Item 1. Business
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate. Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to the factors discussed under the section of this report entitled “Risk Factors.”
Background
SecureAlert, Inc. (“we,” “us,” “our,” “SecureAlert” or the “Company”) is a Utah corporation originally formed to manufacture and market medical diagnostic stains, solutions and related equipment. In July 2001 we expanded into the elder care market with hardware products and monitoring services for Personal Emergency Response Systems (PERS) and Global Positioning System (GPS) location tracking. In 2006, we introduced GPS tracking technology and monitoring services for the corrections industry with a line of wearable, interactive GPS tracking devices that we manufacture and distribute, combined with offender monitoring and intervention services.
In December of 2007, we acquired Midwest Monitoring and Surveillance, Inc. (Midwest), Court Programs Inc. and Court Programs of Florida, Inc. In order to focus our resources on our strategic purpose of producing or acquiring and deploying leading edge tracking technology and monitoring services for the criminal justice arena in 2009, we completed the divestiture of our medical diagnostic stain and PERS business in an entity known as ActiveCare, Inc., a Delaware corporation.
During fiscal year 2012, we continued our efforts to focus on our core competencies and embarked on a number of divestitures of those subsidiaries which were primarily local services based. We sold certain territories in the state of Florida previously serviced by our wholly-owned subsidiary, Court Programs of Florida, Inc. to various independent distributors. At the end of fiscal year 2012, we also sold our interest in Midwest. In fiscal year 2013, we sold Court Programs, Inc. to complete our divestment plans.
We own or have rights to various trademarks, service marks or trade names that we use in connection with the operation of our business, including, without limitation: Mobile911, Mobile911Siren with 2-Way Voice Communication & Design, ActiveTrace, MobilePAL, HomePAL, HomeAware, PAL Services, TrackerPAL, ReliAlert, SecureAlert, SecureCuff, TrueDetect, and the stylized SecureAlert logo. While some of these trademarks, service marks and trade names are used in this document, for convenience, without protective marking, we will assert our ownership and rights to the fullest extent under applicable law. The trademarks, service marks and trade names of other companies appearing in this report are, to our knowledge, the property of their respective owners. In this report on Form 10-K, unless indicated otherwise, references to “dollars” and “$” are to United States dollars.
Our Business
We market and deploy 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 believe that we currently deliver the only offender management technology, which 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 ReliAlert portfolio of devices and services are customizable to provide secure reintegration solutions for various offender types, including domestic abusers, sexual predators, gang members, pre-trial defendants, 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.
ReliAlert 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.
We believe successful monitoring requires effective, persistent management of monitored individuals. Our monitoring and intervention centers act as an important link between offenders and their supervising officers. SecureAlert intervention specialists initiate contact at the direction of the supervising agency or when an offender violates any established restriction or protocol. The monitoring that is enabled by our state-of-the-art devices, which give us the unique ability to conduct live, three-way voice communication with monitored individuals and officers, provides the situational context that is the basis for behavior management and modification. And, if necessary, it allows us to provide interaction details to law enforcement officers, giving them greater insights prior to intervention.
Our Strategy
Our global growth strategy is to continue to expand offerings which empower professionals in security, law enforcement, corrections and rehabilitation organization worldwide with single-sourced offender management solutions that integrate reliable intervention technologies to support re-socialization and monitoring initiatives. We will accomplish this through an ever increasing portfolio of proprietary and non-proprietary real-time monitoring and intervention products and services. These may include GPS, RF, drug and alcohol testing for not only defendants and offenders, but other individuals and assets in the corrections, law enforcement and rehabilitation arena.
In addition, our product and service offerings will expand upon our exception-based reporting, analytical capabilities and behavioral-monitoring knowledge. These customizable solutions will be available through Web portals and mobile device platforms, in addition to traditional desktops, to leverage our real-time monitoring data, best-practice monitoring, and interaction protocols and analytics capabilities. Customer insights will be further increased by aggregating real-time data from additional monitoring device types and technologies, regardless of manufacturer, as well as other critical data sources.
In summary, we are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services for the global offender management marketplace. We are currently targeting pilot and operational deployments worldwide. We will continue to work with agencies to increase public safety and officer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and improve monitoring program success rates, all while offering defendants and offenders opportunities for accountable freedom instead of incarceration.
Marketing
Our strategic purpose is to produce or acquire and globally deploy leading edge tracking technology and monitoring services in the criminal justice arena. During fiscal year 2013, we worked to meet this purpose by expanding sales and marketing activities, both domestically and internationally through the addition of sales resources and increase of marketing efforts such as trade show participation. As in fiscal 2012, new account acquisition was aided by the lack of public funding, the need to increase jail operating and expansion expenses, and a desire for greater monitoring control of high risk and high flight risk device wearers. Also, the view continues to widen that society needs to look at alternative ways of sentencing offenders, as well as keeping track of certain types of offenders, such as those convicted of sexual or domestic violence offenses and which have been released from custody. Several countries including the United States began or continued the process of evaluating sentencing laws which would release sentenced felons onto to GPS monitoring, after partially serving their incarceration sentences. We foresee that these views and the harsh economic and funding realities will continue to fuel wider implementation of electronic monitoring programs globally.
Our unique and patented functionality makes us a good match for these opportunities. In particular, our customers have expressed interest for our patented two- and three-way voice communication technology on our ReliAlert device, and our SecureCuff steel reinforced band. Other SecureAlert features, including our 95 decibel siren, the real-time posting of location traces and flexible mapping, were also instrumental in winning accounts.
During fiscal year 2013 we continued our commitment to ongoing enhancements to both the ReliAlert device line and our TrackerPAL tracking and monitoring software. Device enhancements centered on the continuation of integrating componentry designed to expand the life span and robustness of the devices, enhance GPS sensitivity, and increase battery operation time. We also enhanced our TrackerPAL software in the areas of selection and reporting features.
Research and Development Program
During the fiscal year ended September 30, 2013, we spent $987,934 on research and development, compared to research and development expenditures of $1,248,654 in the fiscal year ended September 30, 2012. These costs of $987,934 were to further develop our TrackerPAL and ReliAlert portfolio of products and services.
Monitoring Center
During fiscal year 2013, we continued to realize productivity enhancements and additions to our key core competency and differentiator, our Intervention Monitoring Center. Productivity gains were achieved through monitoring software enhancements as well as continuous optimization of processes and procedures and ongoing training. The Intervention Monitoring Center employs bilingual Spanish-speaking staff who provide 24/7 coverage. The bilingual staff addresses the needs of both domestic and international customers.
Competition
During fiscal year 2013, as in past years, we continued to encounter electronic offender monitoring competition from traditional competitors, a few of which had consolidated in 2011 and 2012. We also saw a couple of major new entrants come into the United States market. Traditional competition includes:
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BI Incorporated, Denver Colorado, subsidiary of GEO Care, Inc., Boca Raton, Florida - This international company provides a wide variety of private correctional services from facilities operation and management to correctional health care services. BI Incorporated, which was purchased by GEO Care, Inc. in 2011, has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States.
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iSECUREtrac Corp., Omaha, Nebraska - This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release.
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Omnilink Systems, Inc., Alpharetta, Georgia - This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. In fiscal year 2013, Omnilink completed an agreement with Alcohol Monitoring Systems, Inc. (AMS) for AMS to distribute Omnilink GPS devices as “SCRAM One-Piece GPS™”, to extend AMS’ product line for those agencies looking for a one-stop shop for their monitoring needs.
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3M Electronic Monitoring, Odessa, Florida (purchased and consolidated Attenti Group, (ElmoTech and ProTech) in 2011) - This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks.
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Satellite Tracking of People, LLC, Houston, Texas - This company provides a broad line of GPS tracking systems and services to government agencies.
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Sentinel Offender Services, LLC, Augusta, Georgia (purchased and consolidated G4S’ United States Offender Monitoring operation in 2012) - This company supplies monitoring and supervision solutions for the offender population. Through their acquisition and consolidation of G4S’ United States Offender Monitoring operation, they expanded their customer base to which they provide electronic monitoring of offenders, prison and detention center management and transitional support services. Through this acquisition, they also resell Omnilink’s active GPS device, in addition to their own.
The following companies entered the United States Market in fiscal year 2013:
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Buddi, Ltd., Aylesbury, Binkghamshire, United Kingdom - This company was started in 2005 to provide consumer tracking for consumers such as the elderly or Alzheimer’s sufferers. Their major launch into offender monitoring was via an award of a United Kingdom Ministry of Justice contract. They also announced plans to enter the United States offender monitoring market by headquartering United States operations in Tampa, FL and hiring Steve Chapin, former Protech President and CEO.
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Corrisoft, LLC, Lexington, Kentucky - This company produces offerings for the monitoring of low and medium risk offenders, and distributes other companies’ products for higher risk offenders. They have announced that they will be developing additional products for the monitoring of all offender types.
We also continue to face competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services. Some of these entities utilize less well-known technologies or are resellers of the above competitors’ products. We do not believe there is reliable publicly available information to indicate our relative market share or that of our competitors.
Dependence on Major Customers
We had sales to entities which represent more than 10 percent of gross revenues as follows for the years ended September 30:
No other customer represented more than 10 percent of total revenues for the fiscal years ended September 30, 2013 or 2012. Secretaría de Gobernación de México attributed $5,252,959 (34 percent of total revenues) under a contract that was completed during the fiscal year ended 2013 and it is uncertain if we will provide services to this customer in the future. The Ministry of National Security in the Bahamas attributed $1,622,326 (10% of total revenues) under a three-year contract which concluded in November 2013 which services have continued on a month-to-month basis. This contract could be terminated at anytime with a 30-day notice.
Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, are shown in the table below:
Subsequent to the fiscal year ended September 30, 2013, we received $387,483 from la Oficina de Servicios con Antelación al Juicio de Puerto Rico and $518,137 from The Ministry of National Security in the Bahamas for a total of $905,620.
Dependence on Major Suppliers
We purchase cellular services from several suppliers. The cost to us for these services during the fiscal years ended September 30, 2013 and 2012, was approximately $974,709 and $961,994, respectively. Our cellular costs increased by approximately one percent in 2013 compared to 2012, due to the increase in the number of monitoring devices assigned to customers.
Product Returns
During fiscal year 2013, we made improvements to the ReliAlert device as well as internal processes to improve product reliability and reduce product returns. These improvements include the following:
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We redesigned the shell of the ReliAlert device addressing several issues related to devices that were returned to us by our customers.
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We refined our assembly and inspection processes (outgoing and incoming inspections) to ensure continued quality improvements.
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We instituted a formal change control process to ensure that we have a structured, strategic, and documented approach to addressing and implementing changes. This also includes improvements in our internal communications processes to ensure that different groups within the Company have visibility into current issues, and everyone has input into the process of continual improvement of our processes and design.
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We cross-trained technical support staff and returns analysis staff to enable them to have improved visibility of the customer experience. This has helped our staff to quickly and correctly diagnose issues in the field.
Intellectual Property
Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own 6 trademarks that are registered with the United States Patent and Trademark Office plus one trademark registered in Mexico and one in Canada. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States.
The following table summarizes our trademark registrations and applications:
Patents. We have 15 patents issued and two patents pending in the United States. At foreign patent offices we have three patents issued and 12 patents pending. We are also preparing patents that will be filed in other countries in the coming year.
The following tables summarize information regarding our patents and patent applications. There is no assurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications.
License Agreement. During the fiscal year ended September 30, 2010, we paid $50,000 to enter into a non-exclusive license with Satellite Tracking of People, LLC or STOP, to use U.S. Patent No. 6,405,213, enhancing our intellectual portfolio in the GPS locating service industry. The term of this license is 20 years, through June 2019.
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 percent of our net revenues from the sale or lease of our monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. We redeemed and terminated this royalty in February 2013 using the proceeds of a loan from a related party, Sapinda Asia Limited (“Sapinda Asia”). The obligation to Sapinda Asia was converted to common stock and satisfied in full in September 2013.
Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
Seasonality
Given the consistency in recurring domestic monitoring revenues by customer throughout 2013, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic deployment opportunities slow down in the months of July and August. We believe that this is due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season during these two months.
Environment
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
Employees
As of December 31, 2013, we had 94 full-time employees and four 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 relations with employees are good.
Additional Available Information
We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070. Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.securealert.com. The information found on, or otherwise accessible through, our website, is not incorporated into and does not form a part of this report on Form 10-K. We make available, free of charge at our corporate website copies of our annual reports filed with the United States Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request.
All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549.
Item 1A.
Item 1A. Risk Factors
Our business is subject to significant risks. You should carefully consider the risks described below and the other information in this Form 10-K, including our financial statements and related notes, before you decide to invest in our common stock. If any of the following risks or uncertainties actually occurs, our business, results of operations or financial condition could be materially harmed, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.
Risks Related to Our Business, Operations and Industry
We are primarily dependent on additional capital from limited sources, both of which are related parties to the Company. Our business plan is dependent upon raising sufficient capital to supplement operational income. It may be necessary for us to obtain additional borrowing at less than favorable terms. On October 24, 2013, we drew down $1,200,000 in an unsecured revolving line of credit from Sapinda Asia, a significant shareholder of the Company. The principal accrues interest at the rate of 10 percent per annum and the entire principal and interest is due on or before June 30, 2014. On November 20, 2013, we borrowed an additional $1,500,000 from Sapinda Asia bearing interest at 8% per annum and maturing on November 18, 2014. On January 3, 2014, we entered into an unsecured “Facility Agreement” with Tetra House Pte. Ltd., (“Tetra House”) an entity controlled by our Chairman, Guy Dubois, pursuant to which Tetra House agreed to make available to us up to $25,000,000 in borrowed funds at an 8% annual interest rate due and payable in arrears semi-annually. The funds may be drawn down at any time and from time to time through May 31, 2014, in minimum amounts of $2,000,000 and in $1,000,000 increments. The borrowed funds may be used for acquisitions and for general corporate purposes and are due and payable two years from the closing date. See Item 13. “Certain Relationships and Related Transactions, and Director Independence” for more details regarding the Facility Agreement and our obligations under that agreement. As of January 14, 2014, we borrowed $10,000,000 under the Facility Agreement.
We face risks related to our substantial indebtedness. Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our outstanding debentures and other debt instruments. As of September 30, 2013, we had $2,735,649 million of indebtedness outstanding. Subsequent to September 30, 2013, we added borrowings in the principal amount of $12,700,000.
Our high degree of leverage could have important consequences to us, including:
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making it more difficult for us to make payments on our debt;
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increasing our vulnerability to general economic and industry conditions;
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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Some of this indebtedness is past due and is owed to several vendors and suppliers critical to our operations. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
General economic conditions may affect our revenue and harm our business. As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in the past two years. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and services, adversely affecting our results of operations and financial condition. Challenging economic conditions also may impair the ability of our customers or distributors to pay for products or services they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase. Our cash flows may be adversely affected by delayed payments or underpayments by our customers. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries.
Budgetary issues faced by government agencies could adversely impact our future revenue. Our revenues are primarily derived from contracts with state, local and county government agencies in the United States and governments of Caribbean and Latin American nations. Many of these government agencies are experiencing budget deficits and may continue to do so. As a result, the amount spent by our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government clients. In addition, since 2009, the industry has experienced a general decline in average daily lease rate for GPS tracking units. As a result of these factors, our ability to maintain or increase our revenues may be negatively affected.
As a result of our increased focus on international business markets, our business is subject to many of the risks of a new or start-up venture. Our business goals and strategy subject us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development. If we are to be successful in this new business direction, we must accomplish the following, among other things:
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Develop and introduce functional and attractive product and service offerings;
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Increase awareness of our brand and develop consumer loyalty;
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Respond to competitive and technological developments;
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Increase gross profit margins;
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Build an operational structure to support our business; and
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Attract, retain and motivate qualified personnel.
If we fail to achieve these goals, that failure would have a material adverse effect on our business, prospects, financial condition and operating results. Because the market for our product and service offerings is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. There is no assurance that a market for these products or services will ever develop or that demand for our products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
Certain individuals and groups own or control a significant number of our outstanding shares. Certain groups or persons associated with them beneficially own a substantial number of shares of our outstanding common stock or securities and debt instruments convertible into shares of our common stock. As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, approval or preclusion of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve risk to us or our other shareholders. Additionally, they may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. See, Item 10. “Directors, Executive Officers and Corporate Governance,” on page 23 and Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” on page 29.
There is no certainty that the market will accept our products and services. Our targeted markets may be slow to or may never accept our products or services. Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to currently available methods of tracking. In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control. No assurance can be given that key decision-makers will accept our new products, which could have a material adverse effect on our business, financial condition and results of operations.
We are dependent upon the services of our senior management team, and the failure to attract and retain such individuals could adversely affect our operations. We are dependent on the services, abilities and experience of our executive officers. The permanent loss of the services of any of these senior executives and any change in the composition of our senior management team could have a negative impact on our ability to execute on our business and operating strategies. We do not currently have a chief executive officer. In October 2012, the Board of Directors established an Executive Committee and temporarily transferred the executive function to this committee, currently comprised of Guy Dubois and David Boone. Messrs. Dubois and Boone will continue to execute the responsibilities of the Company’s principal executive officer through the Executive Committee, until our search for a new Chief Executive Officer is completed. Our inability to identify, hire and subsequently integrate a new Chief Executive Officer could adversely impact our business, financial condition and results of operations.
We rely on significant suppliers for key products and cellular access. If we do not renew these agreements when they expire we may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as we have in the past, which would reduce revenues and could adversely affect results of operations or financial condition. We have entered into an agreement with a national cellular access company for cellular services. We also rely currently on a single manufacturer for the manufacture of our ReliAlert devices. If any of these significant suppliers were to cease providing products or services to us, we would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.
Our business subjects our research, development and ultimate marketing activities to current and possibly to future government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. Our monitoring device products are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies must be manufactured in compliance with applicable rules and regulations of the Federal Communications Commission (“FCC”). There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations. We may be required to comply with FCC regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions. Our products and related manufacturing operations may also be subject to regulation, inspection and licensing by other governmental agencies, including the Occupational Health and Safety Administration.
We face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence. Our current and expected markets are rapidly changing. Existing products and services and emerging products and services will compete directly with the products we are seeking to develop and market. Our technology will compete directly with other technology, and, although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will have advantages that are significant enough to cause users to adopt its use. Competition is expected to increase. Many of these competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field. Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our products. We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
We are dependent upon certain customers, the loss of which would adversely affect our results of operations and business condition. During fiscal year 2013, two customers each accounted for more than 10 percent of total sales. One customer paid $5,252,959 (34 percent) under an international contract that was completed during the fiscal year ended 2013 and it is uncertain if we will provide services to this customer in the future. Another customer paid $1,622,326 (10%) under a three-year contract which was completed in November 2013 and has continued under a month-to-month contract. This contract could be terminated at anytime upon 30 days notice. The loss of either of these customers would result in lower revenues and limit the cash available to grow our business and to achieve profitability. In addition, on November 15, 2013, we entered into a contract with the uniformed prison service of the Republic of Chile known as the Gendarmerie. This is a 41-month contract and barring additional new contracts, this contract is expected to account for more than 10 percent of sales for fiscal year 2014. The loss or interruption of this new contract would adversely affect our results of operations and financial condition.
Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets. Some of the products we are currently evaluating likely will require further research and development efforts before they can be commercialized. There can be no assurance that our research and development efforts will be successful. In addition, the technology which we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets and GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user. This limits the effectiveness of GPS if the user is in the lower floors of a tall building, underground or otherwise located where the signals have difficulty penetrating. Other difficulties and uncertainties normally associated with new industries or the application of new technologies in new or existing industries also threaten our business, including the possible lack of consumer acceptance, difficulty in obtaining financing for untested technologies, increasing competition from larger or smaller well-funded competitors, advances in competing or other technologies, and changes in laws and regulations affecting the development, marketing or use of our new products and related services.
Our business plan anticipates significant growth through monitoring revenues and acquisitions. To manage the expected growth we will require capital and there is no assurance we will be successful in obtaining necessary additional funding. If we are successful in implementing our business plan, we may be required to raise additional capital to manage anticipated growth. Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities, the success of our development efforts, the cost and timing of establishing or expanding our revenues, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories. Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.
Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights. We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries. We have received several patents; we have also applied for several additional patents and those applications are awaiting action by the United States Patent Office and in other countries. There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any. Our inability to obtain or to maintain patents on our key products could adversely affect our business. We own 15 patents and have filed and intend to file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop. There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented. The prosecution of patent applications and the enforcement of patent rights are expensive, and the expense may adversely affect our profitability and the results of our operations. In addition, there can be no assurance that the rights afforded by any patents will guarantee proprietary protection or competitive advantage. Our success will also depend, in part, on our ability to avoid infringing the patent rights of others. We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services. Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities. In addition, if patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance that we will be able to obtain any necessary licenses on commercially favorable terms, if at all. Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition. Litigation that could result in substantial costs may also be necessary to enforce patents licensed or issued to us or to determine the scope or validity of third-party proprietary rights. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we eventually prevail. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we cease using such technology.
We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable. These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
We conduct business internationally with a variety of sovereign governments. Our business is subject to a variety of regulations and political interests that could affect the timing of payment for services and the duration of our contracts. We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust. The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses or hardware failures. We may not be able to correct a problem in a timely manner. Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result in negative publicity that could cause us to lose customer accounts or fail to obtain new accounts. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to integrate smoothly and newly developed or purchased modules with our existing systems.
Risks Related to Our Common Stock
Our Board of Directors may authorize the issuance of preferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing shareholders without their approval. Our Articles of Incorporation authorize us to issue up to 20,000,000 shares of preferred stock, at par value $0.0001. The Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of preferred stock. The Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the common stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or common stock. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock and reduce the likelihood that common shareholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of preferred stock may also adversely affect an acquisition or change in control of the Company.
The Board of Directors has designated 85,000 shares of preferred stock as our Series D Preferred stock. Each share of Series D Preferred stock is convertible into common stock. Holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination. As of December 31, there were 468 shares of Series D Preferred issued and outstanding, which were convertible into 24,503 shares of common stock.
Item 2.
Item 2. Properties
Our headquarters and monitoring facility are housed in approximately 7,500 square feet of space located at 150 West Civic Center Drive, Suite 400, Sandy, Utah. Lease payments are approximately $18,000 per month. This lease expires on May 31, 2014. In addition, we lease 6,152 square feet of warehousing and pallet shipping functions and capabilities in a facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $6,500 expiring on August 31, 2014.
Item 3.
Item 3. Legal Proceedings
We are party to the following legal proceedings:
Lazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements with us. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. We believe these allegations are inaccurate and intend to defend the case vigorously. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. We intend to defend this matter. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming the Company breached a contract for computer services and intentionally interfered with its economic relations. We believe the allegations are inaccurate and will defend the case vigorously.
Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against us in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that we breached a 2006 consulting agreement with him and claims damages of not less than $210,000. We dispute the plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is remote.
SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, we filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between us and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. We believe the relief sought in the case is warranted based on the language of the settlement agreement and intent of the parties and we will pursue the matter vigorously.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the OTC Bulletin Board under the symbol “SCRA.OB.”
The following table sets forth the range of high and low bid prices of our common stock as reported on the OTC Bulletin Board for the periods indicated. The sales information is available online at http://otcbb.com.
Holders
As of December 31, we had approximately 2,500 holders of record of our common stock and 9,811,946 shares of common stock outstanding. We also have granted options and warrants for the purchase of 399,591shares of common stock and 42,000 shares of Series D Preferred stock. We also had 468 shares of Series D Preferred stock outstanding, which are convertible into 24,503 shares of common stock and are voted on an as-converted basis with the outstanding common stock.
Dividends
Since incorporation, we have not declared any cash dividends on our common stock. We do not anticipate declaring cash dividends on our common stock for the foreseeable future. The Series D Preferred stock is entitled to dividends at the rate equal to 8 percent per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. To date all dividends payable on our preferred stock outstanding have been paid by issuance of shares of common or preferred stock. During the fiscal years ended September 30, 2013 and 2012, we recorded $1,042,897 and $2,480,298 in stock dividend expenses, respectively, payable with respect to our outstanding preferred stock.
Dilution
The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of common stock are reserved for issuance upon exercise of purchase or conversion rights.
The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York, 11219.
Securities Authorized for Issuance under Equity Compensation Plans
The 2012 SecureAlert, Inc. Stock Incentive Plan
The Board of Directors has adopted the SecureAlert, Inc. 2012 Equity Compensation Plan (the “2012 Plan”), approved by shareholders at the Annual Meeting of Shareholders held on December 21, 2011. We believe that incentives and stock-based awards focus employees on the objective of creating shareholder value and promoting the success of the Company, and that incentive compensation plans like the 2012 Plan are an important attraction, retention and motivation tool for participants in the plan.
Under the 2012 Plan, 90,000 options or shares of common stock may be awarded. As of the date of this report, options for the purchase of 30,000 shares of common stock have been awarded under the 2012 Plan.
The following table includes information as of September 30, 2013 for our equity compensation plans:
Recent Sales of Unregistered Securities
During the 4th fiscal quarter ended September 30, 2013, we issued the following securities without registration under the Securities Act:
Issuance of Common Stock for Conversion of Debt
We converted $17,576,625 of principal and accrued interest debt payable to Sapinda Asia, a shareholder, into 3,905,917 shares of common stock at a rate of $4.50 per share.
Issuance of Common Stock for Payment of Preferred Dividends
We issued 799 shares of common stock as payment of dividends on our Series D Convertible Preferred stock, valued at $9,325.
Issuance of Common Stock for Services
We issued 1,813 shares of common stock to employees and consultants for services valued at $35,535.
Issuance of Common Stock for Board of Director Services
We issued 680 shares of common stock to directors for services valued at $10,000.
In each of the transactions listed above, we issued the shares of common stock without registration under the Securities Act in reliance on exemptions from registration provided by Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.
Purchases of Equity Securities
Neither the Company nor any affiliated purchaser as defined in Rule 10b-18(3) of the Exchange Act made any purchases of shares of our common stock in the public market on behalf of the Company during the year ended September 30, 2013.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. All statements contained in this Form 10-K other than statements of historical fact are forward-looking statements. When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “may,” “will,” “should,” “seeks” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see Item 1A.,“Risk Factors” in Part I of this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of this Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand SecureAlert, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to fiscal year 2013 refers to the year ended September 30, 2013. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2013 and 2012 and the accompanying notes thereto contained in this report. This introduction summarizes MD&A, which includes the following sections:
·
Overview - a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business.
·
Results of Operations - an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements.
·
Liquidity and Capital Resources - an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; and the impact of inflation and changing prices.
·
Critical Accounting Policies - a discussion of accounting policies that require critical judgments and estimates.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
Overview
We market and deploy 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 believe that we currently deliver the only offender management technology, which effectively integrates GPS, 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 ReliAlert and ReliAlert XC devices are manufactured in the United States and include a portfolio of products, e-Arrest Beacons and monitoring services designed to create “Jails without Walls”, while re-socializing offender populations. The products and services are customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, or juvenile offenders) and offer practical solutions and options for the reintegration and effective re-socialization of select offenders safely back into society. Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions. Our technologies are designed for domestic or international, federal, state and local agencies to provide location tracking of designated individuals within the criminal justice system and throughout a restricted geography.
Our GPS devices are securely attached around the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can be adjusted or removed without detection only by a supervising officer, and which is activated through services provided by our SecureAlert Monitoring Center (or other agency-based monitoring centers). During fiscal year 2011, we also deployed an upgraded, patented, dual-steel banded SecureCuff strap for “at-risk” offenders who have qualified for electronic monitoring supervision, but who require an incremental level of security and supervision, provided through both hardware and monitoring services. Our monitoring and intervention centers act as an important link between the offender and the supervising officer, as intervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols. The ReliAlert and ReliAlert XC units are intelligent devices with integrated computer circuitry and constructed from case-hardened plastics designed to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing.
Results of Operations
Continuing Operations - Fiscal Year 2013 compared to Fiscal Year 2012
Net Revenues
During the fiscal year ended September 30, 2013, we had net revenues of $15,641,062 compared to net revenues of $13,114,979 for the fiscal year ended September 30, 2012, an increase of $2,526,083, or approximately 19 percent. Revenues from monitoring services for the fiscal year ended September 30, 2013, totaled $15,028,625, compared to $11,519,727 for fiscal year 2012, an increase of $3,508,898 or approximately 30 percent. Revenues increased as a result of our continued expansion into international markets, which contributed an additional $2,745,667 to monitoring revenues for fiscal year 2013. Of the $15,028,625 in revenues, $5,252,959 (35 percent) derived from an international contract that was completed during the fiscal year and it is uncertain if we will provide services to this customer in the future. Domestic revenues decreased by $219,584, or three percent, from fiscal year 2012. This decrease resulted primarily from lowering our monitoring daily charge to compete in the domestic marketplace. Revenues from product sales for fiscal year 2013 were $612,437, compared to $1,595,252 for the prior year, a decrease of $982,815, or 62 percent. This decrease was primarily due to the sale and installation in fiscal year 2012 of an onsite charging solution.
Cost of Revenues
During the fiscal year ended September 30, 2013, cost of revenues, excluding impairment of equipment and parts, totaled $7,816,892, compared to cost of revenues during the fiscal year ended September 30, 2012 of $7,305,602, an increase of $511,290. These net costs of revenues, as a percentage of net revenues, decreased six percent, from 56 percent in 2012 to 50 percent in 2013. The increase in cost of revenues of $511,290 in 2013 resulted primarily from increases in the costs of royalty fees of $347,483 and higher international costs of $227,808. These increases were partially offset by a decrease in freight costs of $72,010.
Impairment costs for equipment and parts for the fiscal years ended September 30, 2013 and 2012 were $213,276 and $1,648,762, respectively. These costs resulted from the disposal of obsolete inventory, monitoring equipment and parts as we continue to make enhancements to the device.
Amortization for the fiscal years ended September 30, 2013 and 2012, totaled $1,230,293 and $1,231,773, respectively. Amortization costs are based on a three-year useful life for TrackerPAL and ReliAlert devices. Devices that are leased or retained by us for future deployment or sale are amortized over three years. We believe this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness.
We expect the cost of revenues, excluding impairment of equipment and parts, as a percentage of revenues to decrease in the foreseeable future due to (a) economies of scale realized through projected increases in revenues, and (b) further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs.
Gross Profit and Margin
During the fiscal year ended September 30, 2013, gross profit totaled $7,610,894, or 49 percent of net revenues, compared to $4,160,615, or 32 percent of net revenues during the fiscal year ended September 30, 2012, an increase of $3,450,279. Included in cost of revenues are costs attributable to impairment of inventory and monitoring equipment of $213,276 and $1,648,762 for fiscal years 2013 and 2012, respectively. These impairment costs from 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, 2013 was $7,824,170 or 50 percent of net revenues, compared to $5,809,377 or 44 percent of net revenues, for the same period in 2012, an increase of $2,014,793.
Research and Development Expenses
During the fiscal year ended September 30, 2013, we incurred research and development expenses of $987,934 compared to similar expenses recognized during fiscal year 2012 totaling $1,248,654. This decrease of $260,720 is due primarily to a reduction in research and development staff.
Selling, General and Administrative Expenses
During the fiscal year ended September 30, 2013, our selling, general and administrative expenses totaled $7,689,124, compared to $12,623,114 for the fiscal year ended September 30, 2012. The decrease of $4,933,990 is the result of reductions in the following expenses: bad debt expense ($202,782), consulting ($2,286,737), insurance ($182,191), legal fees ($170,011), payroll, payroll taxes and employee benefits ($1,426,001), and travel expenses ($102,810). Consulting and non-cash compensation as a part of employee expense for the fiscal year ended September 30, 2013 totaled $445,971, compared to $3,904,527 for fiscal year 2012, a decrease of $3,458,556. The decrease in consulting and non-cash compensation to employee expenses resulted primarily from the issuance of common stock and acceleration of expense in connection with cancellation of stock options during fiscal year 2012.
Other Income and Expense
For the fiscal year ended September 30, 2013, interest expense was $17,048,519, compared to $1,431,416 for the fiscal year ended September 30, 2012. This increase of $15,617,103 is a result primarily of non-cash interest expense of $15,960,382 related to the amortization of debt discounts on convertible debentures. Also included in interest expense is $939,770 in accrued interest on a loan and security agreement with a related party, of which $936,627 was converted into common stock in fiscal year 2013.
Net Loss
We had a net loss from continuing operations for the fiscal year ended September 30, 2013 totaling $18,334,070 (approximately $3.79 per share), compared to a net loss of $17,150,288 (approximately $6.27 per share) for the fiscal year ended September 30, 2012. This increase of $1,183,782 is due primarily to the amortization of the beneficial conversion feature of our convertible debentures recorded as non-cash interest expense as described above.
Discontinued Operations - Fiscal Year 2013 compared to Fiscal Year 2012
Effective October 1, 2012, we sold all of the issued and outstanding capital stock of our subsidiary, Midwest, to the former principals of Midwest. Because Midwest was a component of our consolidated entity, this sale requires discontinued operations reporting treatment of the Midwest operations.
In addition, effective January 1, 2013, we sold all of the issued and outstanding capital stock of Court Programs, Inc. to the former principal of that entity, together with all issued and outstanding capital stock of its affiliated entities. Because these entities were a component of our consolidated entity, this sale requires that we report their operating results as discontinued operations for accounting purposes.
A summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012 is as follows:
Liquidity and Capital Resources
During the fiscal year ended September 30, 2013, we were able to finance our business from cash flows only in part from operating activities. We supplemented cash flows with the proceeds from borrowings.
As of September 30, 2013, we had unrestricted cash of $3,382,428, compared to unrestricted cash of $458,029 as of September 30, 2012. As of September 30, 2013, we had a working capital surplus of $6,836,442, compared to a working capital deficit of $13,600,345 as of September 30, 2012. The increase in working capital in fiscal year 2013 primarily resulted from the conversion of amounts owed to a related party under a loan and security agreement.
During fiscal year 2013, our operating activities provided cash of $838,910, compared to $1,910,067 of cash used during fiscal year 2012. This improvement in cash provided from operating activities of $2,748,977 resulted primarily from an increase in revenues of $2,526,083.
Investing activities during the fiscal year ended September 30, 2013, used cash of $560,425, compared to $2,847,274 during fiscal year 2012. The decrease in cash used by investing activities of $2,286,849 during fiscal year 2013 resulted primarily from the decrease in cash used for the purchase of monitoring equipment.
Financing activities during the fiscal year ended September 30, 2013, provided $2,500,724 of net cash compared to $4,396,563 of cash provided during fiscal year 2012.
During the fiscal year ended September 30, 2013, we made net cash payments of $299,276 on notes payable. During fiscal year 2013, we had cash proceeds totaling $2,800,000 from the issuance of convertible debentures to related parties.
During the fiscal year ended September 30, 2012, we made net payments of $687,354 on notes payable, and we paid $207,578 on related-party notes payable and $1,147,250 of commissions in connection with capital raises. During fiscal year 2012, we had proceeds of $2,004,000 from the sale of Series D Convertible Preferred stock, proceeds of $500,000 from the issuance of convertible debentures, proceeds of $2,900,000 from the issuance of convertible debentures to related parties, and $1,033,000 from the sale of common stock to a related party.
During the fiscal year ended September 30, 2013, we incurred a net loss from continuing operations of $18,334,070 and we had positive cash flows from operating activities of $838,910, compared to a net loss of $17,150,288 and negative cash flows from operating activities of $1,910,067 for fiscal year 2012. As of September 30, 2013, our working capital surplus was $6,836,442, our stockholders’ equity was $23,963,342, and the accumulated deficit totaled $266,429,337.
Going Concern
We have a history of recurring net losses and a significant accumulated deficit. For the fiscal year ended September 30, 2012, we did not have enough cash on hand to meet our current liabilities. As a result, the report from our independent registered public accounting firm for the year then ended included an explanatory paragraph in respect to the substantial doubt of our ability to continue as a going concern. The financial statements for fiscal year 2012 and for prior periods did not include any adjustments that might result from the outcome of that uncertainty. Our plan for continuing as a going concern included obtaining the necessary funding to meet our projected capital investment requirements and operating needs.
Subsequent to fiscal year ended September 30, 2013, we entered into a Facility Agreement, whereby we may borrow up to $25,000,000 for working capital and acquisitions purposes. As of January 14, 2014, we borrowed $10,000,000 under the Facility Agreement which we believe provides sufficient working capital and enough cash on hand to satisfy our current obligations. See Item 13. “Certain Relationships and Related Transactions, and Director Independence” for additional information regarding the Facility Agreement.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.
Critical Accounting Policies
In Note (2) to the audited Consolidated Financial Statements for the fiscal year ended September 30, 2013, included in this report, we discuss those accounting policies that are considered to be significant in determining the results of operations and our financial position.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivable, we apply 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;
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Product acceptance in the marketplace;
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Customer demand;
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Historical sales;
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Forecast sales;
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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: (a) lease contracts in which we provide monitoring services and lease devices to distributors or end users and we retain ownership of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use our monitoring services.
We typically lease our devices under one-year contracts with customers that opt to use our monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under our standard leasing contract, the leased device becomes billable on the date of activation or 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 being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL and ReliAlert 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 impact 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by us in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning. In our reports and filings we may make forward looking statements regarding our expectations about future sales growth, renewal of existing contracts, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, future compliance with the terms and conditions of our debt obligations, the expected repayment of our liabilities in future periods, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended September 30, 2013, entitled “Risk Factors.”
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management’s expectations as of the date made, and we do not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our business is extending to several countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenues and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
We had $8,462,019 and $5,716,352 in revenues from sources outside the United States for the fiscal years ended September 30, 2013 and 2012, respectively. We received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange loss of $145,612 and $28,358 in fiscal years 2013 and 2012, respectively. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for trading or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On September 23, 2013, Hansen, Barnett & Maxwell, P.C. (“HBM”) resigned as our independent registered public accounting firm. Prior to that resignation, HBM entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which Eide Bailly acquired the operations of HBM, and certain of the professional staff and partners of HBM joined Eide Bailly either as employees or partners of Eide Bailly and will continue to practice as members of Eide Bailly. Concurrent with the resignation of HBM, the Company, through and with the approval of our Audit Committee, engaged Eide Bailly as our independent registered public accounting firm.
Prior to engaging Eide Bailly, we did not consult with Eide Bailly regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Eide Bailly on our financial statements, and Eide Bailly did not provide any written or oral advice that was an important factor considered by us in reaching a decision as to any such accounting, auditing or financial reporting issue.
The reports of HBM regarding our financial statements for the fiscal year ended September 30, 2012 contained a going concern note. Other than such note, the reports of HBM did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended September 30, 2012, and during the period from September 30, 2012 through September 23, 2013, the date of resignation, there were no disagreements with HBM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of HBM would have caused it to make reference to such disagreement in its reports.
We previously filed a Current Report on Form 8-K with the SEC to report this change. We also filed as an exhibit to the Current Report a copy of HBM’s letter dated September 24, 2013 in which HBM stated its agreement with the above statements which were also contained in the Current Report.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of September 30, 2013.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2013.
This management’s report on internal control over financial reporting does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report on form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fourth fiscal quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth information about the members of our Board of Directors as of December 16, 2013:
David S. Boone is the CEO of Paranet Solutions, LLC, in Dallas, Texas. He became a director of our Company on December 21, 2011. He has served in executive roles with a variety of publicly traded and start-up organizations including Kraft General Foods, Sears, PepsiCo, Safeway and Belo Corporation, 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.
Guy Dubois is our Chairman since February 2013 and became a director in December 2012. Mr. Dubois is a Director at Singapore-based Tetra House Pte. Ltd., that provides consulting and advisory services worldwide. Mr. Dubois was Chief Executive Officer of gategroup AG from September 2008 until April 2011. He previously held the positions of President, Executive Vice President Finance and Administration, Chief Administrative Officer and Chief Financial Officer of Gate Gourmet Holding LLC. He served as a manager of the Board of Managers of Gate Gourmet Holding LLC from March 2007 until April 2011, and as a member of the Board of gategroup AG from February 2008 until April 2011. Prior to joining Gate Gourmet in July 2003, Mr. Dubois was Vice President Finance, Administration, Demand and Supply Chain for Roche’s Vitamins Inc. in New Jersey from 2000 to 2003. He was Area Manager, Finance and Administration for Roche’s Vitamins Asia-Pacific Pte. Ltd. in Singapore from 1997 to 1999, and Finance Manager from 1995 to 1997. Mr. Dubois worked in corporate finance for Hoffman-La Roche in 1994. Mr. Dubois also served on the European Organization for Nuclear Research (CERN) team in Switzerland in various roles, including Treasurer and Chief Accountant, Manager General Accounting and Financial Accountant from 1989 to 1994. He also worked with IBM in Sweden from 1984 to 1988 as Product Support Specialist for Financial Applications. He attended the Limburg Business School in Diepenbeek, Belgium, and has a degree in Financial Science and Accountancy. Mr. Dubois’ appointment to the Board of Directors was a requirement of a financing arrangement as part of the terms of a loan agreement with Sapinda Asia.
Rene Klinkhammer became a director in January 2010. He graduated from European Business School, Oestrich-Winkel, Germany, in 2004, with an MBA-equivalent degree in business administration. His majors were Banking, Finance and International Management. After graduating, Mr. Klinkhammer joined Deutsche Bank’s Investment Banking Division as an analyst in the Corporate Finance Advisory Group, specializing in mergers and acquisitions, along with debt and equity financing transactions for larger German clients of the bank. From 2007 to June 2013, Mr. Klinkhammer worked for Sapinda Holding B.V. and its subsidiaries, a group of privately-owned investment companies with offices in Amsterdam, Berlin, London and other major cities around the world. Since July 2013, Mr. Klinkhammer works for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. For the past six years, Mr. Klinkhammer has worked with us as both an investor and advisor.
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. From 2009 to 2011, Mr. Kunz has also worked with us as an investor.
Dan L. Mabey became a director on December 21, 2011. He is the CEO of BigHorn Oil and Gas, an energy development company (Casper, Wyoming), and he has served in both public and private company leadership positions in the high-tech industry including President of 1-2-1 View digital signage company (Singapore), Chief Operating Officer and Director of In Media Corporation IPTV service company (California), President of Interactive Devices, Inc. a video compression company (Folsom, California) and Vice President of Broadcast International, a satellite broadcast company ( Salt Lake City, Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development Office, growing Utah exports from $700 million to $3.6 billion a year. He helped recruit the 2002 Winter Olympics to Salt Lake City, Utah, and managed international business development for the games. Throughout his career, Mr. Mabey has been active in civic and community organizations and is the recipient of numerous service awards. He is also the co-inventor or lead inventor on six patents and the sole inventor of a seventh. Mr. Mabey received a Masters of Public Administration (MPA) degree from Idaho State University in 1978 and a B.A. degree from Boise State University in 1974.
George F. Schmitt became a director on December 21, 2011. He is a director and CEO of MBTH Technology Holdings. He has held this position since December, 2010. Mr. Schmitt is also a director of XG Technology, Inc. a publicly traded company, Kentrox and Calient. Mr. Schmitt previously served as a director of TeleAtlas, Objective Systems Integrators, Omnipoint and LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and 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.
Board of Directors
Election and Meetings
Directors hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are appointed by the Board of Directors and hold office until their successors are appointed and duly qualified. Vacancies on the Board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the Board, with such new director serving the remainder of the term or until his/her successor shall be elected and qualify.
The Board of Directors is elected by and is accountable to our shareholders. The Board establishes policy and provides strategic direction, oversight, and control. The Board met 18 times during fiscal year 2013. All directors attended at least 80 percent 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 NASDAQ Rule 4200(a)(15). The Board determined the independence of all directors based on the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer and Dan L. Mabey meet the standards to be considered independent. The Board has not appointed a lead independent director.
Shareholder Communications with Directors
If we receive correspondence from our shareholders that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o SecureAlert, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070.
Committees of the Board of Directors
The Board of Directors has three standing committees: the Audit Committee, Compensation Committee, and Nominating Committee. These committees assist the Board of Directors to perform its responsibilities and make informed decisions.
Audit Committee. The primary duties of the Audit Committee are to oversee (i) management’s conduct of our financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing our systems of internal accounting and financial controls, (ii) our independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of our independent auditors. The Audit Committee assists the Board in providing oversight of our financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on our website at www.securealert.com.
The Audit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm. The Audit Committee met four times during both fiscal years 2012 and 2013 and all members of the Audit Committee attended at least 75 percent of the committee’s meetings.
Members of the Audit Committee as of September 30, 2013, 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 NASDAQ Listing Standards. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors designated David S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the Securities and Exchange Commission.
The Audit Committee reviewed and discussed the matters required by United States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 2013 with management and our independent registered public accounting firm. The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm's independence.
Compensation Committee. Members of the Compensation Committee are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee met two times during fiscal year 2013. Members of the Compensation Committee are appointed by the Board of Directors. Messrs. Mabey, Boone, and Schmitt are independent directors, as determined by the Board of Directors in accordance with the NASDAQ listing standards. The Compensation Committee is governed by a charter approved by the Board of Directors, a copy of which is available on the Company’s website www.securealert.com.
The Compensation Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to shareholders. The Committee monitors the results of such policy to assure that the compensation payable to our executive officers provides overall competitive pay levels, creates proper incentives to enhance shareholder value, rewards superior performance, and is justified by the returns available to shareholders.
The Compensation Committee also acts on behalf of the Board of Directors in administering compensation plans approved by the Board, in a manner consistent with the terms of such plans (including, as applicable, the granting of stock options, restricted stock, stock units and other awards, the review of performance goals established before the start of the relevant plan year, and the determination of performance compared to the goals at the end of the plan year). The Committee reviews and makes recommendations to the Board with respect to new compensation incentive plans and equity-based plans; reviews and recommends the compensation of the Company’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of executive officers of the Company.
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 case of a vacancy on the Board of Directors, recommend a director to be elected by the Board to fill such vacancy. The Nominating Committee held one meeting during fiscal 2013. The Nominating Committee’s charter is available on our website, www.securealert.com.
Code of Ethics. We have established a Code of Business Ethics that applies to our officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. We will post on our website www.securealert.com any amendments to or waivers from a provision of our Code of Business Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or 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 December 16, 2013:
The Executive Committee of the Board of Directors was established to act temporarily in the principal executive officer function following the resignation of our Chief Executive Officer in October 2012. Current members of the Executive Committee are Guy Dubois and David S. Boone. On April 16, 2013, Mr. Dubois was granted warrants equal to $300,000 for his additional work as a director and member of the Board’s Executive Committee. This grant is of warrants to purchase 64,665 shares of common stock at an exercise price of $9.00 per share; that vest in equal monthly increments over a period of one year or immediately upon the hiring of a new Chief Executive Officer. These warrants were valued at the date of grant using the Black-Scholes model. The Board of Directors has not determined a timeline for the hiring of a new Chief Executive Officer.
Chad D. Olsen was appointed to be our Chief Financial Officer in January 2010. Previously, he served as our corporate controller beginning in September 2001. Additionally, he served as the Company’s corporate secretary from January 2010 to November 2011. From 1997 to 2001, Mr. Olsen worked at Kartchner and Purser, P.C., a certified public accounting firm in performing tax, auditing, and business advisory services. In 1996 while working at Fidelity Investments, Mr. Olsen held Series 6 and 63 licenses with the National Association of Securities Dealers (NASD), now known as Financial Industry Regulatory Authority (FINRA), registered to sell mutual funds, variable annuities and insurance premiums. Additionally, he worked with clients specializing in tax and investment strategies with high net-worth clients. From 1992 to 1996, Mr. Olsen worked in the banking industry with Universal Community Credit Union where he supervised member services employees. Mr. Olsen received a Bachelor of Science Degree in Accounting from Brigham Young University.
Item 11.
Item 11. Executive Compensation
Set out in the following summary compensation table are the particulars of compensation paid to the following persons for our fiscal years ended September 30, 2013 and 2012:
(a) our principal executive officer (note, we currently have no principal executive officer, rather the executive committee of the Board of Directors acts as our principal executive officer and compensation for the members of this committee is included in the Director Compensation table above); and
(b) our most highly compensated executive officer who was serving as an executive officer at the end of the fiscal year ended September 30, 2013 who had total compensation exceeding $100,000 (with the principal executive officer, the Named Executive Officers); and
(c) an additional individual for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer at the end of the most recently completed financial year.
(1)
Mr. Olsen has served as our Chief Financial Officer since January 2010. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller. Column (g) includes additional compensation for paid-time off, health, dental, life and vision insurance.
(2)
Mrs. Suckel has served as Managing Director of Global Customer Service and Account Management of the Company since June 2008. Column (g) includes additional compensation for health, dental, life and vision insurance.
Outstanding Equity Awards at Fiscal Year-End 2013
No options held by the Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2013.
Employment Agreements
Subsequent to the fiscal year ended September 30, 2013, we entered into an Employment Agreement with our Chief Financial Officer, filed as an exhibit to this report. The term of this agreement commenced on November 14, 2013 and continues until the earlier of (i) 30 days following the closing of an acquisition of or by the Company; or (ii) November 30, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment terminates as a result of an involuntary termination other than for cause or at the end of the term of the agreement, he will be entitled to receive separation benefits which include payment of salary of $192,000 paid over 120-day period and other benefits as outlined in the agreement.
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 2013 and that such filings were timely except the following:
·
Mr. Klinkhammer, a director, filed two late Form 4s reporting two transactions.
·
Mr. Schmitt, a director, filed two late Form 4s reporting two transactions.
·
Mr. Dubois, a director, filed two late Form 4s reporting two transactions.
·
Mr. Boone, a director, filed one late Form 4 reporting one transaction.
·
Mr. Mabey, a director, filed one late Form 4 reporting one transaction.
·
Mr. Kunz, a director, filed one late Form 4 reporting one transaction.
Compensation of Directors
The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2013:
Effective January 1, 2012, we accrued $2,500 per month for each director to be issued in shares of common stock valued on the last date of the quarter or the director may elect 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 $5,000 per month rather than $2,500. Mr. Dubois became a director in December 2012 and our Chairman on February 28, 2013.
The table below summarizes outstanding warrants previously issued to our current non-employee directors for compensation as of September 30, 2013:
Reimbursement of Expenses
We reimburse 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.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners
We have two classes of voting securities issued and outstanding: our common stock and our Series D Preferred. The following table presents information regarding beneficial ownership as of December 31, 2013 (the “Table Date”), of all classes of our voting securities by (1) each shareholder known to us to be the beneficial owner of more than five percent of any class of our voting securities; (2) each of our Named Executive Officers serving as of the Table Date; (3) each of our directors serving as of the Table Date; and (4) all of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and dispositive power with respect to all securities they beneficially own. As of the Table Date, the applicable percentage ownership is based on 9,811,946 shares of common stock issued and outstanding and 468 shares of Series D issued and outstanding, convertible into 24,503 shares of common stock. In computing the number of shares of common stock and Series D Preferred beneficially owned by a person and the applicable percentage ownership of that person, we deemed outstanding shares of common stock or Series D Preferred subject to warrants, options and convertible debt or other securities held by that person that are currently exercisable or exercisable within 60 days of the Table Date. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
Beneficial ownership representing less than one percent of the issued and outstanding shares of a class is denoted with an asterisk (“*”). Holders of common stock are entitled to one vote per share and holders of Series D are entitled to 30 votes per share and vote with the common stock shareholders on an as-converted basis.
1)
Except as otherwise indicated, the business address for these beneficial owners is c/o the Company, 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070.
2)
Address is Rooms 803-4, 8F, Hang Seng Bank Building, 200 Hennessy Road, Wanchai, Hong Kong. Based on a Form 4 filed by Sapinda Asia Limited on November 5, 2013.
3)
Includes 573,965 shares of common stock owned of record by Advance Technology Investors, LLC. In addition, we have included 7,323 shares of common stock owned of record by U/W Mark Weidman Trust. Address is 154 Rock Hill Road, Spring Valley, NY 10977.
4)
Mr. Boone is a director and a member of the Board of Directors’ executive committee. Includes 15,306 shares of common stock issuable upon exercise of stock purchase warrants.
5)
Mr. Dubois is a director and Chairman of the Board of Directors; he is also a member of the executive committee of the Board of Directors. Includes 73,413 shares of common stock issuable upon exercise of stock purchase warrants.
6)
Mr. Klinkhammer is a director. Includes 380 shares of common stock owned of record and 11,983 shares of common stock issuable upon exercise of stock purchase warrants.
7)
Mr. Kunz is a director. Includes 12,123 shares of common stock issuable upon exercise of stock purchase warrants.
8)
Mr. Mabey is a director. Includes 1,065 shares of common stock owned of record and 8,943 shares of common stock issuable upon exercise of stock purchase warrants.
9)
Mr. Schmitt is a director. Includes 6,783 shares of common stock owned of record and 12,123 shares of common stock issuable upon exercise of stock purchase warrants.
10)
Mr. Olsen is our Chief Financial Officer. Includes 4,914 shares or common stock owned of record, as well as 16,673 shares of common stock issuable upon conversion of 207 shares of Series D Preferred stock.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Transactions
We have entered into certain transactions with related parties during the fiscal year ended September 30, 2013. These transactions consist mainly of financing transactions and service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Royalty Agreement
On August 4, 2011, with an effective date of July 1, 2011, we entered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to purchase its wholly-owned subsidiary ISS for 310,000 shares of our common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,084,000. As additional consideration, we also granted Borinquen a royalty in the amount of 20 percent of our net revenues from the sale or lease of monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, payable quarterly for a term of 20 years.
On February 1, 2013, we entered into an agreement with Sapinda Asia and Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the repurchase of the royalty (at a cost of $11,616,984) and to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance this redemption, we borrowed $16,700,000 from Sapinda Asia (the “Loan”). We used $13,000,000 toward the redemption of the royalty and to pay off accrued royalty fees and used $3,700,000 of the Loan for operating capital. During the fiscal year ended September 30, 2013, a debt discount of $14,290,269 was recorded as interest expense to account for a beneficial conversion feature in connection with the Loan. Additionally, $611,308 of interest expense was recorded during the fiscal year ended 2013 to record accretion of a debt discount. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in connection with the Loan in the amount of $17,576,627 into 3,905,917 shares of common stock at a rate of $4.50 per share.
Revolving Loan Agreement
On February 1, 2013, we entered into a revolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, we may borrow up to $1,200,000 at an interest rate of three percent per annum for unused funds and 10 percent per annum for borrowed funds. As of September 30, 2013, no advances had been made under this loan and we had accrued $23,868 in interest liability on the Revolving Loan. On October 24, 2013 we drew down the full $1,200,000 for use in a performance bond as required under a contract with an international customer.
Related-Party Service Agreement
During the quarter ended September 30, 2013, we entered into an agreement with Paranet Solutions, LLC to provide the following services for a monthly fee of $4,500: (1) procurement of hardware and software necessary to ensure that vital databases are available to us in the event of a disaster (backup and disaster recovery system); and (2) the security of all data and the integrity of such data against all loss of data, including misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of our Executive Committee, is the Chief Executive Officer of Paranet. The arrangement can be terminated by either party for any reason upon 90 days written notice to the other party.
Related-Party Loan
During fiscal year 2012, we borrowed $500,000 from David Derrick, who was then an executive officer and director of the Company. During the fiscal year ended September 30, 2013, we established terms for this loan which created a debt discount of $500,000 which was immediately recorded as interest expense to account for a beneficial conversion feature to reflect an adjustment in the conversion rate from $11.00 to $4.50 to equal the conversion rate of the Loan to redeem the royalty. During fiscal year 2013, this debt was converted into 111,112 shares of common stock.
Related-Party Convertible Debenture #1
During fiscal year 2012, we borrowed $500,000 from George F. Schmitt, a director of the Company, with an interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 and secured by our domestic patents. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion feature expense of $110,556 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 117,784 shares of common stock.
Related-Party Convertible Debenture #2
During fiscal year 2012, we borrowed $2,000,000 from Sapinda Asia with an interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 and secured by our domestic patents. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion featureof $442,222 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 472,548 shares of common stock.
Facility Agreement
On January 3, 2014, we entered into a loan agreement (“Facility Agreement”) with Tetra-House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Republic of Singapore and is controlled by Mr. Guy Dubois who is a director and currently serves as the Chairman of our Board of Directors. Under this agreement, we may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8 percent per annum; interest is payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due and payable on January 3, 2016. We may prepay (in minimum amounts of $1,000,000) borrowed amounts without penalty. In consideration of the Facility Agreement, we agreed to pay Tetra House an arrangement fee in the amount of 3 percent of the aggregate maximum amount under the Facility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) is due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) is to be withheld from the first draw down of funds under the Facility Agreement. We may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House. Tetra House has 10 business days in which to fund the Utilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. As of January 14, 2014, we borrowed $10,000,000 under the Facility Agreement.
Additional Related Party Transactions and Summary of All Related-Party Obligations
Recent Transactions
We evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2013, the following events occurred:
·
We issued to directors for services rendered during the fourth fiscal quarter ended September 30, 2013, warrants to purchase 6,840 shares of common stock with an exercise price of $19.46 per share, valued at the date of grant at $53,091 using the Black-Scholes model.
·
We issued 483 shares of common stock as payment of fourth quarter Series D Preferred stock dividends, valued at $5,650.
·
We issued a total of 760 shares of common stock to several of our directors for services rendered, valued at $15,000.
·
We issued 500 shares of common stock to a consultant upon the exercise of warrants at an exercise price of $16.00 per share and received cash proceeds of $8,000.
·
We issued 4,700 shares of common stock to an officer upon the cashless exercise of warrants with exercise prices ranging from $15.00 to $16.66 per share.
·
We entered into an Employment Agreement with our Chief Financial Officer, filed as an exhibit to this report. The term of this agreement commenced on November 14, 2013 and continues until the earlier of (i) 30 days following the closing of an acquisition of or by us; or (ii) November 13, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment terminates as a result of an involuntary termination other than for cause or at the end of the term of the agreement, he will be entitled to receive separation benefits which include payment of salary of $192,000 paid over a 120-day period and other benefits as outlined in the agreement. In addition, we agreed with Mr. Olsen that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting.
·
On November 15, 2013, we entered into a 41-month agreement with the Gendarmeria de Chile (the Republic of Chile’s uniformed prison service) to provide electronic (GPS and residential) monitoring of offenders and other services to the Chilean government. The agreement calls for us to put into service up to 9,400 electronic monitoring (GPS) devices over the contract term. We were required under the agreement, to post a performance bond in the amount of $3,382,082. In addition, we will design and construct a real-time monitoring and data center to be staffed by Chilean government employees. Training from the monitoring center personnel will also be provided by us. The maximum sum to be paid for the services provided by us is approximately $70,000,000, at current exchange rates, over the term of the agreement.
·
We borrowed $1,200,000 under a line-of-credit with a related party to be used with other available cash on hand to post the performance bond under our agreement for the Chilean contract described above.
·
We borrowed $1,500,000 from Sapinda Asia, a shareholder, for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014.
·
On December 17, 2013, we filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between us and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. We believe the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously.
·
On December 17, 2013, we entered into a non-binding letter of intent to acquire all of the issued and outstanding stock of GPS Global, an Israeli corporation located in Tel Aviv. The parties are currently negotiating a definitive agreement for the stock purchase; compensation for the stock will be a combination of cash and our common stock. It is the intent of the parties to close the transaction as soon as possible.
·
On January 3, 2014, we entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by our Chairman, Guy Dubois. Under this agreement, we may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8% per annum due and payable in arrears semi-annually, with a maturity date for all principal and unpaid interest of January 3, 2016. In addition, we agreed to pay an arrangement fee equal to 3 percent of the aggregate maximum amount under the loan. As of the date of this report, we borrowed and received $10,000,000 from the Facility Agreement.
Director Independence
The Board of Directors intends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15). The Board determined based on the NASDAQ standards that George F. Schmitt, Winfried Kunz, David S. Boone, Rene Klinkhammer, and Dan L. Mabey meet the NASDAQ standards to be considered independent. The Board has not appointed a lead independent director.
Specifically, none of these directors:
•
has been at any time during the past three years employed by us or by any parent or subsidiary of the Company;
•
has accepted or has a family member who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service;
•
is a family member of an individual who is, or at any time during the past three years was, employed by us as an executive officer;
•
is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5 percent of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more;
•
is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of our executive officers serve on the compensation committee of such other entity; or
•
is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years.
Item 14.
Item 14. Principal Accounting Fees and Services
Audit Fees
Audit services consist of the audit of the annual consolidated financial statements of us, and other services related to filings and registration statements filed by us and our subsidiaries and other pertinent matters. Audit fees paid to Hansen Barnett & Maxwell, P.C. (“HBM”) for fiscal years 2013 and 2012 totaled approximately $49,750 and $147,000, respectively. HBM resigned as our independent registered public accounting firm on September 23, 2013. We appointed Eide Bailly as our independent registered public accounting firm on September 24, 2013. We paid Eide Bailly $50,000 for audit services for the year ended September 30, 2013.
Tax Fees, Audit Related Fees, and All Other Fees
HBM provided tax services to us in fiscal years 2013 and 2012. Tax fees paid for fiscal years 2013 and 2012 totaled approximately $16,750 and $14,000, respectively. The Audit Committee of the Board of Directors considered and authorized all services provided by HBM. No tax services were provided to us during the fiscal years ended September 30, 2013 or 2012 by Eide Bailly. The Company paid Eide Bailly $9,064 in audit related fees for the year ended September 30, 2013.
Auditor Independence
Our Audit Committee considered that the work done for us in fiscal year 2013 by HBM and by Eide Bailly was compatible with maintaining the independence of each of those firms.
Report of the Audit Committee
To the Board of Directors:
The Audit Committee reviewed and discussed SecureAlert, Inc.’s audited financial statements for the fiscal year ended September 30, 2013 with our management. The Audit Committee discussed with Eide Bailly, LLP, our independent public accounting firm for the fiscal year ended September 30, 2013, the matters required to be discussed under applicable PCAOB standards. The Audit Committee also received the written communication from Eide Bailly, LLP required by PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed the independence of Eide Bailly, LLP with them.
Based on the Audit Committee’s review and discussions noted above, the Audit Committee recommended to our Board of Directors that the Company’s audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
Respectfully submitted:
THE AUDIT COMMITTEE
David S. Boone, Chair
George F. Schmitt
Winfried Kunz
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements
2. Financial Statement Schedules. [Included in the Consolidated Financial Statements or Notes thereto.]
3. Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SecureAlert, Inc.
By: /s/Guy Dubois
Guy Dubois, Member Executive Committee
(Acting Principal Executive Officer)
Date: January 14, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Guy Dubois
Director, Member of Executive Committee
January 14, 2014
Guy Dubois
(Acting Principal Executive Officer)
/s/ Chad D. Olsen
Chief Financial Officer and (Principal Financial
January 14, 2014
Chad D. Olsen
Officer and Principal Accounting Officer)
/s/ David S. Boone
Director, Member of Executive Committee
January 14, 2014
David S. Boone
/s/ Winfried Kunz
Director
January 14, 2014
Winfried Kunz
/s/ Rene Klinkhammer
Director
January 14, 2014
Rene Klinkhammer
/s/ Dan L. Mabey
Director
January 14, 2014
Dan L. Mabey
/s/ George F. Schmitt
Director
January 14, 2014
George F. Schmitt
SecureAlert, Inc.
Consolidated Financial Statements
September 30, 2013 and 2012
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of SecureAlert, Inc.
We have audited the accompanying consolidated balance sheet of SecureAlert, Inc. and Subsidiaries (collectively the Company) as of September 30, 2013 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2013 and the consolidated results of its operations, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Eide Bailly LLP
Salt Lake City, Utah
January 14, 2014
5 Triad Center, Ste. 750 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE
www.eidebailly.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of SecureAlert, Inc.
We have audited the accompanying consolidated balance sheets of SecureAlert, Inc. and Subsidiaries (collectively the Company) as of September 30, 2012 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2012, and the consolidated results of its operations, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements (not presented herein), the Company has incurred losses, negative cash flows from operating activities, notes payable in default and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1 (not presented herein). The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
January 10, 2013
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2013 AND 2012
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2013 AND 2012
See accompanying notes to consolidated financial statements.
SECUREALERT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012 AND 2013
See accompanying notes to consolidated financial statements.
SECUREALERT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012 AND 2013
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2013 AND 2012
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2013 AND 2012
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Organization and Nature of Operations
General
SecureAlert, Inc. and subsidiaries (collectively, the “Company”) markets, monitors and leases ReliAlert™ devices. ReliAlert™ devices are used to monitor convicted offenders that are on probation or parole in the criminal justice system or pretrial defendants. ReliAlert™ devices utilize GPS, radio frequencies, and cellular technologies in conjunction with a monitoring center that is staffed 24/7 and 365 days a year. The Company believes that its technologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. ReliAlert™ devices are targeted to meet the needs of this market domestically as well as internationally.
Going Concern
The Company has had a history of recurring net losses and a significant accumulated deficit. For the fiscal year ended September 30, 2012, the Company did not have enough cash on hand to meet its current liabilities. As a result, the report from the independent registered public accounting firm for fiscal year 2012 included an explanatory paragraph in respect to the substantial doubt of the Company’s ability to continue as a going concern. The financial statements for fiscal year 2012 and for prior periods did not include any adjustments that might result from the outcome of that uncertainty. The Company’s plan for continuing as a going concern included obtaining the necessary funding to meet its projected capital investment requirements and operating needs.
Subsequent to September 30, 2013, the Company entered into a Facility Agreement, whereby the Company may borrow up to $25,000,000 for working capital and acquisitions purposes (see Note 5). As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement which its Board of Directors and management believes provides the Company sufficient working capital and enough cash on hand to satisfy its current obligations.
(2)
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SecureAlert, Inc. and its subsidiaries, SecureAlert Monitoring, Inc., International Surveillance Services Corp, and SecureAlert Chile SpA (collectively, the “Company”). Additionally, during the fiscal year ended September 30, 2013, the Company sold Midwest Monitoring & Surveillance, Inc. and Court Programs, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Statements
The carrying amounts reported in the accompanying consolidated financial statements for accrued liabilities and 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:
No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2013 or 2012. Customer A which attributed $5,252,959 (34 percent) derived from a contract that completed during the fiscal year ended 2013 and it is uncertain if the Company will provide services to this customer in the future. Customer B which attributed $1,622,326 (10%) derived from a three-year contract which completed in November 2013 and has continued under a month-to-month contract. This contract could be terminated at anytime with a 30-day notice.
Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, are shown in the table below:
Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts receivable. Subsequent to the fiscal year ended September 30, 2013, the Company received $387,483 from Customer A and $518,137 from Customer B for a total of $905,620.
Cash Equivalents
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company has cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had $3,128,187 and $350,716 of cash deposits in excess of federally insured limits as of September 30, 2013 and 2012, respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The allowance is estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within its normal terms. Interest income is not recorded on trade receivables that are past due, unless that interest is collected.
Note Receivable
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but had entered into an agreement with one of its customers during the fiscal year ended September 30, 2012. Payments are under the note are recorded as they are received and are immediately offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective note. The note requires monthly payments of $15,000 and matures in May 2014. The note is currently in default and accrues interest at a rate of 17% per annum. As of September 30, 2013, the outstanding balance of the note was $199,682 and $5,022 of accrued interest.
Prepaid and Other Expenses
The carrying amounts reported in the balance sheets for prepaid and other expenses approximate their fair market value based on the short-term maturity of these instruments. As of September 30, 2013 and 2012, the outstanding balance of prepaid and other expenses was $1,783,805 and $1,760,579, respectively. Of the $1,783,805, was a bond posted for an international customer in the amount of $1,488,778, which the Company believes will be returned to the Company by March 31, 2014.
Inventory
Inventory is valued at the lower of the cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is determined based on the estimated net realizable value, which generally is the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. The Company impaired its inventory by $1,555 and $359,734 during the fiscal years ended September 30, 2013 and 2012, respectively.
Inventory consists of raw materials that are used in the manufacturing of ReliAlert™ devices. Completed ReliAlert™ devices are reflected in Monitoring Equipment. As of September 30, 2013 and 2012, respectively, inventory consisted of the following:
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 life of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized.
Property and equipment consisted of the following as of September 30, 2013 and 2012, respectively:
Property and equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are included in the results of operations. During the fiscal years ended September 30, 2013 and 2012, the Company disposed of net property and equipment of $4,740 and $5,374, respectively.
Depreciation expense for the fiscal years ended September 30, 2013 and 2012 was $231,853 and $281,791, respectively.
Monitoring Equipment
The Company began leasing monitoring equipment to agencies for offender tracking in April 2006 under operating lease arrangements. The monitoring equipment is depreciated using the straight-line method over an estimated useful life of 3 years. Monitoring equipment as of September 30, 2013 and 2012 is as follows:
Amortization expense for the fiscal years ended September 30, 2013 and 2012, was $1,230,293 and $1,231,773, respectively. These expenses were classified as a cost of revenues.
Monitoring equipment to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the fiscal years ended September 30, 2013 and 2012, the Company disposed and impaired lease monitoring equipment and parts of $296,526 and $1,837,664, respectively. These impairment costs were included in cost of revenues.
Impairment of Long-Lived Assets and Goodwill
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. The Company uses an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair market value that is independent of other groups of assets. In reviewing historical financial performance and participating in selling Court Programs, Inc. and Midwest Monitoring & Surveillance, Inc., the Company recorded an impairment expense.
The following summarizes the changes in goodwill during the fiscal years ended September 30, 2013 and 2012:
Revenue Recognition
The Company’s revenue has historically been from two sources: (i) monitoring services; and (ii) product sales.
Monitoring Services
Monitoring services include two components: (a) lease contracts in which the Company provides monitoring services and leases devices to distributors or end users and the Company retains ownership of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use the Company’s monitoring services.
The Company typically leases its devices under one-year contracts with customers that opt to use the Company’s monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under the Company’s standard leasing contract, the leased device becomes billable on the date of activation or 7 to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned to the Company. The Company recognizes revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
Product Sales
The Company may sell its monitoring devices in certain situations to its customers. In addition, the Company may sell equipment in connection with the building out and setting up a monitoring center on behalf of its customers. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL® 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. However, on occasion, the Company enters 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 the Company's services. For revenue arrangements that have multiple elements, the Company considers 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, the Company recognizes 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
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. The Company sells its devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
Geographical Information
The Company recognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for the fiscal years ended September 30, 2013 and 2012, are as follows:
The long-lived assets, net of accumulated depreciation and amortization, used in the generation of revenues by geographic area as of September 30, 2013 and 2012, were as follows:
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 2013 and 2012 were for the development of the Company’s ReliAlert™ device and associated services. For the fiscal years ended September 30, 2013 and 2012, research and development expenses were $987,934 and $1,248,654, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2013 and 2012, was $30,782 and $29,141, respectively.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The Company estimates the fair value of stock options using a Black-Scholes option pricing model which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.
The tax effects from uncertain tax positions can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements.
The Company’s policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense. As of September 30, 2013 and September 30, 2012, the Company did not record a liability for uncertain tax positions.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, and shares issuable upon conversion of preferred stock. As of September 30, 2013 and 2012, there were 604,006 and 2,825,171 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive. The common stock equivalents outstanding as of September 30, 2013 and 2012, consisted of the following:
Recent Accounting Pronouncements
In 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 a loss or other carryforward that would apply in settlement of the uncertain tax positions. ASU 2013-11 will be effective for us beginning in the first quarter of fiscal 2014. Early adoption is permitted. Since ASU 2013-11 only impacts financial statement disclosure requirements for unrecognized tax benefits, the Company does not expect the adoption of the guidance to have a material impact on the Company's consolidated financial statements.
(3)
Acquisitions and Other Intangible Assets
The following table summarizes the activity of intangible assets for the fiscal year ended September 30, 2013:
The following table summarizes the activity of intangible assets for the fiscal year ended September 30, 2012:
The following table summarizes the future maturities of amortization of intangible assets as of September 30, 2013:
Borinquen Container Corporation
On September 5, 2012, the Company entered into an agreement to redeem the royalty held by Borinquen pursuant to a royalty agreement dated July 1, 2011, as amended. Under the terms of the royalty, Borinquen had the right to receive 20 percent of net revenues derived within certain geographic territories.
As of September 30, 2012, the agreement to redeem the royalty had not yet been completed and as a result the Company capitalized $10,768,555 as a non-current asset and recorded a loan payable to Borinquen to reflect the obligation. On February 1, 2013, the Company completed the redemption of the royalty with Borinquen which was funded under a Loan and Security Agreement (“Loan”) from Sapinda Asia Limited (“Sapinda Asia”), see Note 5. The Company capitalized the total cost of the royalty purchase commitment of $11,616,984, as a non-current asset and will amortize the asset over the remaining term of the royalty agreement, subject to periodic analysis for impairment based on future expected revenues. The Company will annually calculate the amortization based on the effective royalty rate and on the revenues in the geographic territory subject to the royalty. The Company’s analysis will be based on such factors as historical revenue and expected revenue growth in the territory.
During the fiscal years ended 2013 and 2012, the Company recorded $673,374 and $0 of amortization expense for the intangible asset, resulting in a total accumulated amortization of $673,374 and $0, and net intangible assets of $10,943,610, and $10,768,555, respectively.
International Surveillance Services Corp.
Effective July 1, 2011, the Company entered into a stock purchase agreement and purchased ISS, a Puerto Rico corporation, in consideration of 310,000 shares of its common stock, valued at $5,084,000 of which $5,003,583 was recorded as a royalty intangible asset. ISS is an international distributor of electronic monitoring devices to individuals on parole or probation. The Company acquired ISS to utilize the knowledge and connections the company has in Central and South America and to acquire the rights to its territorial commissions that were being paid to ISS.
The Company recorded $250,179 and $250,179 of amortization expense on intangible assets for ISS during the fiscal year ended September 30, 2013 and 2012, resulting in a total accumulated amortization of $562,903 and $312,724, and net intangible assets of $4,440,680 and $4,690,859, respectively.
Patent
On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to Company a non-exclusive license under U.S. Patent No. 6,405,213 and any and all patents issuing from continuation, continuation-in-part, divisional, reexamination and reissues thereof and along with all foreign counterparts, to make, have made, use, sell, offer to sell and import covered products in SecureAlert’s present and future business. The license granted will continue for so long as any of the licensed patents have enforceable rights. The license granted is not assignable or transferable except for sublicenses within the scope of its license to the Company’s subsidiaries. The Company paid $50,000 as consideration for the use of this patent.
During the fiscal years ended 2013 and 2012, the Company recorded $5,554 and $5,557 of amortization expense for the patent, resulting in a total accumulated amortization of $20,370 and $14,816, and net intangible assets of $29,630 and $35,184, respectively.
(4)
Accrued Expenses
Accrued expenses consisted of the following as of September 30, 2013 and 2012:
(5)
Certain Relationships and Related Transactions
The Company entered into certain transactions with related parties during the fiscal years ended September 30, 2013 and 2012. These transactions consist mainly of financing transactions and service agreements. Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
Royalty Agreement
On August 4, 2011, with an effective date of July 1, 2011, the Company entered into an agreement (the “Royalty Agreement”) with Borinquen (a shareholder) to purchase its wholly-owned subsidiary ISS for 310,000 shares of the Company’s common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or $5,003,583. As additional consideration, the Company also granted Borinquen a royalty in the amount of 20% of net revenues from the sale or lease of monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. The royalty payments were due quarterly through June 30, 2031.
On February 1, 2013, the Company entered into an agreement with Sapinda Asia and Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the repurchase of the royalty (at a cost of $11,616,984) and to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance this redemption, the Company borrowed $16,700,000 in connection with the Loan from Sapinda Asia. The Company used $13,000,000 toward the redemption of the royalty and to pay off accrued royalty fees and used $3,700,000 of the loan for operating capital. During the fiscal year ended September 30, 2013, the Company recorded a debt discount of $14,296,296 which was recorded as interest expense to account for a beneficial conversion feature in connection with the Loan. Additionally, $605,281 of interest expense was recorded during the fiscal year ended 2013 to record accretion of debt discount. On September 30, 2013, Sapinda Asia converted all outstanding principal and interest in connection with the Loan in the amount of $17,576,627 into 3,905,917 shares of common stock at a rate of $4.50 per share.
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. 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 international customer.
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: (1) 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 (2) providing the security of all data and the integrity of such data against all loss of data, misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of the Company’s Executive Committee, is the Chief Executive Officer of Paranet.
As consideration for these services, the Company agreed to pay Paranet $4,500 per month. The arrangement can be terminated by either party for any reason upon ninety (90) days written notice to the other party.
Related-Party Loan
During the fiscal year ended 2012, the Company borrowed $500,000 from a former officer. During the fiscal year ended September 30, 2013, the Company established terms for this loan which created a debt discount of $500,000 which was immediately recorded as interest expense to account for a beneficial conversion feature to reflect an adjustment in the conversion rate from $11.00 to $4.50 to equal the conversion rate of the Loan to redeem the royalty. During fiscal year 2013, this debt was converted into 111,112 shares of common stock.
Related-Party Convertible Debenture #1
During the fiscal year ended 2012, the Company borrowed $500,000 from a director with an interest rate of 8% per annum. The debenture was to mature on December 17, 2012 and secured by the domestic patents of the Company. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion 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 borrowed $2,000,000 from a significant shareholder with an interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 and secured by the domestic patents of the Company. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion feature discount of $442,222, which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 472,548 shares of common stock.
Facility Agreement
On January 3, 2014, the Company entered into a loan agreement (“Facility Agreement”) with Tetra House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company for acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Republic of Singapore and is controlled by Mr. Guy Dubois who is a director and currently serves as the Chairman of the Company’s Board of Directors. .Under this agreement, the Company may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8% per annum and interest is payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due and payable on January 3, 2016. The Company may prepay (in minimum amounts of $1,000,000) borrowed amounts without penalty. In consideration of the Facility Agreement, the Company agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the Facility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) being withheld from the first draw down of funds under the Facility Agreement. The Company may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House. Tetra House has 10 business days in which to fund the Utilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the Board of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and George F. Schmitt. As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement.
Additional Related-Party Transactions and Summary of All Related-Party Obligations
(6) Debt Obligations
Debt obligations as of September 30, 2013 and 2012, consisted of the following:
The following table summarizes the Company’s future maturities of debt obligations as of September 30, 2013:
The following table summarizes the Company’s capital lease obligations included in the schedules of debt and debt obligations above as of September 30, 2013:
As of September 30, 2013 and 2012, the Company had total capital lease obligations of $59,266 and $272,508, the current portion being $31,576 and $131,072, respectively. Capital leases are secured by assets with a total original cost of $105,162 and $234,659 with related accumulated depreciation of $40,932 and $83,577 as of September 30, 2013 and 2012, respectively.
(7) Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's Board of Directors has the authority to amend the Company's Articles of Incorporation, without further shareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series D Convertible Preferred Stock
In July 2011, the Company amended its Articles of Incorporation and increased the total designated shares of Series D Preferred stock from 70,000 to 85,000 shares (“Series D Preferred stock”). During the fiscal years ended September 30, 2013 and 2012, the Company issued 0 and 4,008 shares of Series D Preferred stock under securities purchase agreements for $0 and $2,004,000 in net cash proceeds, respectively.
As of September 30, 2013 and 2012, there were 468 and 48,763 Series D Preferred shares outstanding, respectively.
Dividends
The Series D Preferred stock is entitled to dividends at the rate equal to 8 percent per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be). Dividends are payable quarterly, no later than 30 days following the end of the accrual period.
During the fiscal year ended September 30, 2013, the Company issued 181,832 shares of common stock to pay $1,663,997 of accrued dividends on the Series D Preferred stock earned for the twelve months between July 1, 2012 and June 30, 2013. Subsequent to September 30, 2013, the Company issued 483 shares of common stock to pay $5,650 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2013.
During the fiscal year ended September 30, 2012, the Company issued 210,689 shares of common stock to pay $2,391,568 of accrued dividends on the Series D Preferred stock earned for the twelve months between July 1, 2011 and June 30, 2012. Subsequent to September 30, 2012, the Company issued 103,803 shares of common stock to pay $630,528 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2012.
Convertibility
Each share of Series D Preferred stock may be converted into 30 shares of common stock, commencing after ninety days from the date of issue.
In February 2013, and as a condition to a loan agreement, the Company conducted an exchange offer (“Exchange Offer”) of Series D Preferred stock in order to simplify the capitalization structure. The Exchange Offer was conditioned upon at least 90 percent of the cumulative original issue price paid for all of the issued and outstanding shares of Series D Preferred stock. The shareholders were entitled to exchange their shares of Series D Preferred at a premium over the current conversion rate of 30 shares of common stock per Series D Preferred share as follows: 15 shares for each $1,000 of original price paid, 10 shares for each $676 of original price paid, and 8 shares for each $500 of original price paid. During the fiscal year ended September 30, 2013 and under the Exchange Offer, 48,295 shares of Series D Preferred stock converted into 1,894,283 shares of common stock.
During the fiscal year ended September 30, 2012, 90 shares of Series D Preferred stock were converted into 2,700 shares of common stock.
Subsequent to the fiscal year ended September 30, 2013, the Company entered into an Employment Agreement with its Chief Financial Officer. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company.
Voting Rights and Liquidation Preference
The holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. As of September 30, 2013 and 2012, there were 468 and 48,763 shares of Series D Preferred stock outstanding, respectively. Additionally, the holders are entitled to a liquidation preference equal to their original investment amount.
In the event of the liquidation, dissolution or winding up of the affairs of the Company (including in connection with a permitted sale of all or substantially all of the Company’s assets), whether voluntary or involuntary, the holders of shares of Series D Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its shareholders, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.
Series D Preferred Stock Warrants
As of September 30, 2012, 5,400 warrants to purchase Series D Preferred stock at an exercise price of $500 per share were issued and outstanding. During the fiscal year ended September 30, 2013, no Series D Preferred stock warrants were issued or exercised.
(8)
Common Stock
Authorized Shares
The Company held 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 shares of 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, 2013, the Company issued 6,709,021 shares of common stock. Of these shares, 1,894,283 shares were issued upon conversion of 48,295 shares of Series D Preferred stock; 21,884 shares were issued for services rendered to the Company valued at $141,758; 4,607,361 shares were issued in connection with debt and accrued interest of $20,733,118; 181,832 shares were issued to pay dividends from Series D Preferred stock of $1,663,997; and 3,661 shares were issued to pay Board of Director fees of $47,500.
During the fiscal year ended September 30, 2012, the Company issued 578,524 shares of common stock. Of these shares, 2,700 shares were issued upon conversion of 90 shares of Series D Preferred stock; 71,969 shares were issued as part of a royalty agreement, valued at $819,972; 4,315 shares were issued for services rendered to the Company valued at $40,000; 8,449 shares were issued in connection with debt and accrued interest of $118,280; 210,689 shares were issued to pay dividends from Series D Preferred stock of $2,391,568; 121,700 shares were issued to employees for compensation of $732,634; 3,000 shares were issued to pay Board of Director fees of $48,060 and 155,703 shares were issued for $1,033,000 in cash proceeds.
(9)
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”), which had previously been adopted by the Board of Directors of the Company. The 2012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who have important relationships with the Company. A total of 90,000 shares are authorized for issuance pursuant to awards granted under the 2012 Plan. During the fiscal years ended September 30, 2013 and 2012, 0 and 30,000 options were issued under this 2012 Plan, respectively. As of September 30, 2013, 60,000 shares of common stock were available for future grants under the 2012 Plan.
Re-pricing of Warrants
During the fiscal year ended September 30, 2013, the Company did not re-price any previously issued warrants.
During the fiscal year ended September 30, 2012, the Company re-priced 24,465 previously issued warrants in connection with debt financing agreements with original exercise prices ranging from $20 to $60, revising the exercise price to $15, resulting in additional interest expense of $39,965. Of the 24,465 warrants re-priced, 21,055 warrants were in connection with related-party transactions.
All Options and Warrants
During the fiscal year ended September 30, 2013, the Company 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 Board of Directors will be recognized over the next year.
During the fiscal year ended September 30, 2012, the Company granted options and warrants to purchase 54,500 shares of common stock as follows: 18,500 to members of the Board of Directors, valued at $105,041; 30,000 to settle a lawsuit, valued at $253,046; and 6,000 warrants to a consultant, valued at $33,358. The vesting periods for these options and warrants ranged from three to five years. Additionally during the fiscal year ended 2012, the Company cancelled 182,500 of unvested warrants held by executives of the Company and issued 121,700 shares of common stock and accelerated the vesting of 57,500 of warrants for services rendered. The modification of the equity awards resulted in $2,130,694 of compensation expense which includes the immediate recognition of the unamortized portion of the cancelled unvested warrants.
The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2013 and 2012 using the Black-Scholes model, respectively:
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected life of stock options and warrants represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. In fiscal year 2013, the Company changed from a daily to weekly volatility. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options and warrants. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock option and warrants.
A summary of the compensation-based options and warrants activity for the fiscal years ended September 30, 2013 and 2012 is presented below:
The fiscal year end intrinsic values are based on a September 30, 2013 closing price of $19.46 per share.
(10) Income Taxes
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the fiscal years ended September 30, 2013 and 2012, the Company incurred net losses for income tax purposes of $3,427,372 and $8,693,769, respectively. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
At September 30, 2013, the Company had net carryforwards available to offset future taxable income of approximately $179,000,000 which will begin to expire in 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. As 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 permitted to offset future taxable income. Of our federal NOL amount as of September 30, 2013, approximately $79,000,000 is subject to an annual Section 382 limitation of approximately $6,200,000 per year due to the ownership change. Since the Company maintains a full valuation allowance on all of its U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of its U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the year ended September 30, 2013, or on the Company’s net deferred tax asset as of September 30, 2013.
The deferred income tax assets (liabilities) were comprised of the following for the periods indicated:
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the years ended September 30, 2013 and 2012 are as follows:
During the fiscal year ended September 30, 2013, the Company began recognizing revenues from international sources from its products and monitoring services. During the fiscal year ended September 30, 2013, the Company accrued $76,732 in value-added taxes which will be due upon collection.
The Company’s open tax years for its federal and state income tax returns are for the tax years ended September 30, 2010 through September 30, 2013.
(11) 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 with the Company. The complaint was subsequently withdrawn by the plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. The Company believes these allegations are inaccurate and intend to defend the case vigorously. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. The Company intends to defend this matter. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming the Company breached a contract for computer services and intentionally interfered with its economic relations. The Company believes the allegations are inaccurate and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against the Company in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that the Company breached a 2006 consulting agreement with him and claims damages of not less than $210,000. The Company disputes plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously.
Operating Lease Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2013:
The total operating lease obligations of $272,301 consist of the following: $272,301 from facilities operating leases and $0 from equipment leases. During the fiscal years ended September 30, 2013 and 2012, the Company paid approximately $350,073 and $383,187, in lease payment obligations, respectively.
Intellectual Property Settlement
In January 2010, the Company entered into an intellectual property settlement agreement with an entity whereby the Company agreed to begin paying the greater of a 6% royalty or $0.35 per activated device of monitoring revenues, subject to certain adjustments. The Company and other party disagree with the methodology used to calculate such royalty, litigation was filed by the Company in December 2013 to resolve the matter.
Indemnification Agreements
The Company’s Bylaws require the Company to indemnify any individual who is made a party to a proceeding because the individual is or was a director or officer of the Company against any liability or expense incurred in connection with such proceeding to the extent allowed under the Utah Revised Business Corporation Act (the “UBCA”), if the Company has properly authorized indemnification under Section 16.10a-906 of the UBCA. Section 16-10a-906(2) of the UBCA requires that the Company determine, before granting indemnification, that: (i) the individual’s conduct was in good faith; (ii) the individual reasonably believed that the individual’s conduct was in, or not opposed to, the Company’s best interests; and (iii) in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual’s conduct was unlawful. The foregoing description is necessarily general and does not describe all details regarding the indemnification of officers and directors of the Company.
International Importation Audit
During the fiscal year ended September 30, 2013, the Company was notified that several international importation documents were selected to be audited by a taxing authority. The Company resubmitted documentation to comply with the country’s requirements; and as of the date of this Report, the audit results and potential penalties are uncertain.
(12) Discontinued Operations
SecureAlert entered into a Stock Purchase Agreement with certain of the former principals of its wholly-owned subsidiary, Midwest Monitoring & Surveillance, Inc. (“Midwest”) whereby they purchased from the Company all of the issued and outstanding capital stock of Midwest. The agreement was effective as of October 1, 2012. Additionally, the Company entered into a Stock Purchase Agreement to sell to a former principal all of the issued and outstanding stock of Court Programs Inc. (“Court Programs”), effective January 1, 2013. Midwest and Court Programs were components of the Company’s consolidated entity, and as a result of the sale of these entities, these financial statements include the applicable discontinued operations reporting treatment.
The following is a summary of the assets and liabilities of Midwest and Court Programs reported as discontinued operations for the fiscal years ended September 30, 2013 and 2012, respectively:
The following is a summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012:
(13) Subsequent Events
The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2013, the following events occurred:
1)
The Company issued to directors for services rendered during the fourth fiscal quarter ended September 30, 2013, warrants to purchase 6,840 shares of Common Stock with an exercise price of $19.46 per share, valued at the date of grant at $53,091 using the Black-Scholes model.
2)
The Company issued 483 shares of common stock for fourth quarter Series D Preferred stock dividends, valued at $5,650.
3)
The Company issued 760 shares of common stock to several directors for services rendered, valued at $15,000.
4)
The Company issued 500 shares of common stock to a consultant from the exercise of warrants with an exercise price of $16.00 per share which provided cash proceeds to the Company of $8,000.
5)
The Company issued 4,700 shares of common stock to an officer upon the cashless exercise of warrants with exercise prices ranging from $15.00 to $16.66 per share.
6)
The Company entered into an Employment Agreement with its Chief Financial Officer. The term of this agreement commenced on November 14, 2013 and continues until the earlier of (i) 30 days following the closing of an acquisition of or by the Company; or (ii) November 13, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment terminates as a result of an involuntary termination other than for cause or at the end of the term of the agreement, he will be entitled to receive separation benefits which include payment of salary of $192,000 paid over a 120-day period and other benefits as outlined in the agreement. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company.
7)
On November 15, 2013, the Company entered into a 41-month agreement with the Gendarmeria de Chile (the Republic of Chile’s uniformed prison service) to provide electronic (GPS and residential) monitoring of offenders and other services to the Chilean government. The agreement calls for the Company to put into service up to 9,400 electronic monitoring (GPS) devices over the contract. The Company was required under the agreement, to post a performance bond in the amount of $3,382,082 U.S. Dollars. In addition, the Company will design and construct a real-time monitoring and data center to be staffed by Chilean government employees. Training from the monitoring center personnel will also be provided by the Company. The maximum sum to be paid for the services provided by the Company is approximately $70,000,000 U.S. Dollars, at current exchange rates, over the term of the agreement.
8)
The Company drew down an advance of $1,200,000 from a line-of-credit to be used with other available cash on hand to issue a bond for an international customer in the amount of $3,382,082.
9)
The Company borrowed $1,500,000 from a shareholder for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014.
10)
On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously.
11)
On December 17, 2013, the Company entered into a non-binding letter of intent to acquire all of the issued and outstanding stock of GPS Global, an Israeli corporation located in Tel Aviv. The parties are currently negotiating a definitive agreement for the stock purchase; compensation for the stock will be a combination of cash and our common stock. It is the intent of the parties to close the transaction as soon as possible.
12)
On January 3, 2014, the Company entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by the Company’s Chairman, Guy Dubois. Under this agreement, the Company may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on January 3, 2016. In addition, the Company agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the loan. As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement.