10-K 1 securealert10k.htm SECURE ALERT, INC. 10K 2012--09-30 securealert10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               For the fiscal year ended September 30, 2012
or
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               For the transition period from   ___________________   to  __________________                         
 
Commission file number: 0-23153

SECUREALERT, INC.
(Exact name of registrant as specified in its charter)
Utah
 
87-0543981
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

150 West Civic Center Drive, Suite 100, Sandy, Utah 84070
(Address of principal executive offices, Zip Code)
 
(801) 451-6141
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No x 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  
 
Accelerated filer o   
 
Non-accelerated filer o  
 
Smaller reporting company x   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o      No x 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $21,793,000 as of March 30, 2012 based upon the closing price on the Over-the-Counter Bulletin Board Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.  There were 529,730,666 shares of the registrant’s common stock outstanding as of March 31, 2012.  In addition, the registrant also had issued and outstanding at March 31, 2012, 48,783 shares of Series D Convertible Preferred Stock, each share of which may be voted on an as-converted basis with the common stock of the registrant at the rate of 6,000 shares of common stock per share, and which represented 292,698,000 common share equivalents as of such date.

As of December 28, 2012, the registrant had outstanding 640,088,850 shares of common stock and 48,763 shares of Series D Convertible Preferred Stock, convertible into 292,578,000 shares of common stock, which may be voted on an as-converted basis with the registrant’s common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE:  NONE

 
 

 
 
SecureAlert, Inc.
                   
FORM 10-K
                   
For the Fiscal Year Ended September 30, 2012
                   
INDEX
                   
                 
 Page
PART I
                   
Item 1
 
Business
 
             2
Item 1A
 
Risk Factors
 
           10
Item 2
 
Properties
 
           14
Item 3
 
Legal Proceedings
 
           14
Item 4
 
Mine Safety Disclosures [Not Applicable]
       
           14
                   
PART II
 
   
Item 5  
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
           15
Item 7
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
    17
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
 
           22
Item 8
 
Financial Statements and Supplementary Data
 
           22
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    22
Item 9A
 
Controls and Procedures
 
           23
Item 9B
 
Other Information
 
           23
                   
PART III
Item 10
 
Directors, Executive Officers and Corporate Governance
           24
Item 11
 
Executive Compensation
 
           27
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    30
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
 
           32
Item 14
 
Principal Accounting Fees and Services
 
           34
                   
PART IV
Item 15
 
Exhibits and Financial Statement Schedules
           35
                   
Signatures
 
           38
 
 
1

 

PART I
 
Item 1.    Business
 
This Report on Form 10-K contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended (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,” “project,”  “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 have an impact upon their accuracy, see Item 1A,“Risk Factors” and the “Overview” and “Liquidity and Capital Resources” sections of Item 7  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. 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 Securities and Exchange Commission (SEC).
 
Background

SecureAlert was originally formed to manufacture and market medical diagnostic stains, solutions and related equipment.  In July 2001, we expanded our product sales and monitoring services related to the Personal Emergency Response Systems (“PERS”) and mobile Global Positionaing System ("GPS") tracking for the elderly.  In 2006, we introduced the GPS tracking technology and monitoring business for the incarceration industry, which includes manufacturing, distributing, and monitoring mobile emergency and interactive GPS tracking products worn on the body that focus on the defendant and offender tracking, monitoring and intervention marketplace.
 
In fiscal year 2010, we spun off our medical diagnostic stain and PERS business in an entity known as ActiveCare, Inc., a Delaware corporation.  At the end of fiscal year 2012, we sold our interest in Midwest Monitoring and Surveillance, Inc. (“Midwest”) to focus our resources on further developing our foreign markets.  We originally purchased an interest in Midwest in December of 2007, and subsequently acquired full ownership of Midwest.  Under the terms of the December 2007 purchase agreement we owed a group of the previous owners of Midwest approximately $300,000, plus a percentage of future revenue, estimated to be approximately $350,000, for a total of $650,000.  In October 2012, the group of former Midwest owners agreed to repurchase Midwest from SecureAlert at a price equal to all sums owed or potentially owed to them under the December 2007 agreement, as amended.  In addition, $100,000 currently held as security for a performance bond known as the “Moose Lake Bond” will be returned to SecureAlert when it is released.  During fiscal year 2012, we also sold certain territories in the state of Florida previously serviced by our wholly-owned subsidiary, Court Programs of Florida, Inc. to various independent distributors.
 
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business, including, without limitation, “Mobile911”, “Mobile911 Siren with 2-Way Voice Communication & Design”, “ActiveTrace,” “MobilePAL”, “HomePAL”, “HomeAware,” “PAL Services”, “TrackerPAL”, “Mobile911”, “TrackerPAL”, “TrackerPAL”, “ReliAlert”, “HomeAware”, “ReliAlert,” “SecureAlert”, “SecureCuff”, “TrueDetect”, and the stylized “SecureAlert” logo.  Solely for convenience, some of the trademarks, service marks and trade names referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain names. The trademarks, service marks and trade names of other companies appearing in this memorandum are, to our knowledge, the property of their respective owners.

Unless the context otherwise requires, all references in this report to "registrant," "we," "us," "our," “SecureAlert” or the "Company" refer to SecureAlert, Inc., a Utah corporation and its subsidiary corporations.

Our Business

SecureAlert markets and deploys offender management programs, combining patented GPS tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services.  Our vision is to be the global market leader for delivering the most reliable offender management solutions, which leverage superior intervention capabilities and integrated communication technologies.  We believe that we currently deliver the only offender management technology, which effectively integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single piece device, deployable 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.

 
2

 
 
By way of explanation, GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the United States Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz. A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.

SecureAlert’s 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 years 2011 and 2012, we continued to deploy our 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.

According to the Bureau of Justice Bulletin published November 2012, 4,814,200 adults were under community supervision at the end of 2011.  At year end 2010, 4,887,900 adults were on probation, resulting in a 2 percent decline from a year ago.  Additionally, an estimated 853,900 adults were on parole during 2011.  The Bureau of Justice statistics define “probation” and “parole” as follows:
 
Probation is a court-ordered period of correctional supervision in the community, generally as an alternative to incarceration.  In some cases, probation can be a combined sentence of incarceration followed by a period of community supervision.
 
Parole is a period of conditional supervised release in the community following a prison term.  It includes parolees released through discretionary or mandatory supervised release from prison, those released through other types of post-custody conditional supervision, and those sentenced to a term of supervised release.
 
Electronic monitoring provides for significantly enhanced probation and parole supervision, while also rationalizing the increased or earlier release of expensive-to-house low-risk, at-risk or moderate risk offender populations.  From a budgetary perspective, reports on file with the Company indicate that the average daily cost of incarcerating an inmate ranges from $65 to $475, or more, depending upon facility type, adult or juvenile, security level, services rendered, available amenities and jurisdiction.  We market our services on the basis that electronic monitoring and other supervisory programs provide cost-effective alternatives to incarceration or specific solutions for at-risk juveniles, domestic violence perpetrators and/or sexual predators, all of whom need careful monitoring and situational intervention to thwart repeat crimes.  Due to the continuing economic crisis domestically and globally, it is our view that these incarceration costs are unsustainable, given ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas.
 
In our view, electronic monitoring provides reliable, public safety-centric alternatives to incarceration for low and moderate risk offenders (adult and juvenile), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments.  Furthermore, we estimate that for between 10 to 20 percent of the traditional costs of incarceration or for roughly one-third the variable costs (which include, for example, inmate daily food, laundry, uniforms, medical, and guard overtime), our electronic monitoring solutions can provide reliable alternatives to incarceration, supporting real-time location tracking, interactive voice access and intervention-based contact, thus reducing the potential for subsequent or repeat offenses. Importantly, the price of our monitoring and intervention solutions ranges from $4.50 to $15.00 per day or up to a 90 percent reduction from the costs of incarceration.  The ongoing budget crisis and the lingering impact of “the Great Recession” continue to move many jurisdictions to adopt or reconsider adopting “pay-to-stay,” “offender pay,” “parent pay,” or “partial pay” programs with the effect of shifting the burden of incarceration or tracking and monitoring costs in whole or part directly to the offender and defraying some or all of the costs to the public.
 
 
3

 
 
In support of these continually evolving rehabilitation and re-socialization initiatives, which extend to law enforcement and justice agencies beyond the U.S and into other global markets, we have made the strategic decision to adopt and pursue a broader services charter than most electronic monitoring companies.  Our “C.A.R.E.” programs support “Corrections” and “Accountability” objectives in concert with “Rehabilitation” and “Empowerment” agendas.  Specifically, our technology is deployed to facilitate a stringent protocol enforcement capability which incorporates restricted movement provisions coupled with enablement of positive reinforcement communications to support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and sponsors.  We design our programs to be uniquely positioned to allow for regular, frequent, and positive interaction and daily affirmations with monitored offenders with the goal that they will become responsible and contributing members of society, even while living within the virtual “electronic fence” boundaries established through our proprietary technologies.

Our Strategy

Our global growth strategy is to empower worldwide national security officials, law enforcement, corrections departments and rehabilitation professionals with sole-sourced offender management solutions, which integrate reliable intervention technologies supporting re-socialization or mandated monitoring initiatives.  The use of our interactive services and intervention products is intended to provide law enforcement and judiciaries alike, with the ability to provide offenders a level of unmatched “real-time” accountability, while preserving public safety costs that are lower than with the cost of traditional incarceration or other transitional service offerings.

We intend to accomplish our global strategy through the “value-driven” yet profitable deployment of a portfolio of proprietary and non-proprietary GPS/RF real-time monitoring and intervention products and services, which can also include alcohol and drug tracking and testing on behalf of corrections, probation, law enforcement and rehabilitation personnel worldwide, all in support of offender reformation, re-socialization and recidivism reduction initiatives.

Our exclusive portfolio of products and services balances the need to dynamically track and monitor offenders with the opportunity to positively encourage and transform offenders, with the aim of reducing recidivism rates through our proprietary C.A.R.E programs and client-adapted initiatives.

We will continue to innovate, develop and deploy adaptive, cost-effective and reliable interactive technologies, which meet the ever-changing needs of our global clients, while providing value-driven and enhanced public safety services.  Our goal is to continue to manufacture proprietary technologies, while also procuring complementary, best-in-class technologies through world-class companies such as Alcohol Monitoring Services (AMS), which markets SCRAM continuous alcohol monitoring devices and/or 3M, which markets the E3 Presence Monitoring, MEMS Alcohol Monitoring and TRaCE Inmate Tracking products.

In summary, SecureAlert is committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services for the global offender management marketplace, where we are currently targeting pilots and deployments throughout the world in various regions (North America, Latin America, the Caribbean, Australasia, Africa and Europe).  We have shown meaningful international growth since fiscal year 2010, which we anticipate to continue during this next fiscal year and which will remain a concerted focus for the Company.

Marketing

During fiscal year 2012, we continued to expand our electronic monitoring operations, both domestically as well as internationally.  Growth was aided by the lack of public funding to expand prisons, as well as a widening view 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, that have been released from custody.  These views and the harsh economic and funding realities gave rise to the wider implementation of electronic monitoring programs globally.

With our unique and patented functionality, we are poised to take advantage of these opportunities.  In particular demand was the patented two and three-way voice communication of our ReliAlert device, and our SecureCuff steel reinforced band.  These two features contributed heavily to a 50 percent increase in active devices in the United States and its territories from both existing and new customers, particularly for high risk and juvenile populations.  Other SecureAlert features, including the real-time posting of location traces and flexible mapping, were instrumental in winning other key accounts.

Fiscal year 2012 also saw a continuation of our commitment to continuous enhancements to both the ReliAlert device line and our TrackerPAL tracking and monitoring software.  Device enhancements centered on componentry designed to expand the life span and robustness of the devices, enhance GPS sensitivity, and increase battery operation time.  The life expectancy of a ReliAlert device is now expected to be longer than predecessor devices under normal operating conditions.  The latest ReliAlert devices also have greater GPS sensitivity which enables better GPS coverage in impaired reception environments.  Initial battery operation time of the latest ReliAlert devices has tested at 48-49 hours versus the prior time of 41-42 hours, at 5 minute tracking.

 
4

 
 
TrackerPAL software was also enhanced in several areas.  Key among these enhancements were changes to security and password conventions.  We take the security of our systems and data seriously.  We have established a program to make such changes on a periodic basis to help ensure the utmost security.  We also added new features to the software designed to assist our distributor and multi-location customers more easily manage their multiple locations.  Additionally, we provided enhancements and options in the areas of participant registration functionality, device activation and deactivation, alarm notification and reporting.
 
It is our intention to continually upgrade existing solutions and work with customers and partners to develop next generation ideas and solutions.  In order to better enable such initiatives, we transitioned several of our Court Programs offices from company-owned operations to distributorships in fiscal year 2012.  The Court Programs model is fundamentally a services business, while our strategic purpose is to produce and globally deploy leading edge offender tracking technology and monitoring services. While the Court Programs approach served as a good outlet for our core offerings, like any business, it requires management attention and investment to continue to grow.  Rather than continuing to divert executive management attention and investment dollars from core SecureAlert operations, we converted the offices to distributorships owned by local operators who know and are part of the communities they serve.  The distributorships will continue to distribute SecureAlert offerings, but will also independently continue to grow by leveraging the strong customer, office and employee bases already in place.

Research and Development Program
 
During the fiscal year ended September 30, 2012, we spent $1,248,654 on research and development, compared to research and development expenditures of $1,453,994 in the fiscal year ended September 30, 2011.  These costs of $1,248,654 were to further develop our TrackerPAL and ReliAlert portfolio of products and services.

Monitoring Center
 
During fiscal year 2012, we continued to realize productivity enhancements and additions to our key core competency and differentiator, our Intervention Monitoring Center.  Even though the number of monitored devices grew by 50 percent, 2012 staffing levels remained little changed from the previous year.  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 Spanish-language coverage.  The bilingual staff addresses the needs of both domestic and international Spanish-speaking customers and grew approximately 50 percent in fiscal year 2012 compared to fiscal year 2011.

Strategic Relationships
 
We believe one of our strengths is the high quality of our strategic alliances.  Our two primary alliances are described in this section.
 
Inovar, Inc.
 
Inovar, located in Logan Utah, is a leading contract electronics manufacturer dedicated to providing flexible solutions to OEMs (original equipment manufacturers) in the fast growing segments of the electronics, medical, and aerospace industries and the military.  Inovar is ISO 9001:2000 and ISO 13485:2003 certified to provide the most comprehensive and value-added services to our customers. Inovar currently manufactures our ReliAlert products.

3M Electronic Monitoring
 
3M Track & Trace Division, headquartered in St. Paul, Minnesota, is a global provider of leading electronic monitoring solutions, which provides presence and location verification technologies, designed for monitoring individuals in the law enforcement, corrections and security markets.  SecureAlert is currently a proud and leading, value-added reseller of the 3M-ElmoTech MEMS remote alcohol monitoring system and TRaCE prison solutions throughout the United States of America.

Competition
 
During fiscal year 2012, we continued to encounter GPS, house arrest and case management competition from the following traditional and evolving competitors, and also saw the continuation of industry consolidation as follows:

 
5

 
 
·
GEO Care, Inc. – Boca Raton, Florida (purchased and consolidated BI Incorporated, Boulder, Colorado in 2011) – This international company provides a wide variety of private correctional services from facilities operation and management to correctional health care services.  BI Incorporated, has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States.
   
·
G4S plc – Crawley, Sussex, England – This international company is reportedly the world’s leading international security solutions group.
   
·
iSECUREtrac Corp., Omaha, Nebraska – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release.
   
·
Omnilink Systems, Inc., Alpharetta, Georgia – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual.
   
·
3M Electronic Monitoring, Odessa, Florida (purchased and consolidated Attenti Group, (ElmoTech and ProTech) in 2011) – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks.
   
·
Satellite Tracking of People, LLC – Houston, Texas – This company provides GPS tracking systems and services to government agencies.
   
·
Sentinel Offender Services, LLC, Augusta, Georgia (purchased and consolidated G4S’ US Offender Monitoring operation in 2012) – This company supplies  monitoring and supervision solutions for the offender population.  Through their acquisition and consolidation of G4S’ US Offender Monitoring operation, they expanded their customer base to whom they provide electronic monitoring of offenders, prison and detention center management and transitional support services.  Through this acquisition, it is believed that they also now resell Omnilink’s active GPS device.

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
 
One customer accounted for $2,450,984 (12 percent) of our total revenues for the fiscal year ended September 30, 2012 and the same customer accounted for $2,265,805 (13 percent) of our total revenues for the fiscal year ended September 30, 2011.  No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2012 or 2011.
 
The table below reflects our top three customers by revenue for the fiscal year ended September 30, 2012 and their respective revenues for 2011:
 
   
2012
   
%
   
2011
   
%
 
                         
Customer A
  $ 2,450,984       12 %   $ 2,265,805       13 %
                                 
Customer B
  $ 1,876,285       9 %   $ 712,803       4 %
                                 
Customer C
  $ 1,369,610       7   $ 19,701       *  
 
* Amount represents less than one percent of total revenues
 
Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2012 and 2011, respectively, is shown in the table below:

   
2012
   
%
   
2011
   
%
 
                         
Customer A
  $ 681,781       24 %   $ -       -  
                                 
Customer B
  $ 475,800       17 %   $ 347,553       7 %
                                 
Customer C
  $ -       -     $ 1,995,804       39 %
 
Dependence on Major Suppliers
 
We purchase cellular services from a variety of providers.  The cost to us for these services during the fiscal years ended September 30, 2012 and 2011, was approximately $961,994 and $650,230, respectively. Our cellular costs increased by approximately 48 percent in 2012 compared to 2011, due to the increase in the number of monitoring devices assigned under new and existing contracts.

Product Returns

During fiscal year 2012, we made improvements to the ReliAlert and ReliAlert XC devices as well as internal processes to improve product reliability and reduce product returns including some of the following:

Improving case design to enhance waterproofing for our ReliAlert and ReliAlert XC devices.
   
Strengthening our inspection process and developing new tests for incoming parts from suppliers.
   
Designing new software to program and test devices, reducing the risk of “user error” while configuring units for deployment;
 
 
6

 
 
Intellectual Property

Trademarks.  We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own seven trademarks that are registered with the United States Patent and Trademark Office plus one trademark registered in Mexico and one in Canada. We are in the process of applying for four additional trademarks.  Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements.  Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States.

The following table summarizes our trademark registrations and applications:
 
Trademark
 
Application Number
 
Registration Number
 
Status/Next Action
Mobile911®
 
75/615,118
 
2,437,673
 
Registered
Mobile911 Siren with 2-Way Voice Communication & Design®
 
76/013,886
 
2,595,328
 
Registered
MobilePAL®
 
78/514,031
 
3,035,577
 
Registered
HomePAL®
 
78/514,093
 
3,041,055
 
Registered
PAL Services®
 
78/514,514
 
3,100,192
 
Registered
TrackerPAL®
 
78/843,035
 
3,345,878
 
Registered
Mobile911®
 
78/851,384
 
3,212,937
 
Registered
TrackerPAL®
 
CA 1,315,487
 
 749,417
 
Registered
TrackerPAL®
 
MX 805,365
 
960954
 
Registered
ReliAlert™
 
85/238,049
 
In process
 
Pending
HomeAware™
 
85/238,064
 
In process
 
Pending
SecureCuff™
 
85/238,058
 
In process
 
Pending
TrueDetect™
 
85/237,202
 
In process
 
Pending
 
Patents. We have 12 patents issued and three patents pending in the United States.  At foreign patent offices we have one patent issued and 13 patents pending.  We are also preparing patents that will be filed in other countries in the coming year.

The following tables summarize information regarding our patents and patent applications.  There is no assurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications. 

                     
Domestic Patents
 
Application#
 
 Date Filed
 
Patent#
 
 Issued
 
Status
Emergency Phone for Automatically Summoning Multiple Emergency Response Services
 
09/173645
 
16-Oct-98
 
6226510
 
1-May-01
 
 Issued
Combination Emergency Phone and Personal Audio Device
 
09/185191
 
`
 
6285867
 
4-Sep-01
 
 Issued
Panic Button Phone
 
09/044497
 
19-Mar-98
 
6044257
 
28-Mar-00
 
 Issued
Interference Structure for Emergency Response System Wristwatch
 
09/651523
 
29-Aug-00
 
6366538
 
2-Apr-02 
 
 Issued
Emergency Phone With Alternate Number Calling Capability
 
09/684831
 
10-Oct-00
 
7092695
 
15-Aug-06
 
 Issued
Remote Tracking and Communication Device
 
11/202427
 
10-Aug-05
 
7330122
 
12-Feb-08
 
 Issued
Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors
 
11/486991
 
14-Jul-06
 
7545318
 
9-Jun-09
 
 Issued
Alarm and Alarm Management System for Remote Tracking Devices
 
11/486992
 
14-Jul-06
 
7737841
 
15-Jun-10
 
 Issued
Remote Tracking and Communication Device
 
12/028088
 
8-Feb-08
 
7804412
 
28-Sep-10
 
 Issued
A Remote Tracking System with a Dedicated Monitoring Center
 
11/486976
 
14-Jul-06
 
7936262
 
3-May-11
 
 Issued
Alarm and Alarm Management System for Remote Tracking Devices
 
12/792572
 
2-Jun-10
 
8013736
 
 6-Sep-11
 
 Issued
Remote Tracking and Communication Device
 
12/875988
 
3-Sep-10
 
8031077
 
4-Oct-11
 
 Issued
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center
 
11/486989
 
14-Jul-06
 
 -
 
 -
 
 Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device
 
12/399151
 
6-Mar-09
 
 
 -
 
 Pending
Tracking Device Incorporating Enhanced Security Mounting Strap
 
12/818,453
 
18-Jun-10
 
 -
 
 -
 
 Pending


 
7

 
 
International Patents
 
Application#
 
 Date Filed
 
Patent#
 
 Issued
 
Status
Remote Tracking and Communication Device - Mexico
 
MX/a/2008/1932
    4-Aug-06     278405     6-Oct-10      Issued
Remote Tracking and Communication Device - EPO
 
6836098.1
 
4-Aug-06
 
 -
 
 -
 
 Pending
Remote Tracking and Communication Device - Brazil
 
PI0614742.9
 
4-Aug-06
 
 -
 
 -
 
 Pending
Remote Tracking and Communication Device - Canada
 
2617923
 
4-Aug-06
 
 -
 
 -
 
 Pending
A Remote Tracking System with a Dedicated Monitoring Center - EPO
 
7812596
 
3-Jul-07
 
 
 -
 
 Pending
A Remote Tracking System with a Dedicated Monitoring Center - Brazil
 
PI0714367.2
 
3-Jul-07
 
 -
 
 -
 
 Pending
Secure Strap Mounting System For an Offender Tracking Device - EPO
 
 10 009 091.9
 
1-Sep-10
 
 -
 
 -
 
 Pending
Secure Strap Mounting System For an Offender Tracking Device - Brazil
 
Filed. Number not yet available
 
28-Feb-11
 
 -
 
 -
 
 Pending
Secure Strap Mounting System For an Offender Tracking Device - Mexico
 
X/a/2011/002283
 
28-Feb-11
 
 -
 
 -
 
 Pending
Secure Strap Mounting System For an Offender Tracking Device - Canada
 
2732654
 
28-Feb-11
 
 -
 
 -
 
 Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device  - Brazil
 
PI0909172-6
 
1-Sep-10
 
 -
 
 -
 
 Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device  - Mexico
 
MX/a/2010/9680
 
2-Sep-10
 
 -
 
 
 Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device  - Canada
 
2717866
 
3-Sep-10
 
 -
 
 
 Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device  - EPO
 
9716860.3
 
6-Oct-10
 
 -
 
 
 Pending
 
License Agreement.  During the fiscal year ended September 30, 2010, we entered into a cross-licensing agreement with Satellite Tracking of People, LLC (“STOP”) accessing four patents that enhanced our positions into the areas of Crime Scene Correlation, augmenting GPS locationing with cellular network based locationing, and confinement using RF-based beacon.

 
8

 
 
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”) pursuant to which we purchased Borinquen’s wholly-owned subsidiary, International Surveillance Services Corporation, a Puerto Rico corporation (“ISS”) in consideration of 62,000,000 shares of our common stock, valued at the market price on the date of the Royalty Agreement at $0.082 per share, or $5,084,000, and the grant to Borinquen of a royalty in the amount of 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.  The royalty payments are due quarterly through June 30, 2031.  In the event we fail to make the royalty payments when due, in cash or in shares of our common stock, at our discretion, the royalty rate is increased to 50 percent in certain portions of the territory, and 30 percent in others. 
 
On September 5, 2012, we entered into an agreement to redeem the royalty held by Borinquen, subject to certain terms, based upon expected funding from Sapinda Asia Limited (“Sapinda Asia”).  We have capitalized the total cost of the royalty purchase commitment, $10,768,555, as a non-current asset and recorded a loan payable to Borinquen to reflect the obligations under that agreement. We will amortize the asset over the remaining term of the Royalty Agreement (19 years), subject to periodic tests for impairment.  Subsequent to the end of fiscal year 2012, we entered into a Loan and Security Agreement with Sapinda Asia, the proceeds of which are to be used, in part, to redeem and terminate the royalty held by Borinquen.  Our obligations under the Loan and Security Agreement are secured by our international patents and in the event of default, Sapinda Asia may acquire the royalty rights under conditions contained in the Loan and Security Agreement as a reduction to the loan. Subsequent to September 30, 2012, we defaulted in the payment of the full purchase price of the royalty under the amended terms of the September 5, 2012 agreement because the full funding had not been provided under the Loan and Security Agreement.  Due to default under the terms of the royalty buy-back agreement, Borinquen terminated the agreement on December 26, 2012.  As of the date of this report, Sapinda Asia and Borinquen are negotiating to resolve the default and complete the purchase of the royalty on behalf of the Company.
      
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 2012, 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 28, 2012, we had 119 full-time employees and 20 part-time employees.  None of the employees are represented by a labor union or subject to a collective bargaining agreement.  We have never experienced a work stoppage and management believes that the relations with employees are good.

Additional Available Information

We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 100, 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 information, and does not form a part of, this 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, proxy statements and annual reports at no charge to investors upon request.

All reports filed by SecureAlert 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.  

 
9

 
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

The financial statements contained in this Annual Report on Form 10-K for the fiscal year ended September 30, 2012 have been prepared on the basis that we will continue as a going concern, notwithstanding the fact that our financial performance and condition during the past few years raise substantial doubt as to our ability to do so. There is no assurance we will ever be profitable.  In fiscal year 2012, we incurred a net loss of $17,458,107, we had negative cash flows from operating activities of $1,709,388, and as of September 30, 2012 we have an accumulated deficit of $248,513,626 and several of our debts are currently in default.  These factors raise substantial doubt about our ability to continue as a going concern.  The financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on increasing the number of TrackerPAL and ReliAlert devices in the market place from which we will generate monitoring service revenue, reducing operating costs and raising capital through additional borrowings and or the sale of our equity securities.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay indebtedness.  If we are unable to increase cash flows from operating activities or obtain additional financing, we will be unable to continue the development of our products and will likely cease operations.
 
We are primarily dependent on additional capital from one source. Our business plan is dependent upon raising sufficient capital to supplement operational income.  On December 3, 2012, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Sapinda Asia whereby Sapinda Asia is obligated to loan us the sum of $16,640,000 (the “Loan”). The Loan, if fully funded, is secured by all of the intellectual property and other assets of the Company and by the Royalty currently held by Borinquen, which was to be repurchased by us using the proceeds of the Loan pursuant to a royalty and stock purchase agreement entered into with Borinquen (the “Repurchase Agreement”). As of the date of this Report, the full amount expected to be made available to us under the terms of the Loan Agreement has not been advanced.  As a result, Sapinda Asia is currently in default under the Loan Agreement.  If the default continues for 30 days or longer without significant increases in revenue or funding from alternative sources, we expects that we will be may be required to cease operations. As of the date of this report we have received from Sapinda Asia (and its affiliates) under the Loan Agreement a total of $3,700,000 ($900,000 during the fiscal year ended September 30, 2012 and $2,800,000 subsequently).  In addition, Sapinda Asia paid $2,000,000 directly to Borinquen as part of a non-refundable deposit that is to be retained by Borinquen until the full terms under the Repurchase Agreement have been fully satisfied; or if such agreement is not fully satisfied, to be retained by Borinquen as a default penalty. The failure of Sapinda Asia to fully fund the Loan resulted in our default under the terms of the Repurchase Agreement and resulted in Borinquen terminating that agreement on December 26, 2012.  Sapinda Asia and Borinquen, with the support of the Company, are currently negotiating to cure the default and complete the royalty purchase on our behalf.  Borinquen has set January 30, 2013 as a deadline for completing negotiations for any new or modified agreement.  The outcome of these discussions may affect our ability to raise future capital from Sapinda Asia to fund operations.  There is no assurance that Borinquen and Sapinda Asia will reach an agreement.  The failure to do so will have an adverse effect on our business and results of operations.  See “Royalty Agreement” on page 9.
 
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 November 30, 2012, we had $16,516,847 million of indebtedness outstanding, of which $6,200,000 is secured by pledges of our intellectual property or other assets.  On December 7, 2012, we had approximately $4,700,000 million outstanding under a Loan and Security Agreement with Sapinda Asia to fund the redemption of a royalty granted to a significant shareholder and other working capital needs.  A significant portion of this indebtedness is secured by our patents and certain other assets.  Default under any of these secured obligations would severely limit our control over the secured assets and adversely affect our ability to continue to do business.
 
Our high degree of leverage could have important consequences to us, including:
 
making it more difficult for us to make payments on our debt;
   
increasing our vulnerability to general economic and industry conditions;
   
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
   
exposing us to the risk of increased interest rates as certain of our borrowings under our Senior Secured Credit Facilities are at variable rates;
   
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
   
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
   
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.
 
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial 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.

 
10

 
 
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 Unites States and governments of Caribbean and Latin American nations.  Many of these government agencies are experiencing budget deficits and may continue to do so.  As a result, the amount spent by our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government clients.  In addition, since 2009, the industry has experienced a general decline in average daily lease rate for GPS tracking units.  As a result of these factors, our ability to maintain or increase our revenues may be negatively affected.
 
As a result of our increased focus on a new business market, our business is subject to many of the risks of a new or start-up venture.  Our 2012 business goals and strategy subjects us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development.  If we are to be successful in this new business direction, we must accomplish the following, among other things:
 
·
Develop and introduce functional and attractive product and service offerings;
   
·
Increase awareness of our brand and develop consumer loyalty;
   
·
Respond to competitive and technological developments;
   
·
Increase gross profit margins;
   
·
Build an operational structure to support our business; and
   
·
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 the Company or its 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 24 and Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” on page 30.
 
Certain of our shareholders and officers and directors are creditors of the Company and their interests may be in conflict with the interests of the Company or its remaining shareholders or creditors. A substantial portion of our debt obligations are secured by the pledge of our patents and other assets.  As a result, these creditors may benefit directly by our inability to repay our debts when due, which would result in their outright ownership of our patents and a potentially lucrative royalty.  In addition, because certain of these creditors are directors of the Company or have representatives on our Board of Directors, they may control our business affairs and operations in a manner that may result in decisions that favor them over our other shareholders or creditors.
 
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.
 
 
11

 
 
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 have recently experienced a significant change in our executive leadership. On October 23, 2012, John L. Hastings, III resigned as Chief Executive Officer to focus on other business opportunities.  The Board of Directors of the Company established an Executive Committee and temporarily transferred Mr. Hastings’ responsibilities to this committee, comprised of Winfried Kunz and George Schmitt.  Messrs. Kunz and Schmitt will continue to execute the responsibilities of the Company’s principal executive officer through the Executive Committee, until the Company’s 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 TrackerPAL and 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 planned products.  We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position.  There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
 
The Company is dependent upon certain customers and the loss of which would adversely affect its results of operations and business condition.  During fiscal year 2012, one customer accounted for more than 10% of sales.  The loss of this customer would result in lower revenues and limit the cash available to grow our business and to achieve profitability.
 
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 (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories.  Any inability or failure to raise capital when 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.  

 
12

 
 
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.  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 13 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.  We are subject to a variety of regulations and political interests that could affect the timing of our 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

Penny stock regulations may impose certain restrictions on marketability of our securities. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities. 
 
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
·
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer
   
·
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases
   
·
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons
   
·
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers, and
   
·
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
Our management is aware of the abuses that have occurred historically in the penny stock market.

Our Board of Directors may authorize the issuance of preferred 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 6,000 shares of common stock.  Holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination.  As of December 28, 2012, there were 48,763 shares of Series D Preferred issued and outstanding, which were convertible into 292,578,000 shares of common stock.

 
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Our Board of Directors has filed a proxy statement seeking shareholder approval of a proposed reverse stock split amendment and a reduction of authorized capital amendment to our Articles of Incorporation.  In addition, as a condition to the Loan and Security Agreement entered into with Sapinda Asia, we have agreed to conduct an offering directed at the holders of our Series D Preferred stock to exchange their Series D Preferred stock shares for shares of our common stock.  Under the Loan and Security Agreement, failure to obtain the tender of at least 90 percent of the Series D Preferred stock will trigger the right of Sapinda Asia to acquire the royalty previously granted to Borinquen and repurchased by the Company.  However, Sapinda Asia is currently in default under the Loan and Security Agreement, consequently, the full repurchase price has not been paid to Borinquen and Borinquen has terminated the royalty buy-back agreement.  See “Royalty Agreement” on page 9.
 
Item 2.    Properties

Our headquarters and monitoring facility are housed in 11,462 square feet of space located at 150 West Civic Center Drive, Suite 100, Sandy, Utah.  Lease payments are approximately $23,000 per month. This lease expires on November 30, 2013.  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 $5,800.  Management believes that these facilities are sufficient to meet our needs for the foreseeable future.

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 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 intends 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 the Company and its subsidiary.  The case resulted from actions of a former agent of the Company’s subsidiary.  The Company intends to defend itself in 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.

Camacho Melendez et al v. Commonwealth of Puerto Rico and International Surveillance Services Corporation.  On April 24, 2012 the plaintiffs filed suit against the Commonwealth of Puerto Rico and International Surveillance Services Corporation, a wholly-owned subsidiary of the Company, (“ISSC”) claiming negligence by ISSC and the government of the Commonwealth of Puerto Rico resulting in the death of a woman.  The complaint seeks damages of $2,110,000.  The Company is vigorously defending this case and believes ISSC acted appropriately.  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.
.
RACO Wireless LLC v SecureAlert, Inc. On October 12, 2010, RACO Wireless, LLC (“RACO”) filed a complaint alleging that the Company breached a contract by failing to place a sufficient number of RACO SIM chips in its new activations of monitoring devices.  The Company denied these allegations and filed a counterclaim against RACO.  During the fiscal year ended September 30, 2011, the parties agreed to settle this litigation. As part of the settlement agreement, the Company granted RACO warrants to purchase 6,000,000 shares of the Company’s common stock at an exercise price of $0.098 per share, valued at $253,046 using the Black-Scholes valuation model during the quarter ended December 31, 2011.  The Company was late in making some required payments to RACO and RACO filed a complaint on June 4, 2012. The Company is current on its payments and is disputing RACO’s claims.
 
Grenier v. Court Programs of Florida, Inc. The estate of Brooke Grenier filed suit against Court Programs of Florida, Inc., a subsidiary or SecureAlert, in the Circuit Court of the 19th Judicial Circuit in and for Indian River County, Florida.  The suit alleges negligence leading to the death of Ms. Grenier. We assert no negligence and are vigorously defending the claims made against Court Programs of Florida, Inc.

Item 4.    [Not Applicable]


 
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PART II

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.

Fiscal Year Ended September 30, 2011
 
High
   
Low
 
 First Quarter ended December 31, 2010
  $ 0.11     $ 0.08  
 Second Quarter ended March 31, 2011
  $ 0.12     $ 0.09  
 Third Quarter ended June 30, 2011
  $ 0.10     $ 0.08  
 Fourth Quarter ended September 30, 2011
  $ 0.11     $ 0.07  
                 
 Fiscal Year Ended September 30, 2012
 
High
   
Low
 
 First Quarter ended December 31, 2011
  $ 0.10     $ 0.07  
 Second Quarter ended March 31, 2012
  $ 0.08     $ 0.04  
 Third Quarter ended June 30, 2012
  $ 0.05     $ 0.03  
 Fourth Quarter ended September 30, 2012
  $ 0.04     $ 0.02  
 
Holders

As of December 28, 2012, there were approximately 2,500 holders of record of our common stock and 640,088,850 shares of common stock outstanding. We also have granted options and warrants for the purchase of 67,356,493 shares of common stock and 5,400 shares of Series D Preferred stock.  As of December 10, 2012, there were also 48,763 shares of Series D Preferred stock outstanding, which are convertible into 292,578,000 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, 2012 and 2011, we recorded $2,480,298 and $2,029,996 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.


 
15

 
 
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, 18,000,000 options or shares of common stock may be awarded.  As of the date of this report, options for the purchase of 6,000,000 shares of common stock have been awarded under the 2012 Plan.

The following table includes information as of September 30, 2012 for our equity compensation plans:
 
     
Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights
     
Weighted-average
exercise price of
outstanding options,
warrants and rights
     
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities refleted
in column (a))
 
 Plan category    
(a)
     
(b)
     
(c)
 
                         
Equity compensation plans approved by security holderst
    4,286,667     $ 0.08       13,713,333  
                         
Equity compensation plans not approved by security holders
    95,469,826     $ 0.12       -  
                         
Total
    99,756,493     $ 0.12       13,713,333  
 
Recent Sales of Unregistered Securities

During the fiscal quarter ended September 30, 2012, we issued the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) not previously included in a current report on Form 8-K or in a quarterly report on Form 10-Q.

Issuance of Common Stock for Cash

During the fiscal quarter ended September 30, 2012, we issued 31,140,625 shares of common stock for cash proceeds of $1,033,000. 

Issuance of Common Stock for Services

During the fiscal quarter ended September 30, 2012, we issued 410,178 shares of common stock for services, valued at $12,000. 

Issuance of Common Stock for Payment of Royalty

During the fiscal quarter ended September 30, 2012, we issued 1,592,942 shares of common stock in connection with a royalty agreement, valued at $50,396. 

Issuance of Common Stock for Conversion of Preferred Stock

During the fiscal quarter ended September 30, 2012, we issued 120,000 shares of common stock upon conversion of 20 shares of Series D Convertible Preferred stock.

Issuance of Common Stock for Payment of Preferred Dividends

During the fiscal quarter ended September 30, 2012, we issued 17,053,704 shares of common stock as payment of dividends on our Series D Convertible Preferred stock, valued at $623,678.

In each of the transactions listed above, the shares of common stock were issued without registration under the Securities Act in reliance on exemptions from registration provided by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.

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 the Company’s common stock during the year ended September 30, 2012.

 
16

 
 
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 2012 refers to the year ended September 30, 2012.  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, 2012 and 2011 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.
   
·
Recent Developments – a brief description of business developments occurring after the fiscal year ended September 30, 2012 and prior to the filing of this report.
   
·
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; an overview of financial position including the Company’s ability to continue as a going concern; 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.

 
17

 
 
Results of Operations

Fiscal Year 2012 compared to Fiscal Year 2011

During the fiscal year ended September 30, 2012, we had net revenues of $19,791,492 compared to net revenues of $17,961,803 for the fiscal year ended September 30, 2011, an increase of $1,829,689, or approximately 10 percent.  Revenues from monitoring services for the fiscal year ended September 30, 2012, totaled $17,778,337, compared to $16,410,292 for the same period ended 2011, resulting in an increase of $1,368,045 or approximately 8 percent.  These revenues increased as a result of our continued expansion into the global market which contributed an additional $2,254,161 to monitoring revenues for the fiscal year ended September 30, 2012. Domestic revenues decreased by $424,473, or 3 percent, from the fiscal year ended September 30, 2011. This decrease resulted primarily from lowering our monitoring daily charge to compete in the domestic marketplace. Revenues from product sales for the fiscal year ended September 30, 2012 were $2,013,155, compared to $1,551,511 for the prior year, an increase of $461,644, or 30 percent.  This increase was primarily due to a sale and installation of an onsite charging solution.  For the years ended September 30, 2012 and 2011, revenues from one-piece activated GPS tracking devices supported entirely about a single limb of the monitored person totaled $8,360,697 and $6,505,056, respectively.

Cost of Revenues
 
During the fiscal year ended September 30, 2012, cost of revenues, excluding impairment of equipment and parts, totaled $11,418,012, compared to cost of revenues during the fiscal year ended September 30, 2011 of $9,565,959, an increase of $1,852,053.  These net costs of revenues, as a percentage of net revenues, increased 5 percent, from 53 percent in 2011 to 58 percent in 2012.  The increase in cost of revenues of $1,852,053 in 2012 resulted primarily from increases in the costs of the charging solution of $360,961, royalty fees of $853,623, communication costs of $311,764, and amortization expenses of $187,126.

Although there were increases in the cost of revenues, as stated above, the increase in communication costs in 2012 involve the costs associated with Subscriber Identity Modules (“SIM”) which are embedded in each TrackerPAL and ReliAlert device.  The SIM enables the device to transfer voice and data information to a monitoring center.  We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased. Increases in these costs are expected as the number of activated devices increases.

Impairment costs for equipment and parts for the fiscal years ended September 30, 2012 and 2011 were $1,648,762 and $464,295, respectively.  These costs resulted from disposals of obsolete inventory, monitoring equipment and parts as we continue to make enhancements to the device.

Amortization for the fiscal years ended September 30, 2012 and 2011, totaled $1,387,756 and $1,160,920, 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, 2012, gross profit totaled $6,724,718, or 34 percent of net revenues, compared to $7,931,549, or 44 percent of net revenues during the fiscal year ended September 30, 2011, a decrease of $1,206,831.  Included in cost of revenues are costs attributable to impairment of inventory and monitoring equipment of $1,648,762 and $464,295 for the fiscal years ended September 30, 2012 and 2011, 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, 2012 was $8,373,480 or 42 percent of net revenues, compared to $8,395,844 or 47 percent of net revenues, for the same period in 2011, a decrease of $22,364.

 
18

 
 
Research and Development Expenses
 
During the fiscal year ended September 30, 2012, we incurred research and development expenses of $1,248,654 compared to similar expenses recognized during fiscal year 2011 totaling $1,453,994.  This decrease of $205,340 is due primarily to a reduction in research and development staff.
 
Selling, General and Administrative Expenses
 
During the fiscal year ended September 30, 2012, our selling, general and administrative expenses totaled $15,405,742, compared to $15,652,303 for the fiscal year ended September 30, 2011.  The decrease of $246,561 is the result of decreases in the following expenses: payroll, payroll taxes and employee benefits ($399,781), travel expenses ($213,387), and legal ($100,982).  Consulting and non-cash compensation to employees expense for the fiscal year ended September 30, 2012 were $3,911,027 compared to $2,681,718 for the fiscal year ended September 30, 2011, an increase of $1,229,309.  The increase in consulting and non-cash compensation to employees expenses resulted from modifications of stock options.

Other Income and Expense
 
For the fiscal year ended September 30, 2012, interest expense was $1,489,897, compared to $712,840 for the fiscal year ended September 30, 2011. This increase of $777,057 is a result primarily of the non-cash interest expense of $860,190 related to amortization of debt discounts on convertible debentures. Also included in interest expense is $59,575 related to amortization of debt discounts in connection with an acquisition, and $39,965 for re-pricing of warrants.

Net Loss
 
We had a net loss for the fiscal year ended September 30, 2012 totaling $17,458,107 (approximately $0.04 per share), compared to a net loss of $9,858,824 (approximately $0.03 per share) for the fiscal year ended September 30, 2011.  This increase of $7,599,283 is due primarily to the impairment of goodwill of $5,514,395, impairment of monitoring equipment and parts of $1,184,467, royalties of $853,623, interest expense of $777,057, and settlement charges of $126,966.
 
Liquidity and Capital Resources

We have not historically financed operations entirely from cash flows from operating activities.  During the fiscal year ended September 30, 2012, we funded our operating and investing activities through sale and issuance of debt and equity securities. See the accompanying notes to the Consolidated Financial Statements included in this report.  The cash provided by these transactions was used by us to (i) pay operating expenses, including the costs associated with our monitoring center, (ii) purchase monitoring equipment and parts, (iii) pay down various debt and accounts payable, and (iv) pay general and administrative expenses, including the salaries of our employees, officers, and consultants and other expenses as described below.
 
As of September 30, 2012, we had unrestricted cash of $695,111, compared to unrestricted cash of $949,749 as of September 30, 2011.  As of September 30, 2012, we had a working capital deficit of $13,600,345, compared to a working capital deficit of $1,201,955 as of September 30, 2011.  The decrease in working capital in fiscal year 2012 primarily resulted from the royalty repurchase agreement and borrowings from the issuance of our convertible debentures.   

During fiscal year 2012, our operating activities used cash of $1,709,388, compared to $6,809,513 used during fiscal year 2011.  This improvement in cash used from operating activities of $5,100,125 resulted primarily from an increase in revenues of $1,829,689 and improved collections of accounts receivable of $3,780,843. 

Investing activities during the fiscal year ended September 30, 2012, used cash of $2,720,944, compared to $3,716,554 during the fiscal year ended September 30, 2011.  The decrease in cash used by investing activities of $995,610 during fiscal year 2012 resulted primarily from the decrease in cash used for the purchase of monitoring equipment and payments related to an acquisition during the fiscal year ended September 30, 2011.
 
Financing activities during the fiscal year ended September 30, 2012, provided $4,175,694 of net cash compared to $10,349,584 during the fiscal year ended September 30, 2011.
 
During the fiscal year ended September 30, 2012, we made net payments of $906,478 on notes payable, $207,578 on related-party notes payable, and $1,147,250 of commissions paid in connection with capital raised.  During fiscal year 2012, we had proceeds of $2,004,000 from the issuance 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 issuance of common stock to a related party.

 
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During the fiscal year ended September 30, 2011, we made net payments of $635,657 on notes payable and $188,634 on a related-party line of credit.  During fiscal year 2011, we had net proceeds of $10,344,603 from the issuance of Series D Convertible Preferred stock and net proceeds of $829,272 from related-party notes payable.

During the fiscal year ended September 30, 2012, we incurred a net loss of $17,458,107 and negative cash flows from operating activities of $1,709,388, compared to a net loss of $9,858,824 and negative cash flows from operating activities of $6,809,513 for the fiscal year ended September 30, 2011.  As of September 30, 2012, our working capital deficit was $13,600,345, stockholders’ equity was $4,427,137, and accumulated deficit totaled $248,513,626.

Going Concern
 
We have incurred recurring net losses and negative cash flows from operating activities for the fiscal years ended September 30, 2012 and 2011, and we have several debt obligations currently in default.  In addition, we have accumulated deficits of $248,513,626 and $231,055,519 as of September 30, 2012 and 2011, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  In order for the Company to continue as a going concern, we must generate positive cash flows from operating activities and obtain the necessary funding to meet our projected capital investment requirements.  Management’s plans with respect to this uncertainty include raising additional capital through borrowing, from the issuance of preferred or common stock or debt securities, and by expanding the market for our ReliAlert portfolio of products.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  If we are unable to increase cash flows from operating activities or obtain additional financing, we will be unable to continue the development of our products and may have to cease operations.

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, 2012, included in this report, we discussed 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 receivables, we apply critical accounting policies discussed below in the preparation of our financial statements.
 
Inventory Reserves
 
The nature of our business requires maintenance of sufficient inventory on hand at all times to meet the requirements of our customers. We record inventory and raw materials at the lower of cost, or market, which approximates actual cost. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things:

·
Current inventory quantities on hand;
   
·
Product acceptance in the marketplace;
   
·
Customer demand;
   
·
Historical sales;
   
·
Forecast sales;
   
·
Product obsolescence; and
   
·
Technological innovations
 
Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management.
 
 
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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 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.

 
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Impairment of Long-lived Assets
 
We review our 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. 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.  As of September 30, 2012 and 2011, we impaired goodwill from Court Programs by $2,488,068 and $0, respectively and impaired goodwill from Midwest by $3,026,327 and $0, respectively, for a total goodwill impairment for the fiscal year ended September 30, 2012 and 2011 of $5,514,395 and $0, respectively. 

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 its 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.

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.

Foreign Currency Risks.  We had $5,716,352 and $3,462,190 in revenues from sources outside the United States for the fiscal years ended September 30, 2012 and 2011, respectively.  We received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange loss of $28,358 and $173, 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.    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.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
 
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Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has 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 the Company’s 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, 2012 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 the Company’s 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, 2012.

Management's Report on Internal Control over Financial Reporting

The Company’s 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).  The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s 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 the Company’s internal control over financial reporting was effective as of September 30, 2012.

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 Company’s 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, 2012, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B.    Other Information
 
None.
 
 
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PART III
 
 
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 28, 2012:     
 
            Name                                              
 
 Age
 
            Position                                                                                    
         
David S. Boone
 
52
 
Director
Guy Dubois
 
54
 
Director
David P. Hanlon
 
68
 
Director, Chairman of the Board
Rene Klinkhammer
 
32
 
Director
Winfried Kunz
 
47
 
Director
Dan L. Mabey
 
61
 
Director
Antonio J. Rodriquez
 
69
 
Director
Larry G. Schafran
 
74
 
Director
George F. Schmitt
 
69
 
Director
 
David S. Boone was recently appointed CEO of Paranet Solutions in Dallas, Texas.  He became a director of the 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.  Most recently, Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011, a NASDAQ traded company.  In addition, 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 in 1989.

Guy 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 has 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. Prior to which 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 is a Belgian citizen.

Mr. Dubois’ appointment to the Board of Directors was a requirement of a financing arrangement with Sapinda Asia whereby Sapinda Asia is obligated to loan funds to the Company.

An executive of gategroup holdings AG, an airline catering company headquartered in Switzerland was convicted in a Danish court in September 2012 of fraud and embezzlement involving company assets.  Mr. Dubois, who was Chief Executive Officer of the company at the time the executive committed the acts leading to her conviction, voluntarily resigned from gategroup holdings AG in 2011.  The Zurich State Prosecutor initiated an investigation in 2011 focused on whether other individuals, including Mr. Dubois were aware of or benefitted personally from the fraud and embezzlement that occurred.  Mr. Dubois, who has indicated he was unaware of any of these activities at the time they were being committed, has been cooperating with that investigation.

David P. Hanlon has been a member of our Board of Directors since October 2006 and was appointed Chairman in December 2011.  He served previously as Chief Executive Officer and President of Empire Resorts, Inc., a public company in the gaming industry, until May 2009.  Prior to starting his own gaming consulting business in 2000, in which he advised a number of Indian and international gaming ventures, Mr. Hanlon was President and Chief Operating Officer of Rio Suites Hotel & Casino from 1996-1999, a period in which the Rio Suites Hotel & Casino underwent a major expansion.  From 1994-1995, Mr. Hanlon served as President and Chief Executive Officer of International Game Technology, the world's leading manufacturer of microprocessor gaming machines.  From 1988-1993, Mr. Hanlon served as President and Chief Executive Officer of Merv Griffin's Resorts International, and prior to that, Mr. Hanlon served as President of Harrah's Atlantic City (Harrah's Marina and Trump Plaza).  Mr. Hanlon also served as President and Chief Executive Officer of the Las Colinas Group organized for the purpose of developing a major entertainment center in partnership with the city of Irving Texas.  Mr. Hanlon's education includes a B.S. in Hotel Administration from Cornell University, an M.S. in Accounting, and an M.B.A. in Finance from the Wharton School, University of Pennsylvania, and completion of the Advanced Management Program at the Harvard Business School.

 
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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.  Since 2007, Mr. Klinkhammer has been working 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.  For avoidance of doubt, Sapinda Asia Limited is not affiliated with Sapinda Holding B.V. and Mr. Klinkhammer has no affiliation with Sapinda Asia Limited. For the past six years, Mr. Klinkhammer has worked with the Company 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., Contract 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.

Dan L. Mabey became a director on December 21, 2011.  He is the President 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 Sale 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.

Antonio J. Rodriguez became a director on December 21, 2011.  He has practiced corporate law since 1974 with the firm McConnell Valdes, LLC in Puerto Rico and from 1979 to 2006 he served as a principal partner of the law firm.  Since 2006, Mr. Rodriquez has served as Of Counsel with the firm.  Mr. Rodriquez has extensive experience as a corporate attorney advising both private and publicly held corporations and facilitating transactions of all kinds.  Mr. Rodriquez and his firm are legal counsel to Borinquen Container Corporation, a significant shareholder of the Company.
 
Larry G. Schafran has been a member of our Board of Directors since October 2006.  Until mid-December 2012, he was associated with Providence Capital, Inc. (“PCI”) as a Managing Director.  PCI is a New York City-based investment and advisory firm.  Additionally, Mr. Schafran was Lead Director and Audit Committee Chairman and later a consultant to the Chairman of WorldSpace, Inc.  In addition, to Secure Alert, Inc., Mr. Schafran is also a director of the following corporations: National Patent Development Corporation and Glasstech, Inc. In recent years, Mr. Schafran served in several capacities, including, as a director of SulphCo, Inc., PubliCard, Inc., Tarragon Corporation, and ElectroEnergy, and Trustee, Chairman/Interim-CEO/President and Co-Liquidating Trustee of Special Liquidating Trust of Banyan Strategic Realty Trust; Director and/or Chairman of the Executive Committees of Dart Group Corporation, Crown Books Corporation, TrakAuto Corporation, and Shoppers Food Warehouse, Inc. (Vice-Chairman); director and member of the Strategic Planning and Finance Committees of COMSAT Corporation, and Managing General Partner of L. G. Schafran & Partners, LP, a real estate investment and development firm.  
 
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.

 
25

 
 
Board of Directors

Election and Meetings

Directors currently 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 24 times during fiscal year 2012.  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 has determined that the following current members of the Board are independent directors as of December 10, 2012, in accordance with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15): David S. Boone, David P. Hanlon, Winfried Kunz, Larry G. Schafran, and George F. Schmitt.  The independent directors meet from time to time in executive session.  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 100, Sandy, Utah 84070.
 
Committees of the Board of Directors
 
The Board of Directors has a separately-designated standing Audit Committee, Compensation Committee, and Nominating Committee.  These committees assist the Board of Directors to perform its responsibilities and make informed decisions.  Charters for these committees are posted on our website, www.securealert.com
 
Audit Committee.  The primary duties of the Audit Committee are to oversee (i) management’s conduct of the Company’s financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing the Company’s systems of internal accounting and financial controls, (ii) the Company’s independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of the Company’s independent auditors.  The Audit Committee assists the Board in providing oversight as to the Company’s financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on the Company’s 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 fiscal year 2012 and all members of the Audit Committee attended at least 75 percent of the committee’s meetings.  Members of the Audit Committee during 2012 were Messrs. Schafran (Chairman), Schmitt, and Boone. On December 28, 2012, Mr. Schafran stepped down as Chairman and as a member of the Audit Committee and the Board of Directors appointed Mr. Boone to serve as the new Audit Committee Chairman.

Each member of the Audit Committee satisfies 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 Mr. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the Securities and Exchange Commission.  Mr. Boone is a nominee for director at the Annual Meeting.
 
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, 2012 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.  The Audit Committee recommended to the Board of Directors that our audited Consolidated Financial Statements for the fiscal year September 30, 2012 be included in this report.
 
 
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Compensation Committee.  During the fiscal year 2012, the Compensation Committee was chaired by Mr. Kunz.  Messrs. Schmitt and Klinkhammer are also members of the Compensation Committee.  The Compensation Committee met two times during fiscal year 2012.  Members of the Compensation Committee are appointed by the Board of Directors. Mr. Kunz and Mr. Schmitt are independent directors under applicable NASDAQ rules.  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 Committee.  Mr. Kunz serves as the chair of the Nominating Committee.  Messrs. Schafran and Mabey 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 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 three meetings during fiscal 2012.
 
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 10, 2012:
 
            Name                                              
 
 Age
 
            Position                                                                                    
         
Executive Committee of Board of Directors
     
Principal Executive Officer
Chad D. Olsen
 
41
 
Chief Financial Officer
 
The Executive Committee of the Board of Directors, comprised of George F. Schmitt and Winfried Kunz, was established to temporarily act in the principal executive officer function following the resignation of John L. Hastings, III in October 2012.  Mr. Hastings had served as our President since June 2008 and as Chief Executive Officer since June 2011.   Messrs. Schmitt and Kunz will act as a committee to fill the role of our principal executive officer on an interim basis until a new Chief Executive Officer can be engaged.  The members of the Executive Committee are not compensated beyond normal director compensation for their service on the Executive Committee.
 
Chad D. Olsen became our Chief Financial Officer in January 2010.  Prior to that time, he served as our corporate controller since September 2001.  From 1992 to 1997, Mr. Olsen worked in the banking and investment industry where he assisted clients with tax, investment and banking services. From 1997 to 2001, Mr. Olsen worked with a certified public accounting firm performing tax, auditing, and business advisory services. Additionally, Mr. Olsen owned and operated his own accounting practice performing tax, accounting, and consulting services. Mr. Olsen received a Bachelor of Science Degree in Accounting from Brigham Young University.
 
Item 11.    Executive Compensation

Our former President, Chief Operating Officer, and Chief Executive Officer, Mr. Hastings, was paid a base annual salary of $360,000.  Mr. Hastings resigned from the Company in October 2012. The amount of the base salary was determined after negotiations between Mr. Hastings and our Compensation Committee.  Factors considered in determining Mr. Hastings’ base salary included his background in the industries in which we operate; his educational and work background, and reviews of sample salaries at companies of comparable size and industry. 

Effective September 30, 2011, the Board of Directors granted warrants to purchase 69,000,000 shares of Common Stock to executives of the Company, including Mr. Hastings and other of its executive officers and managers.  As of September 30, 2012, unvested warrants held by executives to purchase 36,500,000 shares were cancelled which resulted in outstanding vested warrants for the purchase of 32,500,000 shares of Common Stock held by such executives as of September 30, 2012.  Upon cancellation of these warrants, the Company issued a total of 24,340,000 restricted shares of Common Stock to the executives.
 
Summary Compensation Table

The following table summarizes the total compensation paid or earned by our principal executive officer serving during the most recently completed fiscal year ended September 30, 2012, and the two other most highly compensated executive officers of the Company (with the principal executive officer, collectively, the “Named Executive Officers”) who were serving as executive officers at September 30, 2012:
 
 (a)  
( b )
   
( c )
     
( d )
     
( e )
     
( f )
     
( g )
     
( h )
 
                                       
All Other
         
 Name and      
Salary
     
Bonus
     
Stock Awards
     
Option Awards
     
Compensation
     
Total
 
 Principal Position   Year    
( $ )
     
( $ )
     
( $ )
     
( $ )
     
( $ )
     
( $ )
 
                                                   
John L. Hastings, III (1)
2012
  $ 360,000     $ -     $ 372,000     $ 1,297,055     $ 120,075     $ 2,149,130  
Chief Executive Officer,
2011
  $ 325,000     $ 27,000     $ 137,500     $ 477,350     $ 237,919     $ 1,204,769  
President, and
           
Chief Operating Officer
                                                 
                                                   
Chad D. Olsen (2)
2012
  $ 192,000     $ 35,000     $ 124,000     $ 432,352     $ 42,195     $ 825,547  
Chief Financial Officer
2011
  $ 165,000     $ 4,000     $ -     $ 159,117     $ 26,511     $ 354,628  
                                                   
Bernadette Suckel (3)
2012
  $ 168,000     $ 35,000     $ 77,500     $ 270,219     $ 7,950     $ 558,669  
Managing Director Global
2011
  $ 125,400     $ 2,000     $ -     $ 99,448     $ 10,653     $ 237,501  
Customer Service
           
 
 
(1)
Mr. Hastings was our Chief Executive Officer from July 2011 until October 2012. During that period he also served as our President (from June 2008) and our Chief Operating Officer (from November 2008).  Column (e) includes 12,000,000 shares of restricted and unregistered common stock, valued on the date of grant at $372,000 and 275 shares of Series D Preferred Stock, valued on the date of grant at $137,500 issued to Mr. Hastings during the fiscal years ended September 30, 2012 and 2011, respectively.  Column (f) includes the fair value on the date of grant of certain common stock purchase warrants granted to Mr. Hastings in the years indicated. As of September 30, 2012, the intrinsic value of these warrants was $0. Of the amounts indicated for fiscal year 2012, $676,248 was attributable to the cancellation and surrender of warrants to the Company by Mr. Hastings.  Column (g) includes $120,075 of additional compensation paid by us for services and benefits on behalf of Mr. Hastings as part of his deferred sign-on package which was paid over the past three years, as well as payments for paid-time off, health, dental, vision, and life insurance.

 
(2)
Mr. Olsen became our Chief Financial Officer in January 2010. Prior to his appointment as Chief Financial Officer, Mr. Olsen was our controller.  Column (e) includes 4,000,000 shares of restricted and unregistered  common stock valued on the date of grant at $124,000, issued to Mr. Olsen during the fiscal year ended September 30, 2012.  Column (f) includes the fair value on the date of grant of certain common stock purchase warrants granted to Mr. Olsen in the years indicated. As of September 30, 2012, the intrinsic value of these warrants was $0.  Of the amount indicated for fiscal year 2012, $225,561 was attributable to the cancellation and surrender of warrants to the Company by Mr. Olsen. Column (g) includes additional compensation for paid-time off, health, dental, life and vision insurance.

 
(3)
Mrs. Suckel has served as Managing Director of Global Customer Service and Account Management of the Company since June 2008. Column (e) includes 2,500,000 shares of restricted and unregistered common stock valued on the date of grant at $77,500, issued to Mrs. Suckel during the fiscal year ended September 30, 2012.  Column (f) includes the fair value on the date of grant of certain common stock purchase warrants granted to Mrs. Suckel during the fiscal years indicated. As of September 30, 2012, the intrinsic value of these warrants was $0.  Of the amount indicated for fiscal year 2012, $140,975 was attributable to the cancellation and surrender of warrants to the Company by Mrs. Suckel. Column (g) includes additional compensation for health, dental, life and vision insurance.
 
 
27

 
 
 
Outstanding Equity Awards at Fiscal Year-End 2012
 
                                                                   
Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($)
                                                                   
                       
Equity incentive plan awards: 
 Number of underlying
unexercised
 unearned options (#)
Option exercise price ($)
                     
Equity incentive plan awards:  Number of Unearned
shares, units or
other rights
 that have
 not vested (#)
                                             
                                             
       
Number of securities
underlying unexercised
 options (#) exercisable
Number of securities
 underlying unexercised
options (#) unexercisable
Option expiration date
Number of shares
or units of stock
 that have not vested (#)
Market value
 of shares or units
 of stock that have
 not vested ($)
       
       
       
 
 
Name
                                                                       
John L. Hastings III
1,250,000
-
-
$0.075
 
6/23/13
-
-
 -
 -
       
250,000
-
-
$0.075
 
1/15/14
-
 
-
 -
 -
       
18,000,000
-
-
$0.083
 
9/29/14
-
-
 -
 -
                                                                           
Chad D. Olsen
1,518,000
-
-
$0.075
 
4/30/13
-
-
 -
 -
       
200,000
-
-
$0.075
 
1/15/14
-
-
 -
 -
       
25,000
-
-
$0.075
 
3/14/14
-
-
 -
 -
       
653,380
-
           64,620
$0.075
 
9/29/15
-
-
 -
 -
       
6,000,000
-
-
$0.083
 
9/29/14
-
-
 -
 -
                                                                           
Bernadette Suckel
100,000
-
-
$1.55
 
6/8/13
-
-
 -
 -
       
200,000
-
-
$0.30
 
1/15/14
-
-
 -
 -
       
3,750,000
-
-
$0.083
 
9/29/14
-
-
 -
 -
       
637,000
-
           63,000
$0.15
 
9/29/15
-
-
 -
 -
 
No options held by the Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2012.
 
Employment Agreements
 
We have no employment agreements with any Named Executive Officer.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended (“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, and based on representations made by certain persons who were subject to this obligation that such filings were not required to be made, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2012, and that such filings were timely except the following:

·
Mr. Hanlon, a director, filed one late Form 4 to report one transaction; and
   
·
Mr. Schmitt, a director, filed one late Form 4 to report three transactions.
   
·
Borinquen Container Corporation filed six late Form 4s to report six transactions.
 
 
28

 
 
Compensation of Directors

We do not pay any compensation to our employee directors for their service on the Board.  However, we do pay our non-employee directors as indicated below.

The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended September 30, 2012:
 
(a)    
(b)
     
(c)
     
(d)
     
(e)
 
     
Fees earned
     
Stock awards
     
Option awards
     
Total
 
  Name    
($)
     
($)
     
($)
     
($)
 
                                 
David P. Hanlon
  $ 37,500     $ -     $ -     $ 37,500  
Winfried Kunz
  $ 27,500     $ -     $ -     $ 27,500  
George F. Schmitt
  $ 27,500     $ -     $ -     $ 27,500  
Larry G. Schafran
  $ 37,500     $ -     $ -     $ 37,500  
Rene Klinkhammer
  $ 37,500     $ -     $ -     $ 37,500  
David S. Boone
  $ 27,500     $ -     $ -     $ 27,500  
Dan L. Mabey
  $ 27,500     $ -     $ -     $ 27,500  
Antonio J. Rodriquez
  $ 27,500     $ -     $ -     $ 27,500  
Robert Childers
  $ 15,000     $ -     $ -     $ 15,000  
 
The Company accrued $5,000 per month for each director from October 1, 2011 to December 31, 2011. Effective January 1, 2012, the Board of Directors reduced the monthly fees to $2,500 per month for each director. These fees may be paid in cash, issuance of common stock, or warrants to purchase common stock. As of September 30, 2012, the fees reported under Column (b) were earned, but not paid.  Mr. Childers retired from the Board of Directors in December 2011.
 
The table below summarizes outstanding warrants previously issued to directors for compensation as of September 30, 2012:
 
 
Grant
Expiration
   
Exercise
     
Number of
     
Compensation
 
  Name
Date
Date
   
Price
     
Options
     
Expense
 
                             
Rene Klinkhammer
1/20/10
1/19/15
  $ 0.13       200,000     $ 21,036  
         
David Hanlon
7/14/08
7/13/13
  $ 0.13       459,000     $ 23,530  
1/20/10
1/19/15
  $ 0.13       250,000     $ 26,295  
10/7/11
10/6/14
  $ 0.0833       1,200,000     $ 33,358  
                             
Robert Childers
7/14/08
7/13/13
  $ 0.13       610,000     $ 31,271  
1/20/10
1/19/15
  $ 0.13       250,000     $ 26,295  
10/7/11
10/6/14
  $ 0.0833       1,200,000     $ 33,358  
         
Larry Schafran
12/5/07
12/4/12
  $ 0.13       50,000     $ 3,894  
7/14/08
7/13/13
  $ 0.13       610,000     $ 31,271  
1/20/10
1/19/15
  $ 0.13       250,000     $ 26,295  
10/7/11
10/6/14
  $ 0.0833       1,200,000     $ 33,358  
 
Reimbursement of Expenses

The Company reimburses 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 the Company’s 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 the Company. 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, the Company has determined that its compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.

 
29

 
 
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 Stock.  The following table presents information regarding beneficial ownership as of December 27, 2012 (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; (3) each of our directors; and (4) all of our executive officers and directors as a group.

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission (“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 640,088,850 of Common Stock issued and outstanding and 48,763 shares of Series D Preferred Stock issued and outstanding, convertible into 292,578,000 shares of Common Stock.  In computing the number of shares of Common Stock and Series D Preferred Stock beneficially owned by a person and the applicable percentage ownership of that person, we deemed outstanding shares of Common Stock or Series D Preferred Stock subject to warrants and options 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 Preferred Stock are entitled to 6,000 votes per share and vote with the Common shareholders on an as-converted basis. 
 
   
Title or Class of Securities:
             
                         
Name and Address of
 
Common Stock
         
Series D Preferred Stock
 
Beneficial Owner (1)
 
Shares
   
%
   
Shares
   
%
 
                         
5% Beneficial Owners:
                       
Sapinda Asia Limited (2)
    120,029,514       18.8 %     -       *  
Borinquen Container Corp (3)
    104,914,420       15.8 %     3,900       8.0 %
Advance Technology Investors, LLC (4)
    91,474,382       13.1 %     9,264       19.0 %
Kofler Ventures, S.a.r.1. (5)
    60,756,061       8.7 %     6,000       12.3 %
David G. Derrick (6)
    42,457,829       6.5 %     5,778       11.8 %
                                 
Directors and Named Executive Officers:
                               
George Schmitt (7)
    22,572,222       3.5 %     -       *  
Chad D. Olsen (8)
    14,223,803       2.2 %     172       *  
David P. Hanlon (9)
    3,077,047       *       115       *  
Larry G. Schafran (10)
    3,226,515       *       110       *  
Rene Klinkhammer (11)
    2,611,451       *       255       *  
Dan Mabey (12)
    1,000       *       -       *  
Guy Dubois
    -       *       -       *  
David S. Boone
    -       *       -       *  
Winfried Kunz
    -       *       -       *  
Antonio J. Rodriquez
    -       *       -       *  
                                 
All directors and executive officers as a group
                               
(10 persons)
    45,712,038       7.0 %     652       1.3 %
 
 
30

 
 
 
1)
Except as otherwise indicated, the business address for these beneficial owners is c/o the Company, 150 West Civic Center Drive, Suite 100, Sandy, Utah 84070.

 
2)
Includes 31,140,625 shares of common stock and 88,888,889 shares of common stock issuable upon the conversion of debentures in the principal amount of $2,000,000. Excluded from the table above are $3,700,000 in debentures that may be convertible into 164,444,444 shares of common stock after March 1, 2013.  Address is Rooms 803-4, 8F, Hang Seng Bank Building, 200 Hennessy Road, Wanchai, Hong Kong.

 
3)
Includes 23,400,000 shares of common stock issuable upon conversion of 3,900 shares of Series D Preferred stock and 81,514,420 shares of common stock.  Address is P.O. Box 145170, Arecibo, Puerto Rico 00614.

 
4)
Includes 54,300,000 shares of common stock issuable upon conversion of 9,050 shares of Series D Preferred and 35,113,200 shares of common stock owned of record by Advance Technology Investors, LLC.  In addition, we have included 438,591 shares of common stock owned of record by Dina Weidman, 32,001 shares of common stock owned of record by Steven Weidman, 306,590 shares of common stock owned of record by U/W Mark Weidman Trust, 642,000 shares of common stock issuable upon conversion of 107 shares of Series D Preferred stock owned of record by Dina Weidman, and 642,000 shares of common stock issuable upon conversion of 107 shares of Series D Preferred stock owned of record by Steven C. Weidman, which was not included on the 13D filed in December 2012 by Advance Technology Investors, LLC.  Address is 154 Rock Hill Road, Spring Valley, NY 10977.

 
5)
Includes 5,556,061 shares owned of record by Kofler Ventures, S.a.r.l. and vested stock purchase warrants for the purchases of 19,200,000 shares of common stock, as well as 36,000,000 shares of common stock issuable upon conversion of 6,000 shares of Series D Preferred stock owned of record by Kofler Ventures, S.a.r.l.  Address is R.C.S. Luxembourg B-0090554, 412F, route d’Esch, L-2086 Luxembourg.

 
6)
Amount indicated includes 5,094,766 shares owned of record by Mr. Derrick, 1,695,063 shares held in the name of ADP Management an entity controlled by Mr. Derrick, and vested warrants for the purchase of 1,000,000 shares of common stock. Also includes 22,668,000 shares of common stock issuable upon conversion of 3,778 shares of Series D Preferred stock owned of record by Mr. Derrick and 12,000,000 shares of common stock issuable upon conversion of 2,000 shares of Series D Preferred stock owned of record by JBD Management, LLC, an entity under common control of Mr. Derrick. Address is 1401 N. Highway 89, Suite 240, Farmington, Utah  84025.
 
 
7)
Mr. Schmitt is a director.  Amount indicated includes 350,000 shares of common stock owned of record and 22,222,222 shares of common stock issuable upon the conversion of a debenture in the principal amount of $500,000.

 
8)
Mr. Olsen is our Chief Financial Officer.  Common stock beneficially owned includes 4,795,423 shares owned of record by Mr. Olsen and 8,396,380 shares issuable upon exercise of vested stock purchase warrants, as well as 1,032,000 shares of common stock issuable upon conversion of 172 shares of Series D Preferred stock.

 
9)
Mr. Hanlon is a director.  Amount indicated includes 478,047 shares of common stock owned of record by David P. Hanlon Living Trust and 1,909,000 shares issuable upon exercise of warrants, as well as 690,000 shares of common stock issuable upon conversion of 115 shares of Series D Preferred stock.

 
10)
Mr. Schafran is a director.  Common stock includes 456,515 shares owned of record by Mr. Schafran and 2,110,000 shares of common stock issuable upon exercise of stock purchase warrants, as well as 660,000 shares of common stock issuable upon conversion of 110 shares of Series D Preferred stock.

 
11)
Mr. Klinkhammer is a director.  Includes 881,451 shares of common stock owned of record, 1,530,000 shares of common stock issuable upon conversion of 255 shares of Series D Preferred and 200,000 shares of common stock issuable upon exercise of stock purchase warrants.

 
12)
Mr. Mabey is a director.  Amount indicated includes 1,000 shares of common stock owned of record by Mr. Mabey.
 
 
31

 
 
Item 13.    Certain Relationships and Related Transactions, and Director Independence

Related Transactions

The Company entered into certain transactions with related parties during the fiscal years ended September 30, 2011 and 2012. These transactions consist mainly of financing transactions and consulting arrangements.  Transactions with related parties are reviewed and approved by the independent and disinterested members of the Board of Directors.
 
   
2012
   
2011
 
             
Note payable in connection with the redemption of a royalty agreement for $10,768,555.  The note requires installment payments and matured December 17, 2012. Subsequent to the fiscal year end, this note was terminated.
  $ 10,050,027     $ -  
                 
Note payable in connection with the purchase of the remaining ownership of Midwest Monitoring & Surveillance, Inc. The payments are due quarterly ending in September 2013. The Company imputed interest since the note has no stated interest rate, resulting in a debt discount balance as of September 30, 2012 and 2011 of $11,398 and $32,524, respectively. The note was paid off subsequent to September 30, 2012 through the sale of Midwest Monitoring & Surveillance, Inc.
    138,602       192,476  
                 
Note payable in connection with the purchase of the remaining ownership of Court Programs, Inc., interest at 12% per annum, with monthly payments of $10,000. The note matured November 2012 and is currently in default.
    46,694       139,272  
                 
The Company received $500,000 from Mr. Derrick, a shareholder and former officer. The terms of this financing have not been determined as of the date of this Report.
    500,000       -  
                 
Convertible debenture with an interest rate of 8% per annum. The debenture matures December 17, 2012 and is secured by the domestic patents of the Company. The debenture may be converted into shares of common stock at a rate of $0.0225 per share. The debenture is currently in default.
    500,000       -  
                 
Convertible debenture with an interest rate of 8% per annum. The debenture matures December 17, 2012 and is secured by the domestic patents of the Company. The debenture may be converted into shares of common stock at a rate of $0.0225 per share.  The debenture is currently in default.
    2,000,000       -  
                 
The Company received $1,900,000 through the issuance of convertible debentures with an interest rate of 8% per annum. The debentures mature on June 17, 2014. This debenture may convert into shares of common stock at a rate of $0.0225 per share. A debt discount of $633,333 was recorded to reflect a beneficial conversion feature. As of September 30, 2012, the remaining debt discount was $611,308.
    1,288,692       -  
                 
The Company entered into a Loan a Security Agreement with an entity under which the Company could borrow up to $8,000,000 on a line of credit. Both the Company and the Lender agreed to terminate the agreement and enter into an agreement to raise additional equity on behalf of the Company through the sale of Series D Preferred stock.  The loan was paid back and the line of credit was closed.
    -       500,000  
                 
Note payable with an interest rate of 16% per annum and matured in November 2011.
    -       40,000  
                 
Total related-party debt obligations
    14,524,015       871,748  
Less current portion
    (12,793,303 )     (754,896 )
Long-term debt, net of current portion
  $ 1,730,712     $ 116,852  
 
 
 
32

 

Other Related-Party Transactions

Notes #1 and #2
During the year ended September 30, 2012, the Company borrowed $2,000,000 from a significant shareholder, Borinquen. under two notes payable.  The first note was unsecured and the second was secured by $1,530,000 of leased equipment and $1,529,808 of accounts receivable from an international customer.  The notes bore interest of 15% per annum and the Company accrued a $50,000 origination fee.  During the fiscal year ended 30, 2012, the Company paid $1,018,082 to pay in full all outstanding principal and accrued interest on the first note and $1,037,544 to pay in full all outstanding principal and accrued interest on the second note.

Note #3
During the year ended September 30, 2012, the Company borrowed $50,000 from its then Chief Executive Officer, John Hastings, under an unsecured promissory note.  The note bore interest of 15% per annum and was paid in full prior to September 30, 2012.  In connection with this loan, the Company paid a $5,000 origination fee and agreed to re-price outstanding warrants and options previously granted to Mr. Hastings to an exercise price of $0.075 per share, valued at $15,237 and recorded as interest expense.  The value of $15,237 was calculated based upon the following assumptions:  volatility ranging from 100.02% to 109.24%, risk-free rate of 0.22%, exercise price of $0.075, and market price of Common Stock on grant date of $0.074 per share.

Notes #4 and 5
During the year ended September 30, 2012, the Company borrowed $250,000 from its Chief Financial Officer, Chad Olsen, under two unsecured promissory notes payable.  The notes bore interest of 15% per annum and were paid in full prior to September 30, 2012.  The Company paid $15,000 in loan origination fees and agreed to re-price outstanding warrants and options previously granted to Mr. Olsen and other individuals to an exercise price of $0.075 per share, valued at $24,723 and recorded as interest expense.  The value of $24,723 was calculated based upon the following assumptions:  volatility ranging from 76.69% to 119.56%, risk-free rate ranging from 0.22% to 0.37%, exercise price of $0.075, and market price of Common Stock on grant date ranging from $0.074 to $0.075 per share.

Note #6
During the year ended September 30, 2012, the Company borrowed $180,000 from Rene Klinkhammer, one of its directors, under an unsecured promissory note payable.  The note bore interest of 10 percent per annum and the Company paid $193,220 of principal and interest to settle the note in full prior to September 30, 2012.  Included in the payoff of $193,220 is $9,000 in loan origination fees.

The following table summarizes the Company’s future maturities of related-party debt obligations as of September 30, 2012:

Fiscal Year
 
Total
 
 2013
  $ 12,793,303  
 2014
    1,730,712  
 Thereafter
    -  
 Total
  $ 14,524,015  

Recent Transactions

The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued.  Subsequent to September 30, 2012, the following events occurred:

·
We issued 20,760,551 shares of common stock for fourth quarter Series D Preferred stock dividends, valued at $630,528.
   
·
Effective October 1, 2012, we entered into a Stock Purchase Agreement whereby two former principals of Midwest purchased from the Company all the issued and outstanding capital stock of Midwest for $750,000, payable as follows:  (a) forgiveness of $650,000 in debt obligations owed by the Company to the former Midwest principals, and (b) cash of $100,000 payable under a note on or before April 1, 2013.
   
·
Our Chief Executive Officer, John L. Hastings, III resigned from all executive positions with the Company and as a director.  The Board of Directors formed an Executive Committee comprised of directors George Schmitt and Winfried Kunz to temporarily fulfill the duties of our principal executive officer until a new Chief Executive Officer is hired.
   
·
On December 3, 2012 the Board of Directors appointed Guy Dubois as a director to fill the vacancy resulting from Mr. Hastings’ resignation and to fulfill a condition of the Loan and Security Agreement entered into with Sapinda Asia to appoint to the Board of Directors a representative of Tetra House Pte., Ltd.
 
·  
On December 3, 2012, SecureAlert entered into a Loan and Security Agreement (“Loan Agreement”) with Sapinda Asia Limited (“Sapinda Asia”) whereby Sapinda Asia agreed to loan us the sum of $16,640,000 (the “Loan”). The Loan will accrue interest at a rate of 8% per annum and included a loan origination fee of $640,000, which was forfeited when Sapinda Asia failed to make all of the funds available to us as required under the terms of the Loan Agreement. The Loan is convertible into shares of common stock at $0.0225 per share and matures on June 17, 2014. Subsequent to the fiscal year ended September 30, 2012, Sapinda Asia or its affiliates advanced a total of $2,800,000 to us under the Loan Agreement.  The proceeds of the Loan were to be used in part to redeem the Royalty granted to Borinquen under a royalty repurchase agreement (the “Repurchase Agreement”) and for general corporate purposes. The Loan is secured, after it has been fully funded, by all of the intellectual property and other assets of the Company and by the Royalty.  In the event of a default by the Company, Sapinda Asia has the right to purchase the Royalty by reducing the outstanding principal of the Loan by $10,739,426. However, Sapinda Asia’s failure to fully fund the Loan as expected under the Loan Agreement prevented us from making timely payments to Borinquen under the Repurchase Agreement. As a result, Borinquen terminated the Repurchase Agreement on December 26, 2012.  As of the date of this report, Sapinda Asia and Borinquen are negotiating the terms of an agreement to cure the default and complete the purchase of the royalty on behalf of the Company. See “Risk Factors” on page 10.

 
33

 
 
Director Independence

The current members of our Board of Directors are David S. Boone, Guy Dubois, David P. Hanlon, Rene Klinkhammer, Winfried Kunz, Dan L. Mabey, Antonio J. Rodriquez, Larry G. Schafran, and George F. Schmitt.  The Board of Directors has determined that the following current members of the Board are independent directors, in accordance with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15): Messrs. Boone, Hanlon, Kunz, Rodriquez, Schafran and Schmitt.  The independent directors meet from time to time in executive session.  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 of our parent or subsidiary;
   
·
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 five 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.    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. for fiscal years 2012 and 2011 totaled approximately $147,000 and $144,000, respectively.
 
Tax Fees, Audit Related Fees, and All Other Fees
 
Hansen Barnett & Maxwell, P.C. provided tax services to us in fiscal years 2012 and 2011.  Tax fees paid for fiscal years 2012 and 2011 totaled approximately $14,000 and $14,000, respectively.  The Audit Committee of the Board of Directors considered and authorized all services provided by Hansen Barnett & Maxwell, P.C.
 
 
34

 
 
Auditor Independence

Our Audit Committee considered that the work done for us in fiscal year 2012 by Hansen Barnett & Maxwell, P.C. was compatible with maintaining Hansen Barnett & Maxwell, P.C.’s independence.
 
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, 2012 with our management.  The Audit Committee discussed with Hansen Barnett & Maxwell, P.C., our independent public accounting firm for the fiscal year ended September 30, 2012, the matters required to be discussed under applicable PCAOB standards.  The Audit Committee also received the written communication from Hansen Barnett & Maxwell, P.C. required by PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed the independence of Hansen Barnett & Maxwell, P.C. 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, 2012 filed with the SEC on January 14, 2013.
 
 
Respectfully submitted:
 
 
THE AUDIT COMMITTEE

David S. Boone, Chair
George F. Schmitt

PART IV
 
Item 15.    Exhibits and Financial Statement Schedules
 
(a) The following documents are filed as part of this Form:

1. Financial Statements
 
Report of Independent Registered Public Accounting Firm
 
41
Consolidated Balance Sheets
 
42
Consolidated Statements of Operations
 
43
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income
 
44
Consolidated Statements of Cash Flows
 
46
Notes to the Consolidated Financial Statements
 
48

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: 
 
 
35

 
 
 Exhibit Number   Title of Document
   
 3(i)(1) Articles of Incorporation (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
 3(i)(2) Amendment to Articles of Incorporation for Change of Name (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001).
 3(i)(3) Amendment to Articles of Incorporation Amending Rights and Preferences of Series A Preferred Stock (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001).
 3(i)(4) Amendment to Articles of Incorporation Adopting Designation of Rights and Preferences of Series B Preferred Stock (previously filed as Exhibit on Form 10-QSB for the six months ended March 31, 2002).
 3(i)(5) Certificate of Amendment to the Designation of Rights and Preferences Related to Series A 10% Cumulative Convertible Preferred Stock of SecureAlert, Inc. (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001).
 3(i)(6) Certificate of Amendment to the Designation of Rights and Preferences Related to Series C 8% Convertible Preferred Stock of SecureAlert, Inc. (incorporated by reference to our Current Report on Form 8-K, filed with the Commission on March 24, 2006).
 3(i)(7) Articles of Amendment to Articles of Incorporation filed July 12, 2006 (previously filed as exhibits to our current report on Form 8-K filed July 18, 2006, and incorporated herein by reference).
 3(i)(8) Articles of Amendment to the Fourth Amended and Restated Designation of Right and Preferences of Series A 10% Convertible Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007).
 3(i)(9) Articles of Amendment to the Designation of Right and Preferences of Series A Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007).
 3(i)(10) Articles of Amendment to the Articles of Incorporation and Certificate of Amendment to the Designation of Rights and Preferences Related to Series D 8% Convertible Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-K filed in January 2010).
 3(i)(11) Articles of Amendment to the Articles of Incorporation filed March 28, 2011 (previously filed as Exhibit on Form 8-K filed April 4, 2011).
 3(i)(12) Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed August 1, 2011 (previously filed as Exhibit on Form 10-Q filed August 15, 2011).
 3(i)(13) Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed December 28, 2011 (filed herewith.)
 3(ii) Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997).
 3(iii) Amended and Restated Bylaws (previously filed in February 2011 the Form 10-Q for the three months ended December 31, 2010).
 4.01 2006 Equity Incentive Award Plan (previously filed in August 2006 the Form 10-QSB for the nine months ended June 30, 2006).
 10.01 Distribution and Separation Agreement (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
 10.02 1997 Stock Incentive Plan of the Company, (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
 10.03 1997 Transition Plan (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
 10.04 Securities Purchase Agreement for $1,200,000 of Series A Preferred Stock (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
 10.05 Loan Agreement (as amended) dated June 2001 between ADP Management and the Company (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001).
 10.06 Loan Agreement (as amended and extended) dated March 5, 2002 between ADP Management and the Company, effective December 31, 2001 (filed as an exhibit to our quarterly report on Form 10-QSB for the quarter ended December 31, 2001).
 10.07 Agreement with ADP Management, Derrick and Dalton (April 2003) (previously filed as Exhibit on Form 10-QSB for the six months ended March 31, 2003)
 10.08 Security Agreement between Citizen National Bank and the Company (previously filed on Form 8-K in July 2006).
 10.09 Promissory Note between Citizen National Bank and the Company (previously filed on Form 8-K in July 2006).
 
 
36

 
 
 10.10 Common Stock Purchase Agreement dated as of August 4, 2006 (previously filed as an exhibit to our current report on Form 8-K filed August 7, 2006 and incorporated herein by reference).
 10.11 Change in Terms Agreement between Citizen National Bank and the Company (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2006)
 10.12 Securities Purchase Agreement between the Company and VATAS Holding GmbH, a German limited liability company (previously filed on Form 8-K in November 2006).
 10.13 Common Stock Purchase Warrant between the Company and VATAS Holding GmbH dated November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
 10.14 Settlement Agreement and Mutual Release between the Company and Michael Sibbett and HGR Enterprises, LLC, dated as of February 1, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
 10.15 Distributor Sales, Service and License Agreement between the Company and Seguridad Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
 10.16 Distributor Agreement between the Company and QuestGuard, dated as May 31, 2007. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007).
 10.17 Stock Purchase Agreement between the Company and Midwest Monitoring & Surveillance, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008).
 10.18 Stock Purchase Agreement between the Company and Court Programs, Inc., Court Programs of Florida Inc., and Court Programs of Northern Florida, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008).
 10.19 Sub-Sublease Agreement between the Company and Cadence Design Systems, Inc., a Delaware corporation, dated March 10, 2005 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.20 Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.21 Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.22 Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.23 Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.24 Stock Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to Futuristic Medical, LLC), dated January 15, 2008, including voting agreement (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
 10.25 Distribution and License Agreement between euromicron AG, a German corporation, and the Company, dated May 28, 2009 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2009, filed in August 2009).
 10.26 Agreement for Monitoring & Associated Services among I.C.S. of the Bahamas Co., Ltd., SecureAlert, Inc., International Surveillance Services Corp and The Ministry of National Security, dated November 19, 2010 (previously filed on Form 8-K in November 2010).
 10.27 Agreement and Royalty Agreement between Borinquen Container Corporation and SecureAlert, effective July 1, 2011 (previously filed on Form 8-K in August 2011).
 10.28 Stock Purchase Agreement between Gary Shelton, Larry and Sue Gardner and SecureAlert, effective October 1, 2012 (previously filed on Form 8-K in December 2012).
 10.29 Loan and Security Agreement between Sapinda Asia Limited and SecureAlert, effective December 3, 2012 (previously filed on Form 8-K in December 2012).
 31(i) Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002.
 31(ii) Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002.
 31(iii) Certification of Chief Financial Officer, Principal Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002.
 32 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
 101 INS XBRL Instance Document*
 101 SCH XBRL Schema Document*
 101 CAL XBRL Calculation Linkbase Document*
 101 DEF XBRL Definition Linkbase Document*
 101 LAB XBRL Labels Linkbase Document*
 101 PRE XBRL Presentation Linkbase Document*
     
*           The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 
37

 

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/ George F. Schmitt
 
George F. Schmitt, Member Executive Committee
 
 (Acting Principal Executive Officer)
   
 
By: /s/ Winfried Kunz
 
Winfried Kunz, Member Executive Committee
 
 (Acting Principal Executive Officer)
 
Date: January 14, 2013
 
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/  George F. Schmitt
 
 Director, Member Executive Committee
 
 January 14, 2013
      George F. Schmitt
 
 (Acting Principal Executive Officer)
   
         
 /s/  Winfried Kunz
 
 Director, Member Executive Committee
 
 January 14, 2013
      Winfried Kunz
 
 (Acting Principal Executive Officer)
   
         
 /s/  Chad D. Olsen
 
 Chief Financial Officer and (Principal Financial
 
 January 14, 2013
      Chad D. Olsen
 
 Officer and Principal Accounting Officer
   
         
 /s/  David P. Hanlon
 
 Director
 
 January 14, 2013
      David P. Hanlon
       
         
 /s/  David S. Boone
 
 Director
 
 January 14, 2013
      David S. Boone
       
         
 /s/  Rene Klinkhammer
 
 Director
 
 January 14, 2013
      Rene Klinkhammer
       
         
 /s/  Dan L. Mabey
 
 Director
 
 January 14, 2013
      Dan L. Mabey
       
         
 /s/  Antonio J. Rodriquez
 
 Director
 
 January 14, 2013
      Antonio J. Rodriquez
       
         
 
 
 Director
 
 January 14, 2013
      Larry G. Schafran
       
         
 /s/  Guy Dubois
 
 Director
 
 January 14, 2013
      Guy Dubois
       
 

 
38

 



 










SecureAlert, Inc.
Consolidated Financial Statements
September 30, 2012 and 2011







 






 
39

 


Index to Consolidated Financial Statements



 
Page
   
Report of Independent Registered Public Accounting Firm
41
   
Consolidated Balance Sheets as of September 30, 2012 and 2011
42
   
Consolidated Statements of Operations for the fiscal years ended September 30, 2012 and 2011
43
   
Consolidated Statements of Stockholders’ Equity for the fiscal years ended September 30, 2011 and 2012
44
   
Consolidated Statements of Cash Flows for the fiscal years ended  September 30, 2012 and 2011
46
   
Notes to Consolidated Financial Statements
48
 
 
40

 

 
 

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 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2012 and 2011, and the consolidated results of its operations, and its cash flows for the years 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, 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.  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
 
 


 
41

 
 
SECUREALERT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 AND 2011
 
 
Assets
 
2012
   
2011
 
Current assets:
           
Cash
  $ 695,111     $ 949,749  
Accounts receivable, net of allowance for doubtful accounts of $772,000 and $996,122, respectively
    2,864,542       4,150,427  
Note receivable, current portion
    156,190       90,000  
Prepaid expenses and other
    1,979,172       1,082,581  
Inventory, net of reserves of $192,000 and $127,016, respectively
    630,566       579,779  
Total current assets
    6,325,581       6,852,536  
Property and equipment, net of accumulated depreciation of $2,562,323 and $2,530,591, respectively
    677,493       1,086,633  
Monitoring equipment, net of accumulated amortization of $3,179,310 and $3,608,388, respectively
    3,325,110       3,461,985  
Note receivable, net of current portion
    112,492       125,000  
Goodwill
    375,000       5,889,395