as payment for past contingency payments in connection withpurchase Common Stock were granted during the redemption of the stockholders’ SMI Series A Preferred stock.three months ended December 31, 2014. |
| · | 250,000 shares of common stock, valued at $27,500 for services rendered. | The expected life of stock options (warrants) represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s Common Stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options (warrants).
| · | 19,896,000 shares of common stock for the conversion of Series D Convertible Preferred stock |
| · | 2,925,817 shares of common stock, valued at $359,479, for Series D Convertible Preferred stock dividends |
| · | 150,000 shares of common stock, valued at $18,000, to acquire the additional ownership of Court Programs, Inc. (see Note 12) | A summary of stock option activity for the three months ended December 31, 2014 is presented below: | | Shares Under Option/ Warrant | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Outstanding as of September 30, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding as of December 31, 2014 | | | | | | | | | | | | | | Exercisable as of December 31, 2014 | | | | | | | | | | | | | |
The intrinsic value of options outstanding and exercisable is based on the Company’s share price of $14.99 at December 31, 2014.
Common Stock Options and Warrants
As of June 30, 2010, 18,455,498 of the 19,678,165 outstanding options and warrants were vested with a weighted average exercise price of $0.34 per share.
During the nine months ended June 30, 2010, the Company issued and vested warrants to purchase 2,000,000 shares of common stock at an exercise price of $0.15 per share in connection with a third party consulting service agreement.
During the nine months ended June 30, 2010, the Company granted to each previously serving non-executive member of the board of directors warrants to purchase 250,000 shares of common stock at an exercise price of $0.13 per share for past and future services from October 1, 2009 to December 31, 2010, totaling 750,000 warrants. Additionally, the Company granted to each new non-executive member of the board of directors warrants to purchase 200,000 shares of common stock at an exercise price of $0.13 per share for future services from January 1, 2010 to December 31, 2010, totaling 400,000 warrants. Of the 1,150,000 warrants issued, 650,000 vested during the nine months ended June 30, 2010. The Company recorded $68,825 of expense associated with these warrants during the nine months ended June 30, 2010 resulting in a balance of $52,943 to be expensed over the remaining life of the warrants.
As of June 30, 2010, only 5,892,430 of the 19,678,165 options and warrants outstanding were able to convert into common stock due to certain forbearance agreements obtained by the Company whereby the holders agreed not to convert until the sooner of July 15, 2010 or the effective date of an amendment to the Company’s Articles of Incorporation increasing the authorized number of shares of common stock of the Company. The amendment was filed on June 30, 2010 and did not become effective until July 3, 2010.
(23) COMMITMENTS AND CONTINGENCIES Legal Matters
During the nine months ended June 30, 2010, the Company settled two lawsuits, Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and RemoteMDx, Inc. and RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC). Under the terms of the settlement agreement, these cases were dismissed and the Company agreed to pay STOP over three years $1,150,000, of which $975,000 is outstanding as of June 30, 2010. The settlement agreement also included cross-licensing provisi ons pursuant to which the Company licensed STOP to utilize certain of its patents and STOP licensed the Company to use certain of its patents that were the subject matter of these two lawsuits.
Aculis, Inc. filed a Complaint against the Company in the Fourth District Court in and for Utah County, Utah, on June 7, 2010, alleging breach of contract, unjust enrichment, and a claim for $208,889 in unpaid products and services, incremental to the $4,840,891 the Company has already paid to Aculis. The Company filed a Motion to Dismiss for Improper Venue or for Change of Venue and supporting memorandum on July 16, 2010. Aculis filed its Memorandum in Opposition to the Motion to Dismiss on August 5, 2010. The Company's reply memorandum is due to be filed on August 16, 2010. The Company intends to vigorously defend its interests and to pursue appropriate counterclaims against Aculis.
Indemnification Agreements
In November 2001, the Company agreed to indemnify officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.
Cellular Access Agreement
During the fiscal year ended September 30, 2009, the Company entered into several agreements with cellular organizations to provide communication services. The cost to the Company under these agreements during the nine months ended June 30, 2010 and 2009, was approximately $980,450 and $1,935,524, respectively. These amounts are included in cost of sales.
Subsequent to June 30, 2010, the following events occurred:
| 1) | 19,308,000 shares of common stock were issued upon the conversion of 3,218 shares of Series D Preferred stock. |
| 2) | 4,693,307 shares of common stock were issued for Series D Preferred stock dividends for the third fiscal quarter ended June 30, 2010. |
| 3) | The Company paid off a Senior Secured Convertible Note of $150,000 and accrued interest of $20,891 for cash payments of $170,891. |
| 4) | On June 30, 2010, the Company filed an amendment to its Articles of Incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. The Amendment increases the number of shares of common stock the Company is authorized to issue from 250,000,000 to 600,000,000 shares. Under applicable Utah law, the Amendment was effective July 3, 2010. |
(25) CHANGES IN EQUITY (DEFICIT)
A summary of the composition of Equity (Deficit)equity of the Company at June 30, 2010 and 2009,as of December 31, 2014, 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, 2014 | | | | | Issuance of common stock for acquisition | | | | | Other comprehensive income | | | | | Vesting of stock options and warrants | | | | | | | | | | Balance at December 31, 2014 | | | | |
(24) COMMITMENTS AND CONTINGENCIES
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. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. The plaintiffs claim in excess of $460,000 in damages. The Company believes these allegations are inaccurate and intend to defend the case vigorously. No accrual for a potential loss has been made as management 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 the plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as management believes the probability of incurring a material loss is remote. 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 asserting counterclaims for constructive discharge, interference with contract/interference with prospective economic relations and blacklisting. On February 6, 2015 we entered into a settlement agreement with Mr. Brooks and all claims between us and Mr. Brooks and all counterclaims by Mr. Brooks have been dismissed. (25) SUBSEQUENT EVENTS The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to December 31, 2014, the following events occurred:
During January 2015, the Company purchased 42,000 warrants to purchase Series D Preferred. This represented all outstanding warrants to purchase Series D Preferred. During January 2015, the Company received notice from a shareholder of the Company stating that the shareholder was returning realized profits from their trades of the Company’s Common Stock during the year ended September 30, 2014. The shareholder also indicated that during this time, the shareholder was subject to Section 16 of the United States Security Exchange Act of 1934 (the “Exchange Act”) because they owned more than 10% of the shares of Company Common Stock. As such, the shareholder complied with Section 16(b) of the Exchange Act by returning the realized profits to the Company in the amount of $4.7 million. The Company received these funds during January 2015.
| | 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 | ) |
SECUREALERT, INC. | | F-62
150,000 Shares of Common Stock | | PROSPECTUS |
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.
| | Amount to | | | | be Paid | | Legal fees and expenses | | $ | 20,000.00 | | Accounting fees and expenses | | $ | 5,000.00 | | Filing and other fees | | $ | 186.50 | | Miscellaneous expenses | | $ | 10,000.00 | | | | | | | Total | | $ | 35,186.50 | |
SEC registration fee | | $ | 336 | | Accounting fees and expenses* | | | 15,000 | | Legal fees and expenses* | | | 40,000 | | Printing expenses* | | | 5,000 | | Transfer agent fees and expenses* | | | 1,000 | | Miscellaneous fees and expenses* | | | 1,000 | | Total* | | $ | 62,336 | | _____________ | | | | | *Estimated | | | | |
Item 14. Indemnification of Directors and 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 last three years, we issuedsold the following securities described below without registration under the Securities Act of 1933, as amended (the “Securities Act”“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. Common Stock Fiscal Year 2008
Shares Issued Pursuant to Acquisitions
650,000We issued 14,988 shares of Common Stock for the payment of board of director fees, valued at $2,599,500$180,000.
In the transaction 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.securities was an isolated private transaction which did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale or issuance of the securities took place directly between the offerees and the Company.
Shares Issued Upon the ConversionPurchases of Preferred StockEquity Securities
15,000 shares of Common Stock were issued upon conversion of our Series B Preferred Stock in October 2007. Each share of Series B Preferred Stock was convertible at any time into shares of Common Stock. The number of shares of Common Stock into which each share of Series B Preferred Stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred Stock, namely $3.00, by the conversion price. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of the shares were accredited investors and were already security holders. The common shares were issued 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 solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the Preferred Stock.
Shares Issued Upon the Conversion of SecureAlert Monitoring Series A Preferred Stock
7,434,249 shares of Common Stock were issued upon redemption of SecureAlert Monitoring Series A Preferred Stock in March 2008. In addition, 825,893 shares of Common Stock were issued for SecureAlert Monitoring Series A Preferred Stock dividends. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The shares of Common Stock were issued to individuals who were already security holders and were issued pursuant to the terms of the rights and preferences of the preferred class of securities being converted. These shares were issued pursuant to a privately negotiated transaction. There was no public offering of securities, and no general solicitation or general advertising was made or done in connection with the issuances. No cash consideration was paid in connection with the conversion of the Preferred Stock.
Shares Issued on Revalue Rights
100,000 shares of Common Stock were issued as a penalty to Borinquen Container Corp. (“Borinquen”) for our failure to register shares Borinquen purchased in a private placement. These shares of Common Stock were issued without registration underNeither 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 under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Each investor signed a purchase agreement in which the investor made representations that included being an accredited investor and purchasing for the investor’s own account and not with a view to distribute the shares. There was no public offering of securities. No general solicitation or general advertising was made or done in 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.
Shares Issued Upon Exercise of Warrants
3,618,814 shares were issued upon the exercise of options and warrants between October 2007 and September 2008. The exercise prices ranged from $0.54 to $1.73 per share. The warrants had been granted in connection with services rendered. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
Fiscal Year 2009
Shares Issued Pursuant to Acquisitions
2,857,286 shares valued at $657,176 were issued in January 2009 pursuant to an acquisition of Bishop Rock Software. The recipients of these shares represented in the original acquisition agreements that they were accredited investorsCompany nor any affiliated purchaser as defined in Rule 501 under10b-18(3) of the Securities Act. TheseExchange Act made any purchases of shares of the Company’s Common Stock were issued without registration underduring the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506. There were no non-accredited investors involved in this issuance.year ended September 30, 2014.
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.
Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits 2,200,000 shares valued at $550,000 were issued in May 2009 to Fulbright and Jaworski, LLP (“Fulbright”) to settle amounts owed for legal services. These shares of Common Stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities. Fulbright is an accredited investor. No general solicitation or general advertising was made or done in connection with the issuance of the shares.
Shares Issued Upon the Conversion of Preferred Stock
10,999 shares of Common Stock were issued upon conversion of our Series B Preferred Stock in February 2009. Each share of Series B Preferred Stock was convertible at any time into shares of Common Stock. The number of shares of Common Stock into which each share of Series B Preferred Stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred Stock, namely $3.00, by the conversion price. These shares of Common Stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The recipients of the common shares were accredited investors and were already security holders of the Company. The 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
During 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.
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.
Additionally, we entered into an agreement with four minority owners of Midwest Monitoring and Surveillance (“Midwest Monitoring”) to extend the option period for the purchase of the remaining minority ownership interest of Midwest Monitoring. As consideration for the extension of the option period for an additional 12 months, 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.
In April 2010, the Board of Directors approved the issuance of 2,925,817 shares of Common Stock to pay $359,479 of accrued Series D Preferred dividends. The shares were issued to pay the accrued and unpaid 8% dividends on the Series D Preferred as of March 31, 2010.
In July 2010, the Board of Directors approved the issuance of 4,693,307 shares of Common Stock to pay $579,892 of accrued Series D Preferred dividends. The shares were issued to pay the accrued and unpaid 8% dividends on the Series D Preferred as of June 30, 2010.
During the 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,of Disclosure Law Group (to be filed herewith.by amendment) | | | | | 10.0110.1 | Loan and Security Agreement (as amended) dated June 2001 between ADP ManagementSapinda Asia Limited and the Company (incorporated by reference to our annual reportSecureAlert, effective December 3, 2012 (previously filed on Form 10-KSB for the fiscal year ended September 30, 2001)8-K in December 2012). | | | | 10.2 | 10.02 | Loan Agreement (as amendedSettlement and extended) dated March 5, 2002 between ADP ManagementRoyalty and the Company,Share Buy Back among Borinquen Container Corporation, Sapinda Asia Limited, and SecureAlert, effective December 31, 2001 (filed as an exhibit to our quarterly reportFebruary 4, 2013 (previously filed on Form 10-QSB for the three months ended December 31, 2001)8-K in February 2013). | | | | 10.3 | 10.03 | Stock PurchaseFacility Agreement between the CompanyTetra House Pte. Ltd. and Midwest Monitoring & Surveillance,SecureAlert, Inc., dated effective December 1, 2007January 3, 2014 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed8-K in January 2008)2014). | | | | 10.4 | 10.04 | Stock Purchase Agreement between the Company and Court Programs, Inc., Court ProgramsNotice of Florida Inc., and Court Programs of Northern Florida, Inc.,Conversion from Sapinda Asia Limited, dated effective December 1, 2007 (previously filed asSeptember 24, 2013 (incorporated by reference from Exhibit 10.14 to our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2007,10-K filed in January 2008)14, 2014). | | | | 10.5 | 10.05 | Distribution and License Agreement between euromicron AG, a German corporation, and the Company, dated May 28, 2009 (previously filed as an Exhibit on Form 10-Q for the nine months ended June 30, 2009, filed in August 2009). | | | | | 10.06 | Settlement Agreement between Satellite Tracking of People, L.L.C. and the Company, dated January 29, 2010. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2009, filed in February 2010). | | | | | 10.07 | Agreement between the Company and Sapinda Group, Ltd., dated November 25, 2009 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2009, filed in February 2010). | | | | | 10.08 | Amended StockShare Purchase Agreement between Court Programsdated as of April 1, 2014, by and the Company, effective March 31, 2010 (previously filed as Exhibit to Current Report on Form 8-K/A, filed by the Company on May 14, 2010). | | | | | 10.09 | Second Extension of Purchase Agreement amongbetween SecureAlert, Inc., Midwest Monitoring & Surveillance, Inc., Gary Shelton, Gary Bengtson, Larry Gardner and Sue Gardner, dated effective April 1, 2010 (previously filed asEli Sabag (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed by the Company on May 7, 2010)March 18, 2014). | | | | 10.6 | 21.01 | Subsidiaries of the Company, filed herewith. | | | | | 23.01 | Consent of Durham, Jones & Pinegar, P.C.Executive Employment Agreement by and between SecureAlert, Inc. and John R. Merrill, dated November 20, 2014 (incorporated by reference from Exhibit 10.1 to Exhibit 5.01 included herewith)our Current Report on Form 8-K filed November 25, 2014). | | | 10.7 | Stock Purchase Agreement by and between SecureAlert, Inc. and BFC Surety Group, Inc., dated June 2, 2014 (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed June 4, 2014). | | 23.02 | 10.8 | Share Purchase Agreement dated as of November 26, 2014, by and between SecureAlert, Inc., dba TrackGroup, and the shareholders of G2 Research Limited (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed December 2, 2014). |
14.1 | Code of Ethics (previously filed on Form 10-K in January 2014). | | | 23.1* | Consent of Eide Bailly, LLP | | | 23.3 | Consent of Hansen, Barnett & Maxwell, P.C.,Disclosure Law Group (included in Exhibit 5.1) (to be filed herewith.by Amendment) | | | 24.1 | Power of Attorney (included in signature page to registration statement) | | | 99.1 | Insider Trading Policy Adopted (previously filed 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 (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 |
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: | 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. |
(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.
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 the City of Salt Lake City, State of Utah, on December 3, 2010.the 26th day of March, 2015. | SECUREALERT, INC. | | By: | /s/ Guy Dubois | | | Guy Dubois, member, Executive Committee | | | | | By: | SECUREALERT, INC. | | /s/ John R. Merrill | | | | | | | | | | By: | | /s/ David G. Derrick | | | | | Name: | | David G. Derrick | | | | | Title: | | John R. Merrill, Chief ExecutiveFinancial Officer | | (Principal Financial Officer) |
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/ David G. Derrick David G. Derrick Guy Dubois | | ChiefDirector, Member Executive Officer (Principal Executive Officer) and DirectorCommittee | | December 3, 2010March 26, 2015 | Guy Dubois | | (Acting Principal Executive Officer) | | | | | | | | /s/ Chad D. Olsen David S. Boone Chad D. Olsen
| | Director | | March 26, 2015 | David S. Boone | | | | | | | | | | /s/John R. Merrill | | Chief Financial Officer Controller and Corporate Secretary (Principal Financial | | March 26, 2015 | John R. Merrill | | Officer and Principal Accounting Officer) | | December 3, 2010 | | | | | | /s/ John L. Hastings, III* Rene Klinkhammer John L. Hastings, III
| | President, Chief Operating Officer, and Director | | December 3, 2010March 26, 2015 | Rene Klinkhammer | | | | | | | | | | /s/ Larry G. Schafran* Winfried Kunz Larry G. Schafran
| | Director | | December 3, 2010March 26, 2015 | Winfried Kunz | | | | | | | | | | /s/ Edgar Bernardi* Dan L. Mabey Edgar Bernardi
| | Director | | December 3, 2010March 26, 2015 | Dan L. Mabey | | | | | | | | | | /s/ Robert E. Childers* George F. Schmitt Robert E. Childers
| | Director | | December 3, 2010March 26, 2015 | George F. Schmitt | | | | | /s/ David P. Hanlon*
|
David P. Hanlon
| | Director | | December 3, 2010 |