Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2017
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ____________
to ___________
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Commission file number:
000-23153
TRACK GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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87-0543981
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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200 E.
5th
Avenue
Suite 100 Naperville, Illinois 60563
(Address of principal executive offices, Zip Code)
(877) 260-2010
(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 [ ] 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
[ ] 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 [ ]
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 [ ]
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. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated
filer [
]
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Non-accelerated filer [
]
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Smaller reporting company [X]
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(Do not check if a smaller reporting company)
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Emerging growth company [ ]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes
[ ] No [X]
The aggregate market value of the registrant’s Common Stock
held by non-affiliates of the registrant computed by reference to
the closing price on March 31, 2017 was $10.9 million. As of
December 1, 2017, there were 10,480,984 shares of Common Stock
issued and outstanding.
Documents Incorporated by
Reference
The registrant incorporates information required by Part III (Items
10, 11, 12, 13, and 14) of this report by reference to portions of
the registrant's definitive proxy statement with respect to its
2018 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after the close of the
fiscal year ended September 30, 2017, pursuant to Regulation
14A.
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Track Group, Inc.
FORM 10-K
For the Fiscal Year Ended September 30, 2017
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933
(the “Securities
Act”) and Section 21E of
the Securities Exchange Act of 1934 (the “Exchange
Act”), as amended,
relating to our operations, results of operations, and other
matters that are based on our current expectations, estimates,
assumptions, and projections. Words such as “may,”
“will,” “should,” “likely,”
“anticipates,” “expects,”
“intends,” “plans,” “projects,”
“believes,” “estimates,” and similar
expressions are used to identify these forward-looking
statements. These statements are not guarantees of future
performance and involve risks, uncertainties, and assumptions that
are difficult to predict. Forward-looking statements are based
upon assumptions as to future events that might not prove to be
accurate. Actual outcomes and results could differ materially
from what is expressed or forecast in these forward-looking
statements. Risks, uncertainties, and other factors that might
cause such differences, some of which could be material, include,
but are not limited to the factors discussed under the section of
this Annual Report entitled “Risk
Factors.”
PART I
Track Group, Inc., a Delaware corporation since 2016 and previously
incorporated in 1995 as a Utah corporation, has its principal place
of business at 200 E. 5th
Avenue Suite 100, Naperville, Illinois
60563. Our telephone number is (877) 260-2010. We maintain a
corporate website at www.trackgrp.com. Our common stock, par
value $0.0001 (“Common
Stock”), is currently
listed for quotation on the OTCQX Premier marketplace
(“OTCQX”) under the symbol TRCK. Unless
specified otherwise, as used in this Form 10-K, “we,”
“us,” “our,” “Track Group” or
the “Company” refer to Track Group, Inc. and its
subsidiaries.
Company Background
The Company designs, manufactures, and markets location tracking
devices and develops and sells a variety of related software,
services, accessories, networking solutions, and monitoring
applications. Our products and services include a full-range of
one-piece GPS tracking devices, a device-agnostic operating system,
a portfolio of software applications including smartphone, alcohol
and predictive analytics, and a variety of accessory, service and
support offerings. Our products and services are currently
available worldwide and are sold through our direct sales force, as
well as through value-added resellers. The Company sells to
government customers on federal, state and local levels in the US
and to members of the Ministry of Justice (MOJ) internationally.
Track Group’s device-agnostic platform and expanded portfolio
of integrated and complimentary monitoring-related services help
reduce risk and make the administration of justice better, faster,
and less expensive for taxpayers. As of September 30, 2017, The
Company’s products and platform are used to monitor over
30,000 individuals globally.
Business Strategy
We are committed to helping our customers improve offender
rehabilitation and re-socialization outcomes through our innovative
hardware, software, and services. We treat our business as a
service business. Although we still manufacture patented tracking
technology, we see the physical goods as only a small part of the
integrated offender monitoring solutions we provide. So, rather
than receiving a stream of ongoing revenue just for a piece of
manufactured equipment, the Company is now receiving a steady
stream of revenue for ongoing device agnostic subscription
contracts. As part of our strategy, we continue to expand our
device-agnostic platform to not
only collect, but also store, analyze, assess and correlate
location data for both accountability and auditing reasons, as well
as to use for predictive analytics and assessment of effective and
emerging techniques in criminal behavior and rehabilitation.
We believe a high-quality customer
experience with knowledgeable salespersons who can convey the value
of our products and services greatly enhances our ability to
attract and retain customers. Therefore, our strategy also includes
building and expanding our own direct sales force and our
third-party distribution network to effectively reach more
customers and provide them with a world-class sales and post-sales
support experience. In addition, we are developing related-service
offerings to address adjacent market opportunities in both the
public and private sectors. We believe continual investment in
research and development (“R&D”), including smartphone applications and
other monitoring services is critical to the development and sale
of innovative technologies and integrated solutions today and in
the future.
Recent Developments
Marion County Agreements
The Company is
working on finalizing two contracts with Marion County Community
Corrections (“Agency”), the largest county in
the state of Indiana. On October 19, 2017, the Agency’s
Advisory Board approved a multi-year contract for the Company to
provide electronic monitoring services (“Monitoring Contract”) across the
full range of sentences under the Agency’s oversight. On
November 28, 2017, the Marion County Information Technology Board
approved both the Monitoring Contract and a multi-year contract for
the Company to provide analytics
software.
Contract with the Gendarmeria de Chile
The previous multi-year agreement signed between
Gendarmeria de Chile, the Republic of Chile's uniformed prison
service, and Track Group in 2013, ended in October of 2017 although
services have continued uninterrupted. In March 2017, a public
tender process commenced as required. After submissions and reviews
were complete, the results of the tender were suspended by the
Chilean Court of Public Buyers following formal complaints filed by
the Company and another competitor. The Company's Chilean
subsidiary and Gendarmeria de Chile signed a new agreement on
December 7, 2017 ("New
Agreement") to provide
electronic monitoring of offenders commencing on October 18, 2017
for a period of 365 days to supply monitoring services totaling up
to approximately $10.6 million. The New Agreement is subject to
approval by the Oficina de la Contraloria General de la
República which the Company anticipates receiving within the
next 30 days.
Debt Exchange Agreement
On October 9, 2017, the Company entered into a
Debt Exchange Agreement with Conrent Invest S.A.
(“Conrent”), a public limited liability company
incorporated under the laws of the Grand Duchy of Luxembourg
regarding total debt and unpaid interest of approximately $34.7
million as of October 31, 2017 (the “Debt”) (the “Debt
Exchange”). The Debt
Exchange called for the Company to exchange newly issued shares of
preferred stock for the entire Debt subject to approval by the
investors who purchased securities from Conrent to finance the Debt
(the “Noteholders”). On November 2, 2017, Conrent convened a
meeting of the Noteholders to approve the Debt Exchange; however,
the quorum required to approve the Debt Exchange was not achieved.
Management continues to negotiate with Conrent regarding terms for
the Debt Exchange acceptable to Noteholders with the objective of
reaching an agreement acceptable to both Conrent and the
Noteholders before the Debt matures on July 31,
2018.
Restructuring Plan
During the fiscal year ended September 30, 2017,
the Company completed a restructuring (the
“Restructuring
Plan”) to streamline
operations by consolidating our headquarters from Salt Lake City,
Utah into our existing Chicagoland office. The Restructuring Plan
also included the build-out and development of a new outsourced
monitoring center located in the Chicagoland area that allowed us
to upgrade operators and management, improve training, lower future
expenses, and improve our ability to align workforce costs with
customer demands.
Sapinda Loan Agreement Amendment Number One
On March 13, 2017, the
Company and Sapinda Asia
Limited (“Sapinda”) entered into an
agreement to amend the Loan Agreement executed by the parties on
September 25, 2015 (“Amendment
Number One”). Amendment
Number One extends the maturity date of all loans made pursuant to
the Loan Agreement to September 30, 2020. In addition, we began
accruing penalties since Sapinda has not funded the remaining
amount of approximately $1.5 million available on the loan on or
before March 31, 2017. The penalties totaled approximately $183,000
at September 30, 2017, and the daily penalties currently exceed the
daily interest due Sapinda. Further advances under
the Loan Agreement are not currently expected to be forthcoming,
and therefore no assurances can be given that the Company will
obtain additional funds to which it is entitled under the Loan
Agreement, or that the penalties accruing will ever be
paid.
Products and Services
Devices
ReliAlert™XC 3
ReliAlert™XC3 is our flagship GPS device that sets the
standard for reliability and performance in the offender monitoring
industry. Advanced features enable agencies to more effectively
track offender movements and communicate directly with offenders in
real-time, through a patented, on-board two/three-way voice
communication technology. This device includes an enhanced GPS
antenna and GPS module for higher sensitivity GPS, enhanced voice
audio quality, increased battery performance of 50+ hours, 3G
cellular capabilities, improved tamper sensory, and durability
enhancements.
Shadow™
Driven by customer demand to improve the performance and
affordability of offender tracking devices, Shadow™ is the
smallest and lightest device of its kind with a sleek, modern
design featuring an enhanced mobile charging capability that makes
it easier to use. The device is 3G compliant and fully supported by
all global mobility providers. Management anticipates that this
product will increase the Company’s penetration into the
offender monitoring marketplace.
Operating System Software
TrackerPAL™
TrackerPAL™ is a secure, cloud-based monitoring system
that gives customers the
ability to not only collect, but also store, analyze, assess and
correlate offender data for both accountability and auditing
reasons, as well as to use with predictive analytics applications
and assess criminal behavior and rehabilitation opportunities. The
Company is working on a successor software platform,
IntelliTrackTM
that will be introduced to customers
in a controlled manner through the upcoming fiscal
year.
Application Software
TrackerPAL™ Mobile
A mobile application of the TrackerPAL™ software is available
for Android and iOS devices. The Company is also developing a
similar application for IntelliTrackTM.
Data Analytics
Our data analytics services help facilitate the discovery and
communication of meaningful patterns in diverse location and
behavioral data that helps agencies reduce risks and improve
decision making. Our analytics applications use various
combinations of statistical analysis procedures, data and text
mining, and predictive modeling to proactively analyze information
on community-released offenders to discover hidden relationships
and patterns in their behaviors and to predict future
outcomes.
Real-Time Alcohol Monitoring
BACtrack is the world’s first smartphone-based remote alcohol
monitoring system. The award-winning BACtrack Mobile integrates a
smartphone app and police-grade breathalyzer branded for the
Company to bring blood-alcohol content (“BAC”) wirelessly to a mobile device. We can
quickly and easily estimate an enrollee’s BAC and track the
results over time. The smartphone monitoring application allows
supervisors to send scheduled or random notifications to enrollees
to take BAC tests, providing photo/location-verified and time
stamped results. It also includes an onboard calendar, reminding an
enrollee of court dates, testing dates, medications to take,
mandatory events to attend, and other matters.
Victim and Survivor Support
Our Domestic Violence Smartphone Application creates a mobile
geo-zone around a survivor of domestic abuse and communicates with
the offender’s tracking device – providing an
early-warning notification to the survivor if he or she is in
proximity of the offender or group of offenders.
Accessories
SecureCuff™
The SecureCuff™ is a patented, optional accessory available
exclusively for ReliAlert™XC3 and is the only uncuttable
strap in the industry specifically made for high-risk offenders.
SecureCuff™ has encased, hardened steel bands that provide
extreme cut-resistance and includes the same fiber-optic technology
as the standard strap for tampering notification.
RF Beacon™
The Beacon™ is a completely self-contained, short-range
transmitting station that provides a Radio Frequency (RF) signal
communicating with assigned offender GPS devices to increase the
ability to maintain critical offender location information and
provide agencies with an effective way to more accurately
“tether” an offender to a specific
location.
Product Support and Services
Monitoring Centers
Our monitoring centers provide live 24/7/365 monitoring of all
alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, are staffed with highly trained, bi-lingual
individuals. These operators act as an extension of agency
resources receiving alarms, communicating and intervening with
offenders regarding violations, and interacting with supervision
staff, all pursuant to agency-established protocols. The
facilities have redundant power source, battery backup and triple
redundancy in voice, data, and IP. We have assisted in the
establishment of monitoring centers for customers and local
partners in the United States, Chile and other global
locations.
Customer Care
We offer a range of support options for our customers. These
include assistance that is built into software products, printed
and electronic product manuals, online support including
comprehensive product information, as well as technical
assistance.
Research and Development Program
During
the fiscal year ended September 30, 2017, we incurred research and
development expense of $1,784,867, compared to $2,415,924
recognized during fiscal year 2016. The $631,057 decrease in
research and development cost reflects plans implemented to lower
contract labor, curtail outside services and reduce payroll costs.
However, the Company also strategically invested in enhancing the
firmware and software to improve the customer experience and
completing the new software platform to increase scalability and
add new features requested by government agencies. As a result of
these investments and improvements, $2,416,804 was capitalized as
developed technology during the twelve months ended September 30,
2017. This represented an increase of $325,842 over the $2,090,962
capitalized as developed technology during the twelve months ended
September 30, 2016.
Competition
The markets for our products and services are highly competitive
and we are confronted by aggressive competition in all areas of our
business. These markets are characterized by frequent product
introductions and technological advances. Our competitors selling
tracking devices have aggressively cut prices and lowered their
product margins to gain or maintain market share. The
Company’s financial condition and operating results can be
adversely affected by these and other industry-wide downward
pressures on gross margins. Principal competitive factors important
to us include price, product features, relative price/performance,
product quality and reliability, design innovation, a strong
software ecosystem, service and support, and corporate
reputation.
Our specific competitors vary from market to market and we compete
against other international, national and regional companies, some
of whom use local partners who have more knowledge of the local
markets and the government decision making process. Some of our
competitors are owned by large public companies and may have access
to more resources than we do, while others are backed by private
equity firms with large funds, or in some cases, work as part of
consortium with extensive international experience. We expect
competition in these markets to intensify significantly as
competitors attempt to imitate some of the features of our products
and applications within their own products or, alternatively,
collaborate with third-party providers to offer solutions that are
more competitive than those they currently offer.
Competitive Strengths
Industry leading Analytics Software. Remains the only fully
functioning, revenue generating analytics software on the market
today, specifically designed for the offender monitoring
market. Several state
department of corrections, county probation agencies and
Sheriff’s offices have utilized this solution for more than
two years.
Device Agnostic Software Platform. The Company’s
software platform is device agnostic and currently accommodates
offender monitoring of new products that we introduce, integrates
with case management software utilized by sheriff, probation and
pre-trial departments, and adds devices manufactured by
competitors.
Smartphone Monitoring Pioneers in Criminal Justice.
Today’s prison system incarcerates too many individuals who
pose little threat to public safety, at far too great a cost. They
serve their sentences in overcrowded, outdated institutions that
expose them to hardened criminals. Upon release, their
opportunities and lives have changed forever. Now, low-risk
offender populations can serve their sentences virtually, holding
jobs and taking care of family members, yet still feeling the
weight of their punishment while seeing a clear path to avoiding
trouble in the future. And taxpayers gain a clear cost advantage.
Today, we have developed apps targeting alcohol monitoring,
domestic violence and our core monitoring
platform.
Experienced Senior Management Team. Our top executives have
extensive experience in both the offender monitoring marketplace
and their specific fields of expertise whether that be sales,
customer care and technology. We also benefit from a diverse and
experienced Board of Directors.
Recurring Revenue.
The Company’s revenue is generated in large part by long-term
customer contracts based on the size of the offender monitoring
program throughout each month which creates a predictable,
recurring revenue stream.
Relationships with High-Quality Government Customers. The
Company has developed strong relationships with federal, state and
county customers within the United States and with Ministries of
Justice internationally.
Extensive Product Suite. The Company has a large variety of
products that appeal to a broad range of government customers and
greatly enhances our ability to attract and retain clients. These
products include different GPS devices, alcohol monitoring and new
smartphone applications including those that address adjacent
market opportunities in both the public and private sectors and
analytics software.
National Footprint with International Presence. The
Company operates in approximately 42 states as well as select
international locations including Chile. Our presence both within
the United States and abroad better positions the Company to
compete for new and expiring government contracts.
Sources and Availability of Raw Materials
We use various suppliers and contract manufacturers to supply parts
and components for the manufacture and support of our product
lines. Although our intention is to establish at least two sources
of supply for materials whenever possible, for certain components
we have sole or limited source supply arrangements. We may not be
able to procure these components from alternative sources at
acceptable prices and quality within a reasonable time, or at all;
therefore, the risk of loss or interruption of such arrangements
could impact our ability to deliver certain products on a timely
basis.
Dependence on Major Customers
We had sales to entities, two of which represents more than ten
percent of gross revenues, as follows for the years ended September
30, 2017 and 2016:
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2017
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%
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2016
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%
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Customer
A
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$8,747,338
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29%
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$7,543,116
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28%
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Customer
B
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$3,743,508
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13%
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$2,013,929
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7%
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Customer
C
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$2,326,318
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8%
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$1,573,959
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6%
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No other customer represented more than 10 percent of the
Company’s total revenues for the fiscal years ended September
30, 2017 or 2016. (See Note 16 to the Consolidated Financial
Statements).
Concentration of credit risk associated with our total and
outstanding accounts receivable as of September 30, 2017 and 2016,
respectively, are shown in the table below:
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2017
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%
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2016
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%
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Customer
A
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$1,657,316
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30%
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$2,476,168
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36%
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Customer
B
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$641,973
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12%
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$899,428
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13%
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Customer
C
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$394,253
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7%
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$548,867
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8%
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Dependence on Major Suppliers
We purchase cellular services from several major suppliers. The
cost to us for these services during the fiscal years ended
September 30, 2017 and 2016 was $2,178,895 and $1,581,219,
respectively. The 38% increase in cellular service expense in 2017
compared to 2016 resulted from increased costs associated with
higher revenue and resulting cost of sales and the consolidation of
smaller suppliers into national suppliers, partially offset by
lower pricing on contracts negotiated in fiscal 2017.
During
the years ended September 30, 2017 and 2016, we also purchased a
significant portion of our inventory and monitoring equipment from
certain suppliers. The cost during the fiscal years ended September
30, 2017 and 2016 of these purchases was $1,838,779 and $1,488,515,
respectively. The 24% increase was due to the shut-down of the 2G
cellular network resulting from the one-time replacement of these
2G units and higher demand due to growth for products purchased
from these suppliers.
Intellectual Property
The Company currently holds rights to patents and copyrights
relating to certain aspects of our hardware devices, accessories,
software and services. The Company has registered or applied for
trademarks and service marks in the U.S. and a number of foreign
countries. Although we believe the ownership of such patents,
copyrights, trademarks and service marks is an important factor in
our business and that our success does depend in part on the
ownership thereof, the Company relies primarily on the innovative
skills, technical competence and marketing abilities of our
personnel.
The Company regularly files patent applications to protect
innovations arising from our research, development and design, and
are currently pursuing numerous patent applications around the
world. Over time, the Company has accumulated a large
portfolio of issued patents around the world. The Company
holds copyrights relating to certain aspects of our products and
services. No single patent or copyright is solely responsible for
protecting our products. The Company believes the duration of our
patents is adequate relative to the expected lives of our
products.
Many of the Company’s products are designed to include
intellectual property obtained from third parties. It may be
necessary in the future to seek or renew licenses relating to
various aspects of our products, processes and services. While the
Company has generally been able to obtain such licenses on
commercially reasonable terms in the past, there is no guarantee
that such licenses can be obtained in the future on reasonable
terms or at all. Because of technological changes in the industries
in which we compete, current extensive patent coverage and the
rapid rate of issuance of new patents, it is possible that certain
components of our products, processes and services may unknowingly
infringe existing patents or intellectual property rights of
others. From time to time, the Company has been notified that it
may be infringing certain patents or other intellectual property
rights of third parties.
Trademarks. We have
developed and use trademarks in our business, particularly relating
to our corporate and product names. The Company owns 10
trademarks that are registered with the United States Patent and
Trademark Office, plus one trademark registered in Mexico and one
in Canada. In addition, we have the Track Group trademark and
design registered in various countries around the
world.
The Company will 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:
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Trademark
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|
Application
Number
|
|
Registration Number
|
|
Status/
Next
Action
|
|
Mobile911 Siren with 2-Way Voice Communication &
Design®
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76/013,886
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2,595,328
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Registered
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TrackerPAL®
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78/843,035
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3,345,878
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Registered
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Mobile911®
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78/851,384
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3,212,937
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Registered
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TrackerPAL®
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CA 1,315,487
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749,417
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Registered
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TrackerPAL®
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MX 805,365
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960954
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|
Registered
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ReliAlert™
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85/238,049
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4200738
|
|
Registered
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HomeAware™
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85/238,064
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4111064
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|
Registered
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|
SecureCuff™
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85/238,058
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4271621
|
|
Registered
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SecureAlert™
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86/031,550
|
|
4623370
|
|
Registered
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|
TrackGroup™
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|
86/301716
|
|
4701636
|
|
Registered
|
|
Track Group™ and Design
|
|
86/469103
|
|
4793747
|
|
Registered
|
|
Track Group™ and Design*
|
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1257077
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1257077
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Registered
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*Track Group™ and Design is also a registered trademark
in the following countries: Europe, Switzerland, Mexico, Canada and
Chile.
Patents. We have 16
patents issued in the United States. At foreign patent
offices, we have seven patents issued and six patents
pending.
The following tables summarize information regarding our patents
and patent applications. There are no assurances given that
the pending applications will be granted or that they will, if
granted, contain all of the claims currently included in the
applications.
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US Patents
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Application Serial No.
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Date Filed
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Patent No.
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Issue Date
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Remote Tracking and Communication Device
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11/202427
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10-Aug-05
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7330122
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12-Feb-08
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Remote Tracking and Communications Device
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12/028088
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8-Feb-08
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7804412
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28-Sep-10
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Remote Tracking and Communications Device
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12/875,988
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3-Sep-10
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8031077
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4-Oct-11
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Alarm and Alarm Management System for Remote Tracking
Devices
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11/486992
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14-Jul-06
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7737841
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15-Jun-10
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Alarm and Alarm Management System for Remote Tracking
Devices
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12/792,572
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2-Jun-10
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8013736
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6-Sep-11
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A Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
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11/486989
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14-Jul-06
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8797210
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5-Aug-14
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A Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
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14/323,831
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3-Jul-14
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9491289
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8-Nov-16
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A Remote Tracking System with a Dedicated Monitoring
Center
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11/486976
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14-Jul-06
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7936262
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3-May-11
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Remote Tracking System and Device With Variable Sampling and
Sending Capabilities Based on Environmental Factors
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11/486991
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14-Jul-06
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7545318
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9-Jun-09
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Tracking Device Incorporating Enhanced Security Mounting
Strap
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12/818,453
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18-Jun-10
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8,514,070
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20-Aug-13
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Tracking Device Incorporating Cuff with Cut Resistant
Materials
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14/307,260
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17-Jun-14
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9129504
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8-Sep-15
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device
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12/399151
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6-Mar-09
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8232876
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31-Jul-12
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Panic Button Phone
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09/044497
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19-Mar-98
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6044257
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28-Mar-00
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Emergency Phone for Automatically Summoning Multiple Emergency
Response Services
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09/173645
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16-Oct-98
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6226510
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1-May-01
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Combination Emergency Phone and Personal Audio Device
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09/185191
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3-Nov-98
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6285867
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4-Sep-01
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Emergency Phone with Single-Button Activation
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11/174191
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30-Jun-05
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7251471
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31-Jul-07
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International Patents
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Application Serial No.
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Date Filed
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Patent No.
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Issue Date
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Remote Tracking and Communication Device - Brazil
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PI0614742.9
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4-Aug-06
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Pending
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Remote Tracking and Communication Device - Canada
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2617923
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4-Aug-06
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2617923
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7-Jun-16
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Remote Tracking and Communication Device - Mexico
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MX/a/2008/001932
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4-Aug-06
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278405
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24-Aug-10
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A Remote Tracking System with a Dedicated Monitoring Center -
Brazil
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PI0714367.2
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3-Jul-07
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Pending
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Secure Strap Mounting System for an Offender Tracking Device -
EPO
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10009091.9
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9-Jan-10
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Pending
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Secure Strap Mounting System for an Offender Tracking Device -
Brazil
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PI11001593
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28-Feb-11
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Pending
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Secure Strap Mounting System for an Offender Tracking Device -
Mexico
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MX/a/2011/002283
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28-Feb-11
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319057
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4-Apr-14
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Secure Strap Mounting System For an Offender Tracking Device -
Canada
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2732654
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25-Oct-13
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Pending
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Brazil
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PI0909172-6
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1-Sep-10
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Pending
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Canada
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2717866
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3-Sep-10
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2717866
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17-May-16
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - EPO
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09 716 860.3
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6-Oct-10
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2260482
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9-Jan-13
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - United Kingdom
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Refer to EP Patent # 2260482
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A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Mexico
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MX/a/2010/009680
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2-Sep-10
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306920
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22-Jan-13
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Trade Secrets. The
Company owns certain intellectual property, including trade secrets
that we seek to protect, in part, through confidentiality
agreements with employees and other parties. Even where these
agreements exist, there can be no assurance that these agreements
will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known
to or independently developed by competitors.
The Company intends 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.
Government Regulation
Our operations are subject to various federal, state, local and
international laws and regulations. We are not involved in any
pending or, to our knowledge, threatened governmental proceedings,
which would require curtailment of our operations because of such
laws and regulations.
Seasonality
Given the consistency in recurring domestic monitoring revenues by
customers throughout 2017, we detected no apparent seasonality in
our business. However, as in previous years, incremental
domestic device deployment opportunities typically slow down in the
months of July and August. We believe this is due to the
unavailability of judicial and corrections officials who observe a
traditional vacation season during this period.
Employees
As of December 8, 2017, we had 154 full-time employees and two
part-time employees. None of the employees are represented by
a labor union or subject to a collective bargaining
agreement. We have never experienced a work stoppage and
management believes that relations with employees are
good.
Additional Available Information
We make available, free of charge, at our corporate website
(www.trackgrp.com) copies of our annual reports filed with the
United States Securities and Exchange Commission
(“SEC”) on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements,
and all amendments to these reports, as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act. We also provide copies of our Forms 8-K, 10-K,
10-Q, and proxy statements at no charge to investors upon
request.
All reports filed by us with the SEC are available free of charge
via EDGAR through the SEC website at www.sec.gov. In addition, the
public may read and copy materials we have filed with the SEC at
the SEC's Public Reference Room located at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Our
business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this Annual Report on 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 occur, our
business, results of operations or financial condition could be
materially harmed, the trading price of our Common Stock could
decline and you could lose all or part of your investment. The
risks and uncertainties described below are those that we currently
believe may materially affect us; however, they may not be the only
ones that we face. Additional risks and uncertainties of which we
are unaware or currently deem immaterial may also become important
factors that may harm our business. Except as required by law, we
undertake no obligations to update any risk
factors.
Risks Related to Our Business, Operations and
Industry
We face risks related to our substantial indebtedness, including
risk related to the repayment of our short-term
indebtedness.
As
of September 30, 2017, we had $33,751,248 of indebtedness
outstanding, of which approximately $30,270,531 becomes due and
payable within the next 12 months. Our significant
indebtedness could adversely affect our ability to raise additional
capital to fund our operations, make interest payments as they come
due, limit our ability to react to changes in the economy or our
industry, and prevent us from meeting our obligations under our
outstanding debt instruments. As a result, we will have to
raise additional capital or restructure such indebtedness during
the next 12 months, and no assurances can be given that we may be
successful in that regard. See Note 16 to the Consolidated
Financial Statements.
Our high degree of leverage could have adverse consequences to
us, including:
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making it more difficult for us to make payments on our
debt;
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increasing our vulnerability to general economic and industry
conditions;
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requiring a substantial portion of cash flow from operations to be
dedicated to the payment of principal and interest on our debt,
thereby reducing our ability to use our cash flow to fund our
operations, capital expenditures, and future business
opportunities;
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restricting us from making strategic acquisitions or causing us to
make non-strategic divestitures;
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limiting our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions, and general corporate or other
purposes; and
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limiting our ability to adjust to changing market conditions and
placing us at a competitive disadvantage compared to our
competitors who may be less highly leveraged.
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We will 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. While we are currently negotiating
to restructure our indebtedness, no assurances can be given that we
will be successful, and we cannot assure you that we will maintain
a level of cash flows 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 difficulties 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 the proceeds that we realize from them may not be
adequate to meet the debt service obligations then
due.
There is no certainty that the market will continue to accept or
expand the use of our products and services.
Our targeted markets may be slow to or may never expand the use of
our products or services. Governmental organizations may not
use our products unless they determine, based on experience,
advertising or other factors, that our products are a preferable
alternative to other available methods of tracking or
incarceration. In addition, decisions to adopt new tracking
devices can be influenced by government administrators, regulatory
factors, and other factors largely outside of our control. No
assurance can be given that key decision-makers will continue to
accept or expand the use of our products, which could have a
material adverse effect on our business, financial condition and
results of operations.
Budgetary issues faced by government agencies could adversely
impact our future revenue.
Our revenues are primarily derived from contracts with state, local
and county government agencies in the United States and governments
of Caribbean and Latin American nations. Many of these
government agencies are experiencing budget deficits and may
continue to do so. As a result, we may experience delays in
payment on customer invoices, 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 light of the
recent hurricanes, and the destruction sustained by many Caribbean
countries, this is of increasing risk. Furthermore, the industry
has experienced a general decline in average daily lease rates for
GPS tracking devices. As a result of these factors, our
ability to maintain or increase our revenues may be negatively
affected.
Certain individuals and groups own or control a significant number
of our outstanding shares.
Certain groups or persons beneficially own a substantial number of
shares of our outstanding Common Stock or securities and debt
instruments. 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, 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 significant risk to us or our other
shareholders. Additionally, they may make investments in
businesses that directly or indirectly compete with us, or may
pursue acquisition opportunities that may be complementary to our
business and, as a result, those acquisition opportunities may not
be available to us.
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 could adversely affect our results of operations
or financial condition.
We have entered into an agreement with three national providers for
cellular services. We also rely currently on a single source for
the large majority of the manufacturing of our products. If
any of these significant suppliers were to cease providing products
or services to us, we would be required to seek alternative
sources. No assurances can be provided 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 research, development and marketing activities are subject to
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 products and services are not subject to specific approvals
from any governmental agency, although our products using cellular
and GPS technologies for use in the United States or
internationally must be manufactured in compliance with applicable
rules and regulations of specific governmental agencies. There can
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 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. 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.
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. Although we believe our technology has advantages
over competing systems, there can be no assurance that those
advantages are significant. Many of our competitors have
products or techniques approved or in development and operate
large, well-funded research and development programs in the
field. Moreover, competitors may be in the process of
developing technology that could be developed more quickly or
ultimately be more effective than our products. There can be
no assurance that our competitors will not develop more effective
or more affordable products, or achieve earlier patent protection
or product commercialization.
We are dependent upon certain customers, the loss of which may
adversely affect our results of operations and business
condition.
During fiscal year 2017, three of our customers in aggregate
accounted for 50% of total sales. All of their contracts
expire within the next fiscal year. Failure to renew these
contracts, resulting in the loss of any of these customers,
may have a material adverse effect on our business (See Note 2
and Note 16 to the Consolidated
Financial Statements).
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.
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. GPS technology depends upon
“line-of-sight” access to satellite signals used to
locate the user, which, under some circumstances may limit the
effectiveness of GPS tracking.
We face risks of litigation and regulatory investigation and
actions in connection with our operations.
Lawsuits, including regulatory actions, may seek recovery of large,
indeterminate amounts or otherwise limit our operations, and their
existence and magnitude may remain unknown for substantial periods
of time. Relevant authorities in the markets in which we
operate may investigate us in the future. These investigations may
result in significant penalties in multiple jurisdictions, and we
may become involved in disputes with private parties seeking
compensation for damages resulting from the relevant violations.
Such legal liability or regulatory action could have a material
adverse effect on our business, results of operations, financial
condition, cash flows, reputation and credibility. In
addition, our business activities are subject to various
governmental regulations in countries where we operate, which
include investment approvals, export regulations, tariffs,
antitrust, anti-bribery, intellectual property, consumer and
business taxation, foreign trade, exchange controls, and
environmental and recycling requirements. These regulations limit,
and other new or amended regulations may further limit, our
business activities or increase operating costs. In addition, the
enforcement of such regulations, including the imposition of fines
or surcharges for violation of such regulations, may adversely
affect our results of operations, financial condition, cash flows,
reputation and credibility.
Our products are subject to the risks and uncertainties associated
with the protection of intellectual property and related
proprietary rights.
We believe that our success depends in part on our ability to
obtain and enforce patents, maintain trade secrets and operate
without infringing on the proprietary rights of others, both in the
United States and in other countries. Our inability to obtain
or to maintain patents on our key products could adversely affect
our business. We currently own 23 patents issued 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
enforcement of patent rights can be uncertain and involves 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 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. 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 is no
assurance given that we will be able to obtain any necessary
licenses on commercially favorable terms, if at all. Any
breach of an existing license or failure to obtain a license to any
technology that may be necessary in order to commercialize our
products may have a material adverse impact on our business,
results of operations and financial condition.
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 seek to protect this
un-patentable and unpatented proprietary technology and processes,
in addition to other confidential and proprietary information in
part, by entering into confidentiality agreements with employees,
collaborative partners, consultants, and certain
contractors. There can be no assurance that these agreements
will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and other confidential and
proprietary information will not otherwise become known or be
independently discovered or reverse-engineered by
competitors.
We conduct business internationally with a variety of sovereign
governments.
Our business is subject to a variety of regulations and political
interests that could affect the timing of payment for services and
the duration of our contracts. We face the risk of systems
interruptions and capacity constraints, possibly resulting in
adverse publicity, revenue loss and erosion of customer trust. The
satisfactory performance, reliability and availability of our
network infrastructure are critical to our reputation and our
ability to attract and retain customers and to maintain adequate
customer service levels. In addition, because our customers in
these foreign jurisdictions are sovereign governments or
governmental departments or agencies, it may be difficult for us to
enforce our agreements with them in the event of a breach of those
agreements, including, but not limited to, the failure to pay for
services rendered or to complete projects that we have
commenced.
We may experience temporary service interruptions for a variety of
reasons, including telecommunications or power failures, fire,
water damage, vandalism, computer bugs or viruses, malicious
cyber-attacks or hardware failures.
Any service interruption that results in the unavailability of our
system or reduces its capacity could result in real or perceived
public safety issues that may affect customer confidence in our
services. Historically, we have experienced temporary
interruptions of telecommunications or power outages, which were
promptly mitigated, although this year Hurricane Maria presented
even greater challenges in Puerto Rico. Such instances may
result in loss of customer accounts or similar problems if they
occur again in the future. Given rapidly changing
technologies, we are not certain that we will be able to adapt the
use of our services to permit, upgrade, and expand our systems or
to integrate smoothly with new technologies. Network and
information systems and other technologies are critical to our
business activities. Network and information systems-related
events, including those caused by us, our service providers or by
third parties, such as computer hacking, cyber-attacks, computer
viruses, or other destructive or disruptive software, process
breakdowns, denial of service attacks, malicious social engineering
or other malicious activities, or any combination of the foregoing
could result in a degradation or disruption of our
services. These types of events could result in a loss of
customers and large expenditures to repair or replace the damaged
properties, networks or information systems or to protect them from
similar events.
Risks
Related to Acquisitions
The success of our business depends on achieving our strategic
objectives, including acquisitions, dispositions and
restructurings.
Our acquisitions, as well as potential restructuring actions, may
not achieve expected returns and other benefits as a result of
various factors, including integration and collaboration
challenges, such as personnel and technology. In addition, we may
not achieve anticipated cost savings from restructuring actions,
which could result in lower operating margins. If we decide to sell
assets or a business, we may encounter difficulty in finding buyers
or alternative exit strategies on acceptable terms in a timely
manner, which could delay the accomplishment of our strategic
objectives. After reaching an agreement with a buyer or seller for
the acquisition or disposition of a business, we are subject to
satisfaction of pre-closing conditions as well as to necessary
regulatory and governmental approvals on acceptable terms, which
may prevent us from completing the transaction.
We may not be able to grow successfully through our recent
acquisitions or through future acquisitions, we may not
successfully manage future growth, and we may not be able to
effectively integrate businesses that we may acquire.
We plan to continue to grow organically as well as through
strategic acquisitions of other businesses. In order to
complete acquisitions, we would expect to require additional debt
and/or equity financing, which may increase our interest expense,
leverage, and increase the number of shares
outstanding. Businesses that we acquire may not perform as
expected. Future revenues, profits and cash flows of an acquired
business may not materialize due to the failure or inability to
capture expected synergies, increased competition, regulatory
issues, changes in market conditions, or other factors beyond our
control. In addition, we may not be successful in integrating these
acquisitions into our existing operations. Competition for
acquisition opportunities may escalate, increasing our cost of
making further acquisitions or causing us to refrain from making
additional acquisitions. Additional risks related to
acquisitions include, but are not limited to:
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the potential disruption of our existing business;
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entering new markets or industries in which we have limited prior
experience;
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difficulties integrating and retaining key management, sales,
research and development, production and other personnel or
diversion of management attention from ongoing business concerns to
integration matters;
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difficulties integrating or expanding information technology
systems and other business processes or administrative
infrastructures to accommodate the acquired
businesses;
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complexities associated with managing the combined businesses due
to multiple physical locations;
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risks associated with integrating financial reporting and internal
control systems; and
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whether any necessary additional debt or equity financing will be
available on terms acceptable to us, or at all, and the impact of
such financing on our operating performance and results of
operations.
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Risks Related to International Operations
We are exposed to fluctuations in currency exchange
rates.
Our financial results are reported in U.S. dollars, but operations
are conducted internationally. Currency exchange rates have, and
may continue to have, a significant impact on our operating
results. We do not utilize hedging techniques to minimize our
exposure. As a result, an investment in our Common Stock may expose
shareholders to fluctuations in exchange rates.
The dollar cost of our operations internationally could increase as
a result of increases or decreases in the rate of inflation or
devaluation of the local currency in relation to the dollar, which
may harm our results of operations.
The dollar cost of our international operations is expected to be
influenced by any increase in inflation that is not offset by the
devaluation of the local currency in relation to the dollar. As a
result, we are exposed to the risk that foreign currencies will
appreciate in relation to the dollar. We cannot predict whether the
foreign currencies will appreciate or depreciate against the dollar
in the future.
International political, economic and military instability may
impede our ability to execute our plan of
operations.
Political, economic and military conditions, both domestic and
abroad, may affect our business. We cannot predict whether or in
what manner these problems may occur. Acts of random terrorism
periodically occur which could affect our operations or
personnel. Ongoing or revived hostilities or other factors
could harm our operations and could impede our ability to execute
our plan of operations. Natural disasters, such as the recent
hurricanes in the Caribbean, could render our affected customers
financially unable to continue making payments or using our
services. Moreover, in order to effectively compete in certain
foreign jurisdictions, it is frequently necessary or required to
establish joint ventures, strategic alliances or marketing
arrangements with local operators, partners or agents. Reliance on
local operators, partners or agents could expose us to the risk of
being unable to control the scope or quality of our overseas
services or products. In addition, our business insurance may
not cover losses that may occur as a result of events associated
with the security situation. Any losses or damages incurred by us
could have a material adverse effect on our business and financial
condition.
Risks Related to Our Common Stock
Our largest shareholder’s beneficial ownership is over 50%,
and is therefore able to exert control over us, which may limit
your ability to influence corporate matters.
As of September 30, 2017, the
Company's transfer agent records indicate that Sapinda Asia Limited
and Mr. Lars Windhorst (collectively “Sapinda
Asia”) are the Company's
largest shareholders with more than 50% of the outstanding voting
securities of the Company. As a result, Sapinda Asia will
control the outcome of any shareholders’ meeting, including
having the power to determine the composition of our board of
directors and control the outcome of the voting on any significant
corporate transactions or other matters submitted to our
shareholders for approval. The interests of Sapinda Asia may not be
aligned with or be in the best interests of other shareholders.
This concentration of voting power could also have the effect of
delaying, deterring or preventing a change of control or other
business combination that might otherwise be beneficial to other
shareholders. In the near future, based on Schedule 13D filings
made with the Securities and Exchange Commission in July and
September of 2017, management believes that ETS Limited
(“ETS”), a Cayman Islands entity, will become the
owner of a substantial majority of Sapinda Asia's shares in the
Company such that ETS will become the Company's largest shareholder
with 46.5% of the Company's total outstanding shares. As a result,
ETS will have substantial influence over the outcome of shareholder
meetings in the future and the interests of ETS may not be aligned
with or be in the best interests of other
shareholders.
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 Certificate of Incorporation authorizes us to issue up to
20,000,000 shares of preferred stock, 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. As of
September 30, 2017, there were no outstanding shares of preferred
stock issued.
Sales by certain of our shareholders of a substantial number of
shares of our Common Stock in the public market could adversely
affect the market price of our Common Stock.
A large number of outstanding shares of our Common Stock are held
by several of our principal shareholders. If any of these
principal shareholders were to decide to sell large amounts of
stock over a short period of time, such sales could cause the
market price of our Common Stock to decline.
A decline in the price of our Common Stock could affect our ability
to raise additional working capital and adversely impact our
operations and would severely dilute existing or future investors
if we were to raise funds at lower prices.
A prolonged decline in the price of our Common Stock could result
in a reduction of our ability to raise capital. Because our
operations have been financed in part through the sale of equity
securities, a decline in the price of our Common Stock could be
especially detrimental to our continued operations. Any reduction
in our ability to raise equity capital in the future would force us
to reallocate funds from other planned uses and would have a
significant negative effect on our business plans and operations,
including our ability to develop new products and continue our
current operations. If our stock price declines, there can be no
assurance that we can raise additional capital or generate funds
from operations sufficient to meet our obligations. We believe
the following factors could cause the market price of our Common
Stock to fluctuate widely:
|
●
|
actual or anticipated variations in our interim or annual
results;
|
|
|
|
|
●
|
announcements of new services, products, acquisitions or strategic
relationships within the industry;
|
|
|
|
|
●
|
changes in accounting treatments or principles;
|
|
|
|
|
●
|
changes in earnings estimates by securities analysts and in analyst
recommendations; and
|
|
|
|
|
●
|
general political, economic, regulatory and market
conditions.
|
Any failure to meet these expectations, even if minor, could
materially adversely affect the market price of our Common
Stock.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
shareholders.
Our Certificate of Incorporation authorizes the issuance of
30,000,000 shares of Common Stock. Our Board of Directors has the
authority to issue additional shares of Common Stock up to the
authorized capital stated in the Certificate of Incorporation. The
issuance of any such shares of Common Stock will result in a
reduction in value of our outstanding Common Stock. If we do issue
any such additional shares of Common Stock, such issuance also will
cause a reduction in the proportionate ownership and voting power
of all other shareholders. Further, any such issuance may result in
a change of control of the Company.
Trading of our Common Stock may be volatile and sporadic, which
could depress the market price of our Common Stock and make it
difficult for our shareholders to resell their
shares.
There is currently a limited market for our Common Stock and the
volume of our Common Stock traded on any day may vary significantly
from one day to the other. Our Common Stock is quoted on the OTCQX.
Trading in stock quoted on the OTCQX is often thin, volatile, and
characterized by wide fluctuations in trading prices, due to many
factors that may have little to do with the issuer’s
operations, results or business prospects. The availability of
buyers and sellers represented by this volatility could lead to a
market price for our Common Stock that is unrelated to operating
performance. Moreover, the OTCQX is not a stock exchange, and
trading of securities quoted on the OTCQX is often more volatile
than the trading of securities listed on a stock exchange like
NASDAQ or NYSE:MKT.
Item 2.
Properties
Our headquarters is approximately 5,600 square feet of commercial
office space located at 200 E. 5th
Avenue Suite 100, Naperville,
Illinois. The lease for this office space began on September 1,
2017 and expires on August 31, 2022. Lease payments are
approximately $10,900 per month.
We lease commercial office space in Indianapolis, Indiana of
approximately 2,000 square feet. This lease began on August 1, 2016
and shall terminate on July 31, 2018. Lease payments are
approximately $3,600 per month. In addition, we lease a second
location with approximately 2,000 square feet in Indianapolis,
Indiana. This lease was executed on January 1, 2014 and expires on
December 31, 2018. Monthly lease payments for this facility are
approximately $3,300.
Track Group Analytics, Inc. operations are approximately 4,200
square feet of office space in Bedford, Nova Scotia,
Canada. The lease for this office space began on July 1, 2015
and expires on June 30, 2020. Monthly lease payments are
approximately $5,700.
SecureAlert Chile operations are approximately 3,500 square feet of
commercial office space located in Santiago, Chile. The lease for
this office space began on December 31, 2016 and expires on
December 31, 2019. Lease payments are approximately $6,500 per
month.
We lease commercial office space in Sandy, Utah of approximately
1,500 square feet. The lease for this office space began on
September 1, 2017 and expires on August 31, 2018. Lease payments
are $1,500 per month.
Item 3.
Legal Proceedings
We are, from time to
time, involved in various legal proceedings incidental to the
conduct of our business. Historically, the outcome of all such
legal proceedings has not, in the aggregate, had a material adverse
effect on our business, financial condition, results of operations
or liquidity. Other than as set forth below, there are no
additional pending or threatened legal proceedings at this
time.
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. On May
2, 2016, the Court resolved this case in favor of the Company by
granting the Company's motion for Summary Judgment. The Plaintiffs
filed a Notice of Appeal on June 1, 2016 challenging the
Court’s ruling on the motion for Summary Judgment. An oral
argument has been set for December 2017. We intend to defend the
case vigorously.
Boggs
et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et
al. On December 3, 2015, Candace Boggs et al. filed a
complaint in the State Court of Dougherty County, Georgia, alleging
breach of contract and negligence in monitoring of certain
offenders in Dougherty County, Georgia, as well as a request for
punitive damages in an amount sufficient to deter similar conduct
in the future. Plaintiffs withdrew their complaint in February
2016, but refiled the complaint on October 12, 2016. The
Company’s motion for Summary Judgment was denied on February
27, 2017 and a Notice of Appeal was filed by The Company’s
counsel on April 15, 2017. An oral argument has been scheduled for
December 2017. We believe the allegations are inaccurate and are
defending the case vigorously. We believe the probability of
incurring a material loss to be remote.
Track
Group, Inc. v. I.C.S. of the Bahamas Co. Ltd. On May 18, 2016, the Company filed a complaint in
the District Court of the Third Judicial District in Salt Lake
County, Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid
principal and interest on the Promissory Note are in the amount of
$230,000.00, plus per annum interest. The Defendant’s initial
Counterclaims were dismissed, however the Court granted the
Defendant leave to amend. The Amended Counter Claims were filed on
June 23, 2017. The Company’s Motion to Dismiss the Amended
Counterclaims was denied on September 19, 2017. The Company filed
an Answer to the Amended Counterclaims on October 3, 2017. Once the
discovery period is completed, the Company will proceed with a
Motion for Summary Judgment. We believe we will be successful in
this action for amounts owed under the loan agreement and
promissory note; however, the Company may encounter problems
enforcing a favorable judgment in the foreign jurisdiction where
ICS resides.
Track
Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016, the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by I.C.S. of the Bahamas
Co. Ltd. (“ICS”). Under the terms of the Commercial and
Monitoring Representative Agreement dated November 30, 2010 (the
“C&M
Agreement”) between the
Company and ICS any dispute must be resolved by binding
arbitration. The Company asserts that ICS has failed to pay the
Company fees owed to it under the C&M Agreement. The amount
owed to the Company is upwards of $1 million. Depositions were
completed in August of 2017. The arbitration hearing is tentatively
scheduled for January 31, 2018. The Company is confident it will be
successful in the arbitration; however, the Company may encounter
problems enforcing a successful arbitration award in the foreign
jurisdiction where ICS resides.
John
Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with
a complaint filed by John Merrill, the former Chief Financial
Officer of the Company, in District Court of the Third Judicial
District in Salt Lake County, Utah alleging breach of contract,
among other causes of action, related to Mr. Merrill’s
termination of employment. Mr. Merrill is seeking not less than
$590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated
effective September 27, 2016. The Company filed an Answer with
Counter Claims on December 21, 2016. The Company plans to file its
motion for Summary Judgment by the end of the year. We intend to
defend the case vigorously and believe the allegations and claims
are without merit.
Michael
Anthony Johnson v. Community Corrections of Marion County and Track
Group, Inc. On February 28, 2017, the Company was notified
that Mr. Johnson, the Plaintiff, had filed a pro se complaint in the United States District Court for
the Southern District of Indiana, asserting violations of his
rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at
least $250,000. We believe the allegations and claims are unfounded
and without merit. The Company’s Answer was filed April 27,
2017, and we are currently responding to the Defendant’s
discovery. We will defend the case vigorously and believe the
probability of incurring a material loss to be
remote.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, the Company filed a complaint
before the Federal Administrative Tribunal, against the failure by
Defendants to pay claimant amounts agreed to, and due under, the
Pluri Annual Contract for the Rendering of Monitoring Services of
Internees, through Electric Bracelets, in the Islas Marias
Penitentiary Complex dated July 15, 2011, entered into by the
Organo Administrativo Desconcentrado Prevencion y Readaptacion
Social of the then Public Security Department, and presently, an
agency of the National Security Commission of the Department of the
Interior, and SecureAlert, Inc., presently Track Group, Inc. The
Company’s claim amount is upwards of $6 million. On March 28,
2017, the Federal Administrative Tribunal rejected our claim, under
the consideration that this case should be resolved by a Civil
Court and not by the Federal Administrative Tribunal. For that
reason, on April 25, 2017, the Company filed an appeal before the
Collegiate Tribunals against the decision of the Federal
Administrative Tribunal. Counsel estimates the Tribunal should have
a ruling on or before June 30, 2018. If the Company’s appeal
is successful, the case will be sent back to the Federal
Administrative Tribunal for a resolution on the merits of the
case.
Inversiones
Tecnologicas SpA v. Track Group Chile SpA. On October 10, 2014, Inversiones Tecnologicas SpA
(a.k.a. Position) filed a complaint before the Civil Court of
Santiago, in order to collect $1.0 million of fees for alleged
services rendered with occasion of the public tender for the
adjudication of the contract ID 634-66-LP13 labeled
“Telematics Surveillance of Convicts.” On April 13,
2017, the Court issued its decision, rejecting the
Plaintiff’s claim, under the consideration that insufficient
evidence of a service agreement between Track Group Chile SpA
(formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA,
was submitted to the Court. Moreover, the fact that Secure Alert
Chile SpA was incorporated after the facts on which the lawsuit is
based, led to the complete dismissal of the claim. Position filed
an appeal on May 4, 2017. A hearing on the Appeal will be scheduled
for February 2018. The Company expects the court to make a decision
within three months of the hearing date.
Pablo
Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al.
On June 9, 2017 Plaintiff, Pablo
Gonzalez-Cruz, and relatives of the Plaintiff, filed a Complaint in
the Court of First Instance, San Juan Superior Court, Common Wealth
of Puerto Rico against the Company, and associated parties alleging
the death of his daughter was as a direct and immediate result of
the gross negligence and guilty indifferent actions and omissions
of all the defendants. Plaintiff is requesting damages at no less
than $2.0 million. The Company’s Answer and Appearance were
filed August 13, 2017.
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 OTCQX under the symbol
“TRCK.” The following table sets forth the range
of high and low sales prices of our Common Stock as reported on the
OTCQX for the periods indicated.
|
Fiscal Year Ended September 30,
2017
|
High
|
Low
|
|
First Quarter ended December 31,
2016
|
$7.30
|
$3.35
|
|
Second
Quarter ended March 31, 2017
|
$5.25
|
$3.36
|
|
Third
Quarter ended June 30, 2017
|
$3.36
|
$2.16
|
|
Fourth
Quarter ended September 30, 2017
|
$2.34
|
$1.40
|
|
Fiscal Year Ended September 30,
2016
|
High
|
Low
|
|
First Quarter ended December 31,
2015
|
$9.50
|
$2.00
|
|
Second
Quarter ended March 31, 2016
|
$9.00
|
$3.15
|
|
Third
Quarter ended June 30, 2016
|
$6.75
|
$2.60
|
|
Fourth
Quarter ended September 30, 2016
|
$8.45
|
$3.51
|
Holders
As of November 20, 2017, we had 409 holders of record of our Common Stock
and 10,480,984 shares of Common Stock outstanding. We also have
granted options and warrants for the purchase of 600,842 shares of
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.
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 outstanding options and warrants.
The issuance of any shares of Common Stock for any reason will
result in dilution of the equity and voting interests of existing
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is American
Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New
York, 11219.
Securities Authorized for Issuance under Equity Compensation
Plans
The 2012 Stock Incentive Plan
The Company’s 2012 Equity Compensation Plan, as amended (the
“2012
Plan”), was first
approved by our Board of Directors and shareholders at the Annual
Meeting of Shareholders held on December 21, 2011, and amended
following our Annual Meeting of Shareholders on May 19,
2015. We believe that incentives and stock-based awards focus
and align 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, up to 803,262 options or shares of Common Stock may
be awarded. As of the date of this report, 276,959 shares of
Common Stock and options for the purchase of 488,011 shares of
Common Stock have been awarded under the 2012
Plan.
The following table includes information as of September 30, 2017
for our equity compensation plans:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
488,011
|
$8.51
|
526,303
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
488,011
|
$8.51
|
526,303
|
Recent Sales of Unregistered Securities
No securities were issued without registration under the Securities
Act during the fiscal year ended September 30, 2017, nor were any
securities issued subsequent to September 30, 2017.
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 Annual Report on 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 Track Group, our operations and our present business
environment. Our fiscal year ends on September 30 of each
year. Reference to fiscal year 2017 refers to the year ended
September 30, 2017. 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, 2017
and 2016 and the accompanying notes thereto contained in this
report. This introduction summarizes MD&A, which includes the
following sections:
●
Overview – a general description of our business and the
markets in which we operate; our objectives; our areas of focus;
and challenges and risks of our business.
●
Results of Operations – an analysis of our consolidated
results of operations for the last two fiscal years presented in
our consolidated financial statements.
●
Liquidity and Capital Resources – an analysis of cash flows;
off-balance sheet arrangements and aggregate contractual
obligations; and the impact of inflation and changing
prices.
●
Off-Balance Sheet Arrangements
●
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
Our core business is based on the manufacture and leasing of
patented tracking and monitoring solutions to federal, state and
local law enforcement agencies, both in the U.S and abroad, for the
electronic monitoring of offenders and offering unique data
analytics services on a platform-as-a-service (PaaS) business
model. Currently, we deploy offender based management services
that combine patented GPS tracking technologies, fulltime 24/7/365
global monitoring capabilities, case management, and proprietary
data analytics. We offer customizable tracking solutions that
leverage real-time tracking data, best practices monitoring, and
analytics capabilities to create complete, end-to-end tracking
solutions.
Marion County Agreements
The Company is working on finalizing two contracts with Marion
County Community Corrections, the largest county in the state of
Indiana. On October 19, 2017, the Agency’s Advisory Board
approved a multi-year contract for the Company to provide
electronic monitoring services across the full range of sentences
under the Agency’s oversight. On November 28, 2017, the
Marion County Information Technology Board approved both the
Monitoring Contract and a multi-year contract for the Company to
provide analytics software.
Contract with the Gendarmeria de Chile
The previous multi-year agreement signed between Gendarmeria de
Chile, the Republic of Chile's uniformed prison service, and Track
Group in 2013, ended in October of 2017 although services have
continued uninterrupted. In March 2017, a public tender process
commenced as required. After submissions and reviews were complete,
the results of the tender were suspended by the Chilean Court of
Public Buyers following formal complaints filed by the Company and
another competitor. The Company's Chilean subsidiary and
Gendarmeria de Chile signed a new agreement on December 7, 2017 to
provide electronic monitoring of offenders commencing on October
18, 2017 for a period of 365 days to supply monitoring services
totaling up to approximately $10.6 million. The New Agreement is
subject to approval by the Oficina de la Contraloria General de la
República which the Company anticipates receiving within the
next 30 days.
Debt Exchange Agreement
On October 9, 2017, the Company
entered into a Debt Exchange Agreement with Conrent Invest S.A.
(“Conrent”), a public limited liability company
incorporated under the laws of the Grand Duchy of Luxembourg
regarding total debt and unpaid interest of approximately $34.7
million as of October 31, 2017 (the “Debt”) (the “Debt
Exchange”). The Debt
Exchange called for the Company to exchange newly issued shares of
preferred stock for the entire Debt subject to approval by the
investors who purchased securities from Conrent to finance the Debt
(the “Noteholders”). On November 2, 2017, Conrent convened a
meeting of the Noteholders to approve the Debt Exchange; however,
the quorum required to approve the Debt Exchange was not achieved.
Management continues to negotiate with Conrent regarding terms for
the Debt Exchange acceptable to Noteholders with the objective of
reaching an agreement acceptable to both Conrent and the
Noteholders before the Debt matures on July 31,
2018.
Restructuring Plan
During the fiscal year ended September 30, 2017, the Company
completed a Restructuring Plan to streamline operations by consolidating our
headquarters from Salt Lake City, Utah into our existing
Chicagoland office. The Restructuring Plan also included the
build-out and development of a new outsourced monitoring center
located in the Chicagoland area that allowed us to upgrade
operators and management, improve training, lower future expenses,
and improve our ability to align workforce costs with customer
demands.
Sapinda Loan Agreement Amendment Number One
On March 13, 2017, the Company and Sapinda entered into an
agreement to amend the Loan Agreement executed by the parties on
September 25, 2015. Amendment Number One
extends the maturity date of all loans made pursuant to the Loan
Agreement to September 30, 2020. In addition, we began accruing
penalties since Sapinda has not funded the remaining amount of
approximately $1.5 million available on the loan on or before March
31, 2017. The penalties totaled approximately $183,000 at September
30, 2017, and the daily penalties currently exceed the daily
interest due Sapinda. Further advances under
the Loan Agreement are not currently expected to be forthcoming,
and therefore no assurances can be given that the Company will
obtain additional funds to which it is entitled under the Loan
Agreement, or that the penalties accruing will ever be
paid.
Results of Operations
Continuing Operations - Fiscal Year 2017 Compared to Fiscal Year
2016
Net Revenue
During the fiscal year ended September 30, 2017, we had net
revenues of $29,727,018 compared to net revenues of $27,193,807 for
the fiscal year ended September 30, 2016, an increase of
$2,533,211, or approximately 9%. Of these revenues,
$28,887,460 and $26,343,783 were from monitoring and other related
services during the 2017 and 2016 period, respectively, an increase
of $2,543,677 or 10%. Growth in revenue during the year ended
September 30, 2017 was principally the result of (i) increases in
total growth of our North American monitoring operations
driven by clients in Indiana and Virginia, and (ii) growth of
offender monitoring in Chile.
Other revenue for the year ended September 30, 2017 decreased to
$839,558 from $850,024 in the same period in 2016 largely due to
lower sales of consumable items and a continued focus on
recurring subscription based sales as opposed to product
sales.
Cost of Revenue
During the year ended September 30, 2017, cost of revenue totaled
$14,125,699 compared to cost of revenue during the year ended
September 30, 2016 of $12,416,923, an increase of $1,708,776. This
increase is largely due to increases in total
monitoring and other related services revenue recognized both
domestically and internationally. Increases in cost of revenue
include but are not limited to monitoring costs, communication
costs, lost device expense and other incremental revenue related
costs.
Although management expects the cost of revenue to continue to
increase in subsequent periods, the Company expects the cost of
revenue as a percentage of total revenue to decrease in the
foreseeable future due to economies of scale of purchasing, lower
device costs, reduced communication costs and efficiencies of our
proprietary software.
Depreciation and amortization included in cost of revenue for the
fiscal years ended September 30, 2017 and 2016, totaled $2,128,668
and $2,009,437, respectively. These costs represent an acceleration
of certain monitoring devices, the depreciation of
TrackerPAL™, ReliAlert™ and other monitoring
devices as well as the amortization of certain royalty
agreements. We believe
this 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. Amortization of a patent
related to GPS and satellite tracking is also included in cost of
sales.
Impairment cost for equipment and parts for the fiscal years ended
September 30, 2017 and 2016 were $0 and $80,000,
respectively. These costs relate to
disposal of obsolete inventory, monitoring equipment and parts for
enhancements to our various devices and monitoring
platform.
Gross Profit and Margin
During the fiscal year ended September 30, 2017, gross profit
totaled $15,601,319, resulting in a 52% gross margin, compared to
$14,776,884, or a 54% gross margin during the fiscal year ended
September 30, 2016, an increase of
$824,435. The increase in
absolute gross profit is due to higher overall revenue. The
decrease in gross margin is largely due to higher costs of
monitoring associated with duplicative costs during the transition
from a company owned monitoring center to an outsourced vendor, as
well as certain communication and lost devices expenses. We
anticipate that gross profit as a percentage of total revenue may
improve in subsequent periods as initiatives currently in
development are realized and deployed.
Loss on Sale of Assets
During the year ended September 30, 2017, we sold certain non-core
assets for net cash of $512,500 and incurred a loss on the sale of
$763,531. See Note 5 to the Condensed Consolidated Financial
Statements.
Restructuring Costs
During the year ended September 30, 2017, we recorded $558,833 of
costs related to the relocation of our headquarters from Salt Lake
City, Utah to our existing Chicagoland office. These costs include
the transfer of our own monitoring center activities to a
highly-specialized third party, severance pay related to a
reduction of approximately 65 monitoring center employees, as well
as other support employees and moving costs. See Note 8 to the
Condensed Consolidated Financial Statements.
Impairment of Intangible Assets
In connection with our annual impairment test performed by an
independent valuation firm, a non-cash impairment charge of
$506,413 was recorded during the year ended September 30, 2017
related to a legacy non-core facet of the business.
General and Administrative Expense
During the fiscal year ended September 30, 2017, our general and
administrative expense totaled $12,216,041, compared to $13,038,760
for the fiscal year ended September 30,
2016. The decrease of
$822,719 or 6% in general and administrative cost resulted largely
from a decrease in bad debt
expense, lower business taxes,
lower consulting and contract labor costs, lower training costs and
lower travel expense, partially offset by increases in wages and
benefits, repairs and maintenance, settlements, legal and
professional fees and Board of Director fees.
Selling and Marketing Expense
For the fiscal year ended September 30, 2017, our selling and
marketing expense was $2,311,725 compared to $2,270,733 for the
year ended September 30, 2016. The $40,992, or 2%, increase
was principally the result of higher outside services.
Research and Development Expense
During the fiscal year ended September 30, 2017, we incurred
research and development expense of $1,784,867 compared to those
costs recognized during fiscal year 2016 totaling
$2,415,924. The decrease resulted
largely from lower research and development costs, as well as
payroll and wages and lower outside services. In addition, we are
significantly enhancing our technology platform to improve the
efficiency of our software, firmware, user interface, and
automation. As a result of these improvements, $2,416,804 was
capitalized as developed technology during the year ended September
30, 2017. A portion of these expenses would have been recognized as
research and development expense, absent the software
enhancements.
Depreciation and Amortization Expense
We maintain a significant portion of our tangible and intangible
assets that are amortized or depreciated. During the fiscal year
ended September 30, 2017, depreciation and amortization included in
operating expense totaled $2,332,217, compared to $2,709,918 for
the fiscal year ended September 30, 2016. This decrease of $377,701
or 14% was largely the result of lower amortization due to the sale
of non-core assets and certain property and equipment assets
becoming fully depreciated.
Other Income and Expense
During the fiscal year ended September 30, 2017, other income
(expense) was income of $648,133 compared to expense of $2,837,170
during fiscal 2016, an improvement of $3,485,303.
The
improvement in other income (expense) is due to a gain on
settlement of milestone payments of $3,213,940 and positive
currency exchange rate movements of $374,733. See Note 7 to the Condensed Consolidated
Financial Statements.
Net Loss
We had a net loss for the fiscal year ended September 30, 2017
totaling $4,725,826 or ($0.45) loss per common share, compared to a
net loss of $8,495,621 or ($0.83) per common share for the fiscal
year ended September 30, 2016. This decrease in net
loss is largely due to a gain on settlement of milestone
payments of $3,213,940,
higher gross profit of
$824,435, and lower general and administrative expense of $822,719,
lower research and development costs of $631,057 and lower
depreciation expense of $377,701. These amounts were offset by
income tax expense of $501,651, restructuring costs of $558,833, a
loss on sale of assets of $763,531 and impairment of intangible
assets of $506,413.
Financial Position, Liquidity and Capital Resources
Historically, we have
been unable to finance our business solely from cash flows from
operating activities. During the year ended September 30, 2017 and
prior years, we supplemented cash flows to finance the business
from borrowings under a credit facility, a revolving line of credit
from one of our shareholders, receipt of certain disgorgement
funds, and from the sale and issuance of debt securities. As
of September 30, 2017, excluding interest, $3.4 million was owed to
Sapinda (the “Sapinda
Loan Agreement”) and $30.4 million was
owed to Conrent (the
“Conrent Loan Agreement”). No such borrowings
or sales of equity securities occurred during the year ended
September 30, 2017.
Net Cash Flows from Operating Activities.
During the fiscal year ended September 30, 2017, we incurred a net
loss of $4,725,826 and we had cash flows from operating activities
of $4,147,786, compared to a net loss from continuing operations of
$8,495,621 and cash flows from operating activities of $907,563 for
fiscal year 2016. The increase of cash from operations in 2017
compared to 2016 was largely the result of a decrease in accounts
receivable and improved operating results.
Net Cash Flows from Investing Activities.
The Company used $3,827,832 of cash for investing activities during
the fiscal year ended September 30, 2017, compared to $5,057,183 of
cash used during fiscal year 2016. Cash used for investing
activities was used for significant enhancements of our software
platform and used for purchases of monitoring and other equipment
to meet demand during the twelve months ended September 30,
2017.
Net Cash Flows from Financing Activities.
The Company used $67,775 of cash for financing activities during
the fiscal year ended September 30, 2017, compared to $978,168 of
cash provided by financing activities during fiscal year 2016.
During the fiscal year ended September 30, 2017, we made principal
payments of $67,775 on notes payable. During the fiscal year ended
September 30, 2016, we made principal payments of $1,021,832 on
notes payable and we received cash proceeds totaling $2,000,000
from the issuance of notes payable.
Liquidity, Working Capital and Management’s Plan
As
of September 30, 2017, we had unrestricted cash of $2,027,321,
compared to unrestricted cash of $1,769,921 as of September 30,
2016. As of September 30, 2017, we had a working capital
deficit of $30,874,107, compared to a working capital surplus of
$344,283 as of September 30, 2016. This decrease in working
capital is principally due to an increase in short-term debt of
$27,024,799 which matures July 31, 2018, and a decrease in cash due
to additional capitalized software of $2,416,804, and purchases of
monitoring equipment of $1,838,779. See Notes 9 and 16 to
the Consolidated Financial Statements.
On March 13, 2017, the Company successfully extended the Sapinda
Loan Agreement from September 30, 2017 to September 30, 2020. In
addition, management is currently exploring options to restructure
the debt owed under the Conrent Loan Agreement, which may include
exchanging debt for equity.
Although no assurances can be given, in the event that management
is able to successfully restructure the debt owed under the Conrent
Loan Agreement, management believes it will have adequate cash flow
from operations to provide for our working capital requirements through
the remainder of the fiscal year ended September 30, 2018. Our
belief is conditioned on management’s ability to exchange
such debt owed to Conrent into equity securities of the Company.
However, in the event we are unable to successfully restructure the
debt under the Loan Agreement, our available cash resources
together with cash flow from operations will be inadequate to
provide for the payment of the debt owed under the Conrent Loan
Agreement and to satisfy our working capital
requirements.
On April 3, 2017, Puerto Rico filed for the equivalent of
bankruptcy in U.S. Federal court. The Company has a contractual
relationship with an arm of the Puerto Rico government that
currently owes us approximately $75,674 for pre-bankruptcy
monitoring services, of which we have recorded an allowance for
doubtful accounts of $60,539. Since April 3, 2017, we received
payments of approximately $143,000, $240,000, $73,000 and $9,000
related to pre-bankruptcy amounts from Puerto Rico. While it is too
early to determine how creditors, including the Company, will be
treated in the bankruptcy, we may be required to write down
additional amounts due to the bankruptcy proceeding.
Inflation
We do not believe that inflation has had a material impact on our
historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The Company has not entered into any transactions with
unconsolidated entities whereby the Company has financial
guarantees, derivative instruments, or other contingent
arrangements that expose the Company to material continuing risks,
contingent liabilities, or any other obligation that provides
financing, liquidity, market risk, or credit risk support to the
Company, except as described below.
|
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Payments due in less than 1 year
|
Payments due in 1 – 3 years
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Payments due in 3 – 5 years
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Total
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Operating
leases
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$333,506
|
$492,481
|
$80,860
|
$906,847
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As of September 30, 2017, the Company’s total future
minimum lease payments under noncancelable operating leases were
$906,847. The Company’s facility leases typically have
original terms not exceeding 5 years and generally contain
multi-year renewal options.
Critical Accounting Policies
In Note 2, “Summary of Significant Accounting Policies”
to the audited Consolidated Financial Statements included in this
Annual Report on Form 10-K, we discuss those accounting policies
that are considered to be significant in determining the results of
operations and our financial position.
The preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses. By their
nature, these estimates and judgments are subject to an inherent
degree of uncertainty. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability,
revenue, and income taxes. We base our estimates on historical
experience and other facts and circumstances that are believed to
be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual
results may differ from these estimates under different assumptions
or conditions.
With respect to inventory reserves, revenue recognition, impairment
of long-lived assets and allowance for doubtful accounts
receivable, we apply critical accounting policies discussed below
in the preparation of our financial statements.
Reclassification
Certain reclassifications of amounts previously reported have been
made to the accompanying financial statements to maintain
consistency between periods presented. The reclassifications had no
impact on net loss or shareholders’ equity.
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:
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Current inventory quantities on hand;
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Product acceptance in the marketplace;
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Customer demand;
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Historical sales;
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Forecast sales;
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Product obsolescence; and
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Technological innovations.
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Any modifications to these estimates of reserves are reflected in
cost of revenues within the statement of operations during the
period in which such modifications are determined necessary by
management.
Revenue Recognition
Our revenue is historically derived from two sources: (i)
monitoring services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (i) lease contracts in
which we provide monitoring services and lease devices to
distributors or end users and we retain ownership of the leased
device; and (ii) monitoring services purchased by distributors or
end users who have previously purchased monitoring devices and opt
to use our monitoring services.
We typically lease our devices under multi-year contracts with
customers that opt to use our monitoring services. However,
some of these contracts may be cancelled by either party at any
time upon 30 days’ notice. Under our standard leasing
contract, the leased device becomes billable on the date of
activation or seven 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,
ReliAlert or Shadow 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 services that are included in a single
billable rate. These products or 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 services provided to the
customer as the products or 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 products and services are due upon receipt to 30
days. We sell our devices and services directly to end users
and to distributors. Distributors do not have general rights
of return. Also, distributors have no price protection or
stock protection rights with respect to devices we sell to
them. Generally, title and risk of loss pass to the buyer upon
delivery of the devices.
We estimate our product returns based on historical experience and
maintain an allowance for estimated returns, which is recorded as a
reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as
part of net revenues. The related freight costs and supplies
directly associated with shipping products to customers are
included as a component of cost of revenues.
Impairment of Long-lived Assets
We review our long-lived assets including goodwill and intangibles
for impairment when events or changes in circumstances indicate
that the book value of an asset may not be recoverable, and in the
case of goodwill, at least annually. We evaluate whether events and
circumstances have occurred which indicate possible impairment as
of each balance sheet date. We use an equity method of the related
asset or group of assets in measuring whether the assets are
recoverable. If the carrying amount of an asset exceeds its
market value, an impairment charge is recognized for the amount by
which the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there are an identifiable fair market value
that is independent of other groups of assets.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts
receivable. In doing so, we analyze accounts receivable and
historical bad debts, customer credit-worthiness, current
macroeconomic and geopolitical trends, and changes in customer
payment patterns when evaluating the adequacy of the allowance for
doubtful accounts.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which
are adopted by us as of the specified effective date. Unless
otherwise discussed, we believe that the impact of recently issued
standards that are not yet effective will not have a material
impact on our financial position or results of operations upon
adoption.
Accounting for Stock-Based Compensation
We recognize compensation expense for stock-based awards expected
to vest on a straight-line basis over the requisite service period
of the award based on their grant date fair value. We estimate
the fair value of stock options using a Black-Scholes option
pricing model which requires us to make estimates for certain
assumptions regarding risk-free interest rate, expected life of
options, expected volatility of stock, and expected dividend yield
of stock.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
Our business extends to countries outside the United States, and we
intend to continue to expand our foreign operations. As a
result, our revenues and results of operations are affected by
fluctuations in currency exchange rates, interest rates, and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
We had $10,279,602 and $10,708,679 in revenue from sources outside
the United States for the fiscal years ended September 30, 2017 and
2016, respectively. We made and received payments in a
foreign currency during the periods indicated, which resulted in a
foreign exchange gain of $223,475 and foreign exchange loss
$151,258 in fiscal years 2017 and 2016, 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 hedging 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.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure
that material information relating to the Company is made known to
the officers who certify our financial reports and to other members
of senior management and the Board of Directors. These disclosure
controls and procedures are designed to ensure that information
required to be disclosed in the reports that are filed or submitted
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms.
Under the supervision and with the participation of management,
including the principal executive officer and principal financial
officer, an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of September
30, 2017 was completed pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based on this evaluation,
our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective and designed to provide reasonable assurance that the
information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms as of September 30,
2017.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such
term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Our internal control over financial reporting is a
process designed under the supervision of our principal executive
officer and principal financial officer to provide reasonable
assurance regarding the reliability of financial reporting and
preparation of our financial statements for external purposes in
accordance with generally accepted accounting
principles.
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and, even when
determined to be effective, can only provide reasonable, not
absolute, assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”)
issued in May 2013 and related COSO guidance. Based on our
evaluation under this framework, our management concluded that our
internal control over financial reporting was effective as of
September 30, 2017.
This report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide
only management’s report in this Annual Report on Form
10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act)
during our fourth fiscal quarter ended September 30, 2017, that has
materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.
Item 9B.
Other Information
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2018.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2018.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2018.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2018.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2018.
PART IV
Item 15.
Exhibits and Financial Statement
Schedules
(a) The following documents are filed as part of this
report:
1. Financial
Statements
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Report of Eide Bailly LLP
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F-2
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Operations
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F-4
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Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Loss
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F-5
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Consolidated Statements of Cash Flows
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F-7
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Notes to the Consolidated Financial Statements
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F-9
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2. Financial Statement
Schedules.
3. Exhibits. The following
exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission:
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Exhibit Number
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Title of Document
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10.2
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Supplemental
Settlement Agreement between Satellite Tracking of People, LLC and
SecureAlert, Inc., effective March 1, 2014 (incorporated by
reference to our Form 10-Q for the three months ended March 31,
2015).
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101.INS
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XBRL INSTANCE DOCUMENT
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101.SCH
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XBRL TAXONOMY EXTENSION SCHEMA
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101.CAL
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XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
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101.DEF
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XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
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101.LAB
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XBRL TAXONOMY EXTENSION LABEL LINKBASE
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101.PRE
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XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
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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.
Track Group, Inc.
By: /s/ Guy
Dubois
Guy Dubois, (Principal Executive Officer)
Date: December 19, 2017
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.
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Signature
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Title
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Date
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/s/ Guy Dubois
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Director,
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December 19, 2017
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Guy Dubois
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(Principal Executive Officer)
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/s/ David S. Boone
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Director
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December 19, 2017
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David S. Boone
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/s/ Dirk K. van Daele
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Director
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December 19, 2017
|
|
Dirk K. van Daele
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Karen Macleod
|
|
Director
|
|
December 19, 2017
|
|
Karen Macleod
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Eric Rosenblum
|
|
Director
|
|
December 19, 2017
|
|
Eric Rosenblum
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ray Johnson
|
|
Director
|
|
December 19, 2017
|
|
Ray Johnson
|
|
|
|
|
Index to Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-7
|
|
|
|
F-9
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Track Group, Inc.
We have audited the accompanying consolidated balance sheets of
Track Group, Inc. and Subsidiaries (collectively, the
“Company”) as of September 30, 2017 and 2016 and the
related consolidated statements of income, comprehensive income,
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 misstatement. 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, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe 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 Track Group, Inc. as of September 30, 2017 and 2016 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.
/s/ Eide Bailly LLP
Salt Lake City, Utah
December 19, 2017
TRACK GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017 AND 2016
|
Assets
|
2017
|
2016
|
|
Current assets:
|
|
|
|
Cash
|
$2,027,321
|
$1,769,921
|
|
Accounts
receivable, net of allowance for doubtful accounts of $3,268,095
and $2,335,508, respectively
|
5,438,564
|
6,894,095
|
|
Note
receivable, current portion
|
234,733
|
334,733
|
|
Prepaid
expenses and other
|
854,122
|
816,708
|
|
Inventory,
net of reserves of $26,934 and $98,150, respectively
|
261,810
|
521,851
|
|
Total
current assets
|
8,816,550
|
10,337,308
|
|
Property
and equipment, net of accumulated depreciation of $1,778,634 and
$1,421,389, respectively
|
903,100
|
1,226,461
|
|
Monitoring
equipment, net of accumulated amortization of $4,906,925 and
$3,438,074, respectively
|
3,493,012
|
4,358,117
|
|
Intangible
assets, net of accumulated amortization of $9,839,032 and
$8,233,659, respectively
|
24,718,655
|
25,540,650
|
|
Goodwill
|
8,226,714
|
7,955,876
|
|
Other
assets
|
2,989,101
|
2,900,911
|
|
Total
assets
|
$49,147,132
|
$52,319,323
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
2,769,835
|
2,771,101
|
|
Accrued
liabilities
|
6,650,291
|
3,976,192
|
|
Current
portion of long-term debt, net of discount of $185,811 and
$222,973, respectively
|
30,270,531
|
3,245,732
|
|
Total
current liabilities
|
39,690,657
|
9,993,025
|
|
Stock
payable - related party
|
-
|
3,289,879
|
|
Long-term
debt, net of current portion and discount of $0 and $185,811,
respectively
|
3,480,717
|
30,345,803
|
|
Total
liabilities
|
43,171,374
|
43,628,707
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares authorized;
10,480,984 and 10,333,516 shares outstanding,
respectively
|
1,048
|
1,034
|
|
Additional
paid-in capital
|
300,717,861
|
298,876,399
|
|
Accumulated
deficit
|
(294,067,329)
|
(289,341,503)
|
|
Accumulated
other comprehensive loss
|
(675,822)
|
(845,314)
|
|
Total
equity
|
5,975,758
|
8,690,616
|
|
Total
liabilities and stockholders’ equity
|
$49,147,132
|
$52,319,323
|
The
accompanying notes are an integral part of the financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
2017
|
2016
|
|
Revenues:
|
|
|
|
Monitoring
services
|
$28,887,460
|
$26,343,783
|
|
Other
|
839,558
|
850,024
|
|
Total
revenues
|
29,727,018
|
27,193,807
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
Monitoring,
products and other related services
|
11,997,031
|
10,327,486
|
|
Depreciation
and amortization included in cost of revenues
|
2,128,668
|
2,009,437
|
|
Impairment
of monitoring equipment and parts
|
-
|
80,000
|
|
Total
cost of revenue
|
14,125,699
|
12,416,923
|
|
|
|
|
|
Gross profit
|
15,601,319
|
14,776,884
|
|
|
|
|
|
Operating expenses:
|
|
|
|
General
& administrative
|
12,216,041
|
13,038,760
|
|
Loss
on sale of assets
|
763,531
|
-
|
|
Restructuring
costs
|
558,833
|
-
|
|
Impairment
of intangible assets
|
506,413
|
-
|
|
Selling
& marketing
|
2,311,725
|
2,270,733
|
|
Research
& development
|
1,784,867
|
2,415,924
|
|
Depreciation
& amortization
|
2,332,217
|
2,709,918
|
|
Total operating
expense
|
20,473,627
|
20,435,335
|
|
|
|
|
|
Loss from operations
|
(4,872,308)
|
(5,658,451)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
20,086
|
114,235
|
|
Interest
expense
|
(2,820,924)
|
(2,829,003)
|
|
Currency
exchange rate gain (loss)
|
223,475
|
(151,258)
|
|
Gain
on settlement of milestone payments
|
3,213,940
|
-
|
|
Other
income/expense, net
|
11,556
|
28,856
|
|
Total other income (expense)
|
648,133
|
(2,837,170)
|
|
Net loss before income taxes
|
(4,224,175)
|
(8,495,621)
|
|
Income
tax expense
|
501,651
|
-
|
|
Net loss attributable to common shareholders
|
(4,725,826)
|
(8,495,621)
|
|
Foreign
currency translation adjustments
|
169,492
|
1,532,751
|
|
Comprehensive loss
|
$(4,556,334)
|
$(6,962,870)
|
|
Net
loss per common share, basic and diluted
|
$(0.45)
|
$(0.83)
|
|
Weighted
average common shares outstanding, basic and diluted
|
10,408,870
|
10,285,947
|
The accompanying
notes are an integral part of the financial
statements.
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2017
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
10,333,516
|
$1,034
|
$298,876,399
|
$(289,341,503)
|
$(845,314)
|
$8,690,616
|
|
|
|
|
|
|
|
|
|
Modification
of warrants
|
-
|
-
|
790,313
|
-
|
-
|
790,313
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
Recognition
of milestone achievement services
|
10,602
|
1
|
75,937
|
-
|
-
|
75,938
|
|
|
|
|
|
|
|
|
|
Common
shares issued upon vesting of restricted stock
|
42,026
|
4
|
167,281
|
-
|
-
|
167,285
|
|
|
|
|
|
|
|
|
|
Stock
for Board of Director fees
|
94,840
|
9
|
464,991
|
-
|
-
|
465,000
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock warrants for Board of Director fees
|
-
|
-
|
75,000
|
-
|
-
|
75,000
|
|
|
|
|
|
|
|
|
|
Amortization
of equity-based compensation granted to employees
|
-
|
-
|
267,940
|
-
|
-
|
267,940
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
169,492
|
169,492
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(4,725,826)
|
-
|
(4,725,826)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
10,480,984
|
$1,048
|
300,717,861
|
(294,067,329)
|
(675,822)
|
5,975,758
|
The accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2015 AND 2016
(continued)
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2015
|
10,261,288
|
$1,026
|
$297,591,034
|
$(280,845,882)
|
$(2,378,065)
|
$14,368,113
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
Recognition
of milestone achievement
|
32,490
|
3
|
211,528
|
-
|
-
|
211,531
|
|
Services
|
26,674
|
3
|
259,378
|
-
|
-
|
259,381
|
|
Board
of director fees
|
13,064
|
2
|
97,167
|
-
|
-
|
97,169
|
|
|
|
|
|
|
|
|
|
Vesting
of stock options
|
-
|
-
|
300,873
|
-
|
-
|
300,873
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock warrants for Board of Director fees
|
-
|
-
|
416,419
|
-
|
-
|
416,419
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
1,532,751
|
1,532,751
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(8,495,621)
|
-
|
(8,495,621)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
10,333,516
|
$1,034
|
$298,876,399
|
$(289,341,503)
|
$(845,314)
|
$8,690,616
|
The accompanying notes are an integral part of the financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
2017
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(4,725,826)
|
$(8,495,621)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
4,460,885
|
4,719,355
|
|
Impairment
of monitoring equipment and parts
|
-
|
80,000
|
|
Impairment
of intangible assets
|
506,413
|
-
|
|
Bad
debt expense
|
1,048,737
|
1,996,348
|
|
Accretion
of debt discount
|
222,973
|
222,973
|
|
Stock
based compensation
|
1,140,520
|
1,353,295
|
|
Loss
on disposal of property and equipment
|
763,531
|
39,290
|
|
Gain
on settlement of milestone payments
|
(3,213,940)
|
-
|
|
Loss
on monitoring equipment included on cost of sales
|
569,371
|
90,838
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
583,694
|
(2,718,115)
|
|
Notes
receivable
|
-
|
(28,299)
|
|
Inventories
|
260,041
|
258,519
|
|
Prepaid
expenses and other
|
(433,978)
|
190,951
|
|
Accounts
payable, accrued expenses and other
|
2,965,365
|
3,198,029
|
|
Net
cash provided by operating activities
|
4,147,786
|
907,563
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(84,749)
|
(105,121)
|
|
Capitalized
software
|
(2,416,804)
|
(2,090,962)
|
|
Purchase
of monitoring equipment and parts
|
(1,838,779)
|
(2,861,100)
|
|
Proceeds
from sale of assets
|
512,500
|
-
|
|
Net
cash used in investing activities
|
(3,827,832)
|
(5,057,183)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Proceeds
from notes payable
|
-
|
2,000,000
|
|
Principal
payments on notes payable
|
(67,775)
|
(1,021,832)
|
|
Net
cash provided by (used in) financing activities
|
(67,775)
|
978,168
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
5,221
|
38,328
|
|
|
|
|
|
Net increase (decrease) in cash
|
257,400
|
(3,133,124)
|
|
Cash, beginning of year
|
1,769,921
|
4,903,045
|
|
Cash, end of year
|
$2,027,321
|
$1,769,921
|
The accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
2017
|
2016
|
|
Cash
paid for interest
|
$22,456
|
$15,408
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Issuance
of warrants for accrued Board of Director fees
|
100,000
|
416,419
|
|
Issuance
of common shares in recognition of certain milestone
achievements
|
75,937
|
211,528
|
|
Non-cash
transfer of inventory to monitoring equipment
|
487,544
|
212,330
|
The accompanying
notes are an integral part of the financial
statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Organization and Nature of Operations
|
General
The Company's business is based on the manufacture and leasing of
patented tracking and monitoring solutions to federal, state and
local law enforcement agencies, both in the U.S and abroad, for the
electronic monitoring of offenders and offering unique data
analytics services on a platform-as-a-service (PaaS) business
model. Currently, the Company deploys offender based
management services that combine patented GPS tracking
technologies, full-time 24/7/365 global monitoring capabilities,
case management, and proprietary data analytics. The Company offers
customizable tracking solutions that leverage real-time tracking
data, best-practices monitoring, and analytics capabilities to
create complete, end-to-end tracking solutions.
Reclassifications – Certain
reclassifications of amounts previously reported have been made to
the accompanying financial statements to maintain consistency
between periods presented. The reclassifications had no impact on
net income (loss) or shareholders’
equity.
|
(2)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of Track Group, Inc. and its subsidiaries. All significant
inter-company transactions have been eliminated in consolidation.
Certain prior year amounts on the consolidated statement of
operations have been reclassified to conform to the current period
presentation. These reclassifications have no impact on the
previously reported results.
Use of Estimates in the Preparation of Financial
Statements
The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during
the period presented. Actual results could differ from those
estimates. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to,
allowances for doubtful accounts, certain assumptions related to
the recoverability of intangible and long-lived assets, and fair
market values of certain assets and liabilities.
Business Combinations
Business combinations are accounted for under the provisions of ASC
805-10, Business Combinations
(ASC 805-10), which requires that the
purchase method of accounting be used for all business
combinations. Assets acquired and liabilities assumed at the date
of acquisition are recorded at their respective fair values. ASC
805-10 also specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart
from goodwill. Acquisition-related expenses are recognized
separately from the business combinations and are expensed as
incurred. If the business combination provides for contingent
consideration, the contingent consideration is recorded at its
probable fair value at the acquisition date. Any changes in fair
value after the acquisition date are accounted for as
measurement-period adjustments if they pertain to additional
information about facts and circumstances that existed at the
acquisition date and that the Company obtained during the
measurement period. Changes in fair value of contingent
consideration resulting from events after the acquisition date,
such as performance measures, are recognized in
earnings.
Goodwill represents costs in excess of purchase price over the fair
value of the assets of businesses acquired, including other
identifiable intangible assets.
Foreign Currency Translation
The Chilean Peso, New Israeli Shekel and the Canadian Dollar are
used as functional currencies of the operating subsidiaries: (i)
Track Group Chile SpA; (ii) Track Group International Ltd.; and
(iii) Track Group Analytics Limited, respectively. The balance
sheets of all subsidiaries have been converted into United States
Dollars (“USD”) at the exchange rate prevailing at
September 30, 2017. Their respective statements of operations have
been translated into USD using the average exchange rates
prevailing during the periods of each statement. The corresponding
translation adjustments are part of accumulated other comprehensive
income and are shown as part of shareholders’
equity.
Other Intangible Assets
Other intangible assets principally consist of patents, royalty
purchase agreements, developed technology acquired, customer
relationships, trade name, capitalized software development costs,
and capitalized website development costs. The Company accounts for
other intangible assets in accordance with generally accepted
accounting principles and do not amortize intangible assets with
indefinite lives. Intangible assets with finite useful lives are
amortized over their respective estimated useful lives, which range
from three to twenty years. Intangible assets are reviewed for
impairment annually or more frequently whenever events or changes
in circumstances indicate possible impairment.
Fair Value of Financial Statements
The carrying amounts reported in the accompanying consolidated
financial statements for accrued liabilities and debt obligations
approximate fair values because of the immediate or short-term
maturities of these financial instruments. The carrying
amounts of our debt obligations approximate fair value as the
interest rates approximate market interest rates.
Concentration of Credit Risk
In the normal course of business, the Company provides credit terms
to its customers and requires no collateral. Accordingly, the
Company performs credit evaluations of our customers' financial
condition.
The Company had sales to entities, two of which represents more
than ten percent of gross revenues, as follows for the years ended
September 30, 2017 and 2016.
|
|
2017
|
%
|
2016
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$8,747,338
|
29%
|
$7,543,116
|
28%
|
|
|
|
|
|
|
|
Customer
B
|
$3,743,508
|
13%
|
$2,013,929
|
7%
|
|
|
|
|
|
|
|
Customer
C
|
$2,326,318
|
8%
|
$1,573,959
|
6%
|
No other customer represented more than 10 percent of the
Company’s total revenues for the fiscal years ended September
30, 2017 or 2016. (See Note 16).
Concentration of credit risk associated with the Company’s
total and outstanding accounts receivable as of September 30, 2017
and 2016, respectively, are shown in the table below:
|
|
2017
|
%
|
2016
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$1,657,316
|
30%
|
$2,476,168
|
36%
|
|
|
|
|
|
|
|
Customer
B
|
$641,973
|
12%
|
$899,428
|
13%
|
|
|
|
|
|
|
|
Customer
C
|
$394,253
|
7%
|
$548,867
|
8%
|
Based upon the expected collectability of our accounts receivable,
the Company maintains an allowance for doubtful
accounts.
Cash Equivalents
Cash equivalents consist of investments with original maturities to
the Company of three months or less. The Company has cash in
bank accounts that, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The
Company had $1,445,364 and $1,336,787 of cash deposits in excess of
federally insured limits as of September 30, 2017 and 2016,
respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. The allowance is estimated
by management based on certain assumptions and variables, including
the customer’s financial condition, age of the
customer’s receivables and changes in payment
histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously
written off are recorded when cash is received. A trade
receivable is considered to be past due if any portion of the
receivable balance has not been received by the Company within its
normal terms. Interest income is not recorded on trade
receivables that are past due, unless that interest is
collected.
Note Receivable
Notes receivable are carried at the face amount of each note plus
respective accrued interest receivable, less received
payments. The Company does not typically carry notes
receivable in the course of its regular business, but entered into
an agreement with one of its customers during the fiscal year ended
September 30, 2012. Payments under the note are recorded as
they are received and are immediately offset against any
outstanding accrued interest before they are applied against the
outstanding principal balance on the respective note. The note
requires monthly payments of $15,000, and matured in May
2014. The note is currently in default and accrues interest at
a rate of 17% per annum. As of June 30, 2016, the Company no longer
accrues interest on the note. As of September 30, 2017, the
outstanding balance of the note was $120,824 and $113,909 of
accrued interest, which are both fully reserved.
Inventory
Inventory is valued at the lower of the cost or market. Cost
is determined using the first-in, first-out
(“FIFO”) method. Market is determined based
on the estimated net realizable value, which generally is the item
selling price. Inventory is periodically reviewed in order to
identify obsolete or damaged items or impaired values. The
Company impaired its inventory by $0 and $80,000 during the fiscal
years ended September 30, 2017 and 2016,
respectively.
Inventory consists of finished goods that are to be shipped to
customers and parts used for minor repairs of ReliAlert™,
Shadow, and other tracking devices. Completed and shipped
ReliAlert™ and other tracking devices are reflected in
Monitoring Equipment. As of September 30, 2017 and September
30, 2016, respectively, inventory consisted of the
following:
|
|
2017
|
2016
|
|
Finished
goods inventory
|
$288,744
|
$620,001
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(98,150)
|
|
Total
inventory, net of reserves
|
$261,810
|
$521,851
|
During the year ended September 30, 2015, the Company began using a
third-party fulfillment service provider. As a result of this
service, the Company’s employees no longer assemble, repair
or process inventory or monitoring equipment being shipped directly
from suppliers. Purchases of monitoring equipment are now
recognized directly, rather than being transferred from inventory
to monitoring equipment after their purchase. Management believes
that this process will reduce maintenance and fulfillment costs
associated with inventory and monitoring equipment in future
periods.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are determined using the straight-line method over the estimated
useful lives of the assets, typically three to seven
years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the asset or the term of the lease.
Expenditures for maintenance and repairs are expensed while
renewals and improvements are capitalized.
Property and equipment consisted of the following as of
September 30, 2017 and 2016, respectively:
|
|
2017
|
2016
|
|
Equipment,
software and tooling
|
$1,028,081
|
$1,028,173
|
|
Automobiles
|
52,230
|
87,313
|
|
Leasehold
improvements
|
1,307,802
|
1,279,500
|
|
Furniture
and fixtures
|
293,621
|
252,864
|
|
Total
property and equipment before accumulated depreciation
|
2,681,734
|
2,647,850
|
|
Accumulated
depreciation
|
(1,778,634)
|
(1,421,389)
|
|
Property
and equipment, net of accumulated depreciation
|
$903,100
|
$1,226,461
|
Property and equipment to be disposed of is reported at the lower
of the carrying amount or fair value, less the estimated costs to
sell and any gains or losses are included in the results of
operations. During the fiscal years ended September 30, 2017 and
2016, the Company recognized no losses on the disposal of property
and equipment. Internally developed software costs related to the
Company's monitoring platform are recorded as intangible assets on
the Consolidated Balance Sheet. See Note 15.
Depreciation expense recognized for property and equipment for the
fiscal years ended September 30, 2017 and 2016 was $366,124 and
$609,036, respectively.
Monitoring Equipment
The Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is depreciated using the straight-line method over an
estimated useful life of between one and five years. Monitoring
equipment as of September 30, 2017 and 2016 is as
follows:
|
|
2017
|
2016
|
|
Monitoring
equipment
|
$8,399,937
|
$7,796,191
|
|
Less:
accumulated amortization
|
(4,906,925)
|
(3,438,074)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$3,493,012
|
$4,358,117
|
Amortization expense for the fiscal years ended September 30, 2017
and 2016 was $1,678,668 and $1,559,437, respectively. These
expenses were classified as a cost of revenues.
Monitoring equipment to be disposed of is reported at the lower of
the carrying amount or fair value, less the estimated costs to
sell. As part of the sale of assets described in Note 5, the
Company disposed of $771,568 of monitoring equipment and $361,463
of related accumulated amortization in the year ended September 30,
2017.
During the fiscal years ended September 30, 2017 and 2016, the
Company disposed of leased monitoring equipment and parts of
$569,371 and $90,838, respectively.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset
may not be recoverable, and in the case of goodwill, at least
annually. The Company evaluates whether events and circumstances
have occurred which indicate possible impairment as of each balance
sheet date. If the carrying amount of an asset exceeds its fair
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 value that is
independent of other groups of assets. See Note 15.
Revenue Recognition
Our revenue has historically been from two sources: (i) monitoring
services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (a) lease contracts in
which the Company provides monitoring services and leases devices
to distributors or end users and the Company retains ownership of
the leased device; and (b) monitoring services purchased by
distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring
services.
The Company typically leases devices under multi-year contracts
with customers that opt to use our monitoring
services. However, some of these contracts may be cancelled by
either party at any time with 30 days’ notice. Under our
standard leasing contract, the leased device becomes billable on
the date of activation or 7 to 21 days from the date the device is
assigned to the lessee, and remains billable until the device is
returned to the Company. The Company recognizes revenue on leased
devices at the end of each month that monitoring services have been
provided. In those circumstances in which the Company receives
payment in advance, we record these payments as deferred
revenue.
Product Sales
The Company may sell monitoring devices in certain situations to
customers. In addition, the Company may sell equipment in
connection with the building out and setting up a monitoring center
on behalf of customers. The Company recognizes product sales
revenue when persuasive evidence of an arrangement with the
customer exists, title passes to the customer and the customer
cannot return the devices or equipment, prices are fixed or
determinable (including sales not being made outside the normal
payment terms) and collection is reasonably assured. When
purchasing products (such as TrackerPAL® and ReliAlert™
devices) from the Company, customers may, but are not required to,
enter into monitoring service contracts with us. The Company
recognizes revenue on monitoring services for customers that have
previously purchased devices at the end of each month that
monitoring services have been provided.
The Company sells and installs standalone tracking systems that do
not require ongoing monitoring by us. We have experience in
component installation costs and direct labor hours related to this
type of sale and can typically reasonably estimate costs;
therefore, the Company recognizes revenue over the period in which
the installation services are performed using the
percentage-of-completion method of accounting for material
installations. The Company typically uses labor hours or costs
incurred to date as a percentage of the total estimated labor hours
or costs to fulfill the contract as the most reliable and
meaningful measure that is available for determining a
project’s progress toward completion. The Company evaluates
its estimated labor hours and costs and 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, the Company accrues the estimated losses
immediately. All amounts billed have been
earned.
Multiple Element Arrangements
The majority of the Company’s revenue transactions do not
have multiple elements. However, on occasion, the Company may 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, the Company
recognizes revenue from the sale of devices separately from the
monitoring services provided to the customer as the products or
monitoring services are delivered.
Other Matters
The Company considers an arrangement with payment terms longer than
the Company’s normal terms not to be fixed or determinable,
and revenue is recognized when the fee becomes due. Normal
payment terms for the sale of monitoring services and products are
due upon receipt to 30 days. The Company sells devices and services
directly to end users and to distributors. Distributors do not
have general rights of return. Also, distributors have no
price protection or stock protection rights with respect to devices
sold to them by us. Generally, title and risk of loss pass to
the buyer upon delivery of the devices.
The Company estimates 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.
Research and Development Costs
During the fiscal year ended September 30, 2017, the Company
incurred research and development expense of $1,784,867 compared to
those costs recognized during fiscal year 2016 totaling
$2,415,924. The $631,057 decrease in research and development
costs reflect lower research and development costs, as well as
payroll and wages and lower outside services. The Company
is
currently significantly enhancing its
software platform.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expense for the fiscal years ended
September 30, 2017 and 2016 was $14,984 and $19,440,
respectively.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards
expected to vest on a straight-line basis over the requisite
service period of the award based on their grant date fair value.
The fair value of stock options is estimated using a Black-Scholes
option pricing model, which requires management to make estimates
for certain assumptions regarding risk-free interest rate, expected
life of options, expected volatility of stock and expected dividend
yield of stock.
Income Taxes
The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary.
The tax effects from uncertain tax positions can be recognized in
the financial statements, provided the position is more likely than
not to be sustained on audit, based on the technical merits of the
position. We recognize the financial statement benefits of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being
realized, upon ultimate settlement with the relevant tax authority.
The Company applied the foregoing accounting standard to all of our
tax positions for which the statute of limitations remained open as
of the date of the accompanying consolidated financial
statements.
The Company's policy is to recognize interest and penalties related
to income tax issues as components of other noninterest expense. As
of September 30, 2017 and September 30, 2016, we did not record a
liability for uncertain tax positions.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share
(“Basic
EPS”) is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the
period.
Diluted net income (loss) per common share
(“Diluted EPS”) is computed by dividing net income (loss)
attributable to common stockholders by the sum of the
weighted-average number of common shares outstanding and the
weighted-average dilutive common share equivalents
outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an
anti-dilutive effect.
Common share equivalents consist of shares issuable upon the
exercise of options and warrants to purchase shares of the
Company's Common Stock, par value $0.0001 per share
(“Common
Stock”). As of
September 30, 2017 and 2016, there were 490,842 and 504,991
outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as
their effect would be anti-dilutive. The Common Stock
equivalents outstanding as of September 30, 2017 and 2016 consisted
of the following:
|
|
2017
|
2016
|
|
Exercise
of outstanding Common Stock options and warrants
|
490,842
|
504,991
|
|
Total
Common Stock equivalents
|
490,842
|
504,991
|
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board
("FASB") issued a new standard to conform the
presentation in the statement of cash flows for certain
transactions, including cash distributions from equity method
investments, among others. The adoption of the new standard is
required in 2019. Management does not anticipate that this adoption
will have a significant impact on its consolidated financial
position, results of operations, or cash flows.
In May 2017, the FASB issued Accounting Standards Update
(“ASU”) 2017-09, Compensation - Stock
Compensation: Scope of Modification Accounting, which provides
guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification
accounting. An entity will account for the effects of a
modification unless the fair value of the modified award is the
same as the original award, the vesting conditions of the modified
award are the same as the original award and the classification of
the modified award as an equity instrument or liability instrument
is the same as the original award. The update is effective for
annual periods beginning after December 15, 2017. The update is to
be adopted prospectively to an award modified on or after the
adoption date. Early adoption is permitted. Management does not
anticipate that this adoption will have a significant impact on its
consolidated financial position, results of operations, or cash
flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles –
Goodwill and Other: Simplifying the Test for Goodwill Impairment.
The new guidance simplifies the subsequent measurement of goodwill
by removing the second step of the two-step impairment test. The
amendment requires an entity to perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The new
guidance will be effective for annual periods or any interim
goodwill impairment tests in fiscal years beginning after December
15, 2019. The amendment should be applied on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
Management does not anticipate that this adoption will have a
significant impact on its consolidated financial position, results
of operations, or cash flows.
In May 2016, the FASB issued ASU 2016-12. The amendments in this
update affect the guidance in ASU 2014-09, Revenue from Contracts
with Customers (Topic 606), which is not yet effective. The
effective date and transition requirements for the amendments in
this update are the same as the effective date and transition
requirements for Topic 606 (and any other Topic amended by Update
2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, defers the effective date of
update 2014-09 by one year. Management has reviewed ASU 2014-09 and
has determined that this adoption will not have a significant
impact on its consolidated financial position, results of
operations, or cash flows.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and
Licensing. This update was intended to clarify two aspects of Topic
606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for
those areas. The effective date for ASU 2016-10 is the same as
Topic 606, which begins for annual reporting periods beginning
after December 15, 2017. Management does not anticipate that this
adoption will have a significant impact on its consolidated
financial position, results of operations, or cash
flows.
In March 2016, FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). This update was intended
to improve the operability and understandability of the
implementation guidance on principal versus agent considerations.
The amendments in this update have the same effective date as ASC
606 as discussed above. Management does not anticipate that this
adoption will have a significant impact on its consolidated
financial position, results of operations, or cash
flows.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this update change the
accounting for certain stock-based compensation transactions,
including the income tax consequences and cash flow classification
for applicable transactions. The amendments in this update are
effective for annual periods beginning after December 31, 2016 and
interim periods within those annual periods. Management does not
anticipate that this adoption will have a significant impact on its
consolidated financial position, results of operations, or cash
flows.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 841).
For lessees, the amendments in this update require that for all
leases not considered to be short term, a company recognize both a
lease liability and right-of-use asset on its balance sheet,
representing the obligation to make payments and the right to use
or control the use of a specified asset for the lease term. The
amendments in this update are effective for annual periods
beginning after December 15, 2018 and interim periods within those
annual periods. Management does not anticipate that this adoption
will have a significant impact on its consolidated financial
position, results of operations, or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU
2015-17“). Current GAAP
requires an entity to separate deferred income tax liabilities and
assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, ASU 2015-17 requires that deferred tax
liabilities and assets be classified as noncurrent in a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this Update. The amendments in this update are
effective for financial statements issued for annual periods
beginning after March 15, 2016, and interim periods within those
annual periods. Earlier application is permitted for all entities
as of the beginning of an interim or annual reporting
period. The adoption of ASU 2015-17 is not expected to have a
material impact on our consolidated financial
statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the
Accounting for Measurement-Period Adjustments
(“ASU
2015-16“). ASU 2015-16
requires an acquirer to recognize adjustments to provisional
amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined.
ASU 2015-16 will be effective for the Company’s fiscal year
beginning October 1, 2017 and subsequent interim periods. The
adoption of ASU 2015-16 is not expected to have a material effect
on the Company’s consolidated financial
statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the
Measurement of Inventory, (“ASU 2015-11“). ASU 2015-11 requires that an entity
measure inventory at the lower of cost and net realizable value,
unless the entity is using the LIFO or retail inventory method. ASU
2015-11 will be effective for the Company’s fiscal year
beginning October 1, 2017 and subsequent interim periods, with
early adoption permitted. Management does not anticipate that this
adoption will have a significant impact on its consolidated
financial position, results of operations, or cash
flows.
|
(3)
|
Immaterial Error Corrections
|
This Report on Form 10-K of the Company for the year ended
September 30, 2017, includes the revision of the Company's
previously filed consolidated income statements for the twelve
months ended September 30, 2016.
Management concluded that the general and administrative section of
the Condensed Consolidated Income Statement contained an error and
that for comparative purposes in 2017 filings, these figures should
be revised but that the adjustments are not material
modifications. Accordingly, the Company has determined that
prior financial statements should be corrected, even though such
revisions are immaterial. Furthermore, the Company has
determined that correcting prior year financial statements for
immaterial changes would not require previously filed reports to be
amended.
Under general and administrative expense, the Company has
reclassified costs related to repairs and maintenance of monitoring
devices and certain other costs, including installation,
communications and transportation costs that were previously
recorded in general and administrative expense to cost of revenues,
selling and marketing, and research and development. Net loss and
shareholders’ equity were not affected by the
reclassification. The effect of these revisions on the
Company's results of operations for the twelve months ended
September 30, 2016 previously reported are as follows:
|
|
Twelve months ended
September 30,
2016
Previously
Reported
|
Net Change
|
Twelve months ended
September 30,
2016
(Revised)
|
|
Cost
of revenues:
|
|
|
|
|
Monitoring,
products & other related services
|
$8,443,792
|
$1,883,694
|
$10,327,486
|
|
|
|
|
|
|
Total
operating expense
|
|
|
|
|
General
and administrative expenses
|
14,712,650
|
(1,673,890)
|
13,038,760
|
|
Selling
& marketing
|
2,269,233
|
1,500
|
2,270,733
|
|
Research
& development
|
2,627,228
|
(211,304)
|
2,415,924
|
|
(4)
|
Acquisitions
|
Track Group Analytics Limited
On November 26, 2014, the Company entered into a Share Purchase
Agreement to purchase from the shareholders of Track Group
Analytics Limited, formerly G2 Research Limited
(“TGA”), all issued and outstanding shares of TGA
for an aggregate purchase price of up to CAD $4,600,000 (the
“TGA Acquisition”),
of which CAD $2,000,000 was paid in cash to the TGA shareholders on
the Closing Date with the remainder of the purchase price to be
paid as follows: (i) CAD $600,000 to the former TGA shareholders in
shares of common stock of which one-half of the shares were issued
on the one-year anniversary of the closing and the balance was
issued on the two-year anniversary of the closing; and (ii) up to
CAD $2,000,000 to the former TGA shareholders in shares of common
stock over a two-year period beginning as of the closing,
subject to the achievement of certain milestones set forth in the
purchase agreement. The final milestone payment of 10,602 shares of
common stock was paid on January 31, 2017. In total, the Company
has paid approximately USD $956,000 of milestone payments through
stock issuances related to the TGA Acquisition.
The fair value of patents, developed technology, customer
contracts/relationship, tradename and trademarks were capitalized
as of the acquisition date and will be subsequently amortized using
a straight-line method to depreciation and amortization expense
over their estimated useful lives.
|
(5)
|
Disposition
|
On March 8, 2017, the Company sold certain non-core assets for
$510,000, net, after a payment to a third party for a royalty
repurchase. We retained other assets acquired at the time of the
original acquisition of these non-core assets, consisting of
customers generating material revenue, as well as employees
considered critical to the maintenance, development and growth of
our business and operations. The Company incurred a loss of
$766,031 on the sale, which consists of a sale price of $860,000,
less a third-party royalty buyout payment of $350,000, $410,105 of
equipment, net of accumulated depreciation, and $865,926 of
intangible assets, net of accumulated amortization.
|
(6)
|
Accrued Liabilities
|
Accrued liabilities consisted of the following as of September 30,
2017 and 2016:
|
|
2017
|
2016
|
|
Accrued
payroll, taxes and employee benefits
|
$943,066
|
$1,424,812
|
|
Accrued
consulting
|
11,631
|
123,114
|
|
Accrued
taxes - foreign and domestic
|
529,926
|
311,614
|
|
Accrued
settlement costs
|
200,000
|
35,000
|
|
Accrued
board of directors fees
|
125,000
|
96,000
|
|
Accrued
other expenses
|
201,640
|
124,298
|
|
Accrued
legal costs
|
116,824
|
14,548
|
|
Accrued
cellular costs
|
81,100
|
84
|
|
Accrued
manufacturing costs
|
137,884
|
103,441
|
|
Accrued
interest
|
4,303,220
|
1,743,281
|
|
Total
accrued liabilities
|
$6,650,291
|
$3,976,192
|
|
(7)
|
Certain Relationships and Related Transactions
|
The Company entered into certain transactions with related parties
during the fiscal years ended September 30, 2017 and 2016. These
transactions consist mainly of financing transactions and service
agreements. Transactions with related parties are reviewed and
approved by the independent and disinterested members of the Board
of Directors.
Related-Party Loan Agreement
On September 25, 2015, the Company entered into a
loan agreement (the
“Sapinda Loan
Agreement”) with Sapinda
Asia Limited (“Sapinda”),
a related party, to provide the Company with a $5.0 million line of
credit that accrues interest at a rate of 3% per annum for undrawn
funds, and 8% per annum for borrowed funds. Pursuant to the terms
and conditions of the Sapinda Loan Agreement, available funds may
be drawn down at the Company’s request at any time prior to
the maturity date of September 30, 2017 (the “Maturity
Date”), when all borrowed
funds, plus all accrued but unpaid interest will become due and
payable. The Company, however, may elect to satisfy any outstanding
obligations under the Sapinda Loan Agreement prior to the Maturity
Date without penalties or fees. We did not draw on this line of
credit, nor did we pay any interest during the year ended September
30, 2017. The undrawn balance of this line of credit at September
30, 2017 was $1,600,356.
On March 13, 2017, the Company and Sapinda entered into Amendment
Number One to the Sapinda
Loan Agreement. Amendment Number One extends the maturity date of
all loans made pursuant to the Sapinda
Loan Agreement to September 30, 2020. In addition, Amendment Number
One eliminates the requirement that the Company pay Sapinda
the 3% Interest, and forgives
the 3% Interest due to Sapinda for all undrawn funds under
the Sapinda
Loan Agreement through the Execution Date. In addition, Lender
Penalties under the Sapinda
Loan Agreement through the Execution Date are forgiven. Per
the Sapinda
Loan Agreement, Lender Penalties shall begin to accrue again
provided Sapinda has not funded the amount of $1.5 million on or
before March 31, 2017. In breach of Amendment Number One to
the Sapinda
Loan Agreement, Sapinda failed to fund the $1.5 million by March
31, 2017. The Company formally notified Sapinda of the breach by
letter dated April 4, 2017. The Company is again accruing the
failure to fund penalties, amounting to $183,000 at September 30,
2017, under Section 6.3 of the Sapinda
Loan Agreement, as amended. Further advances under
the Sapinda
Loan Agreement are not currently expected to be forthcoming, and
therefore no assurances can be given that the Company will obtain
additional funds to which it is entitled under the
Sapinda
Loan Agreement, or that the penalties accruing will ever be
paid.
Stock Payable – Related Party
In connection with the acquisitions during 2014 and 2015 described
under Note 4 above, the Company recognized a liability for stock
payable to the Sellers of the entities acquired. In conjunction
with the respective purchase agreements, shares of the
Company’s stock are payable based on the achievement of
certain milestones. Changes in the stock payable liability are
shown below:
|
|
Sept. 30,
2017
|
Sept. 30,
2016
|
|
Beginning
balance
|
$3,289,879
|
$3,501,410
|
|
Payment
of shares for achieving performance milestones
|
(75,939)
|
(211,531)
|
|
Adjustment
to Track Group Analytics stock payable
|
(213,940)
|
-
|
|
Adjustment
to GPS Global stock payable
|
(3,000,000)
|
-
|
|
Ending
balance
|
$-
|
$3,289,879
|
Additional Related-Party Transactions and Summary of All
Related-Party Obligations
|
|
Sept. 30,
2017
|
Sept. 30,
2016
|
|
|
|
|
|
Related
party loan with an interest rate of 3% and 8% per annum for undrawn
and borrowed funds, respectively. Principal and interest due
September 30, 2020.
|
$3,399,644
|
$3,399,644
|
|
Total
related-party debt obligations
|
$3,399,644
|
$3,399,644
|
Shares of Common Stock valued at up to $3,000,000, in the balance
shown above, could have been earned by the former owner of GPS
Global Tracking and Surveillance System, Ltd., now
a wholly-owned subsidiary of the Company, subject to
achieving certain milestones under the Share Purchase Agreement
dated April 1, 2014. The measurement period of the milestones ended
April 1, 2017. On March 30, 2017, the Company informed the seller
that neither the Company nor the seller sold or leased the required
number of GPS tracking devices, under a revenue generating
contract, as defined in the Share Purchase Agreement and no
contingent shares had been earned. Accordingly, the Company
reversed the $3,000,000 contingent liability in the three months
ended June 30, 2017 in “Other Income, net” in the
Condensed Consolidated Statement of Operations.
In connection with the acquisition of TGA (see Note 4), the Company
recognized a liability for stock payable to the former owners of
the entity acquired. In conjunction with the respective purchase
agreements, shares of the Company’s Common Stock are payable
based on the achievement of certain milestones on or before
November 26, 2016. The final milestone payment of 10,602 shares of
common stock related to the TGA acquisition was paid in the second
fiscal quarter of 2017.
Each of the foregoing related-party transactions was reviewed and
approved by disinterested and independent members of
the Company’s Board of Directors.
|
(8)
|
Restructuring
|
In the first quarter of fiscal year 2017, the Company approved a
plan to restructure our business (the “Restructuring
Plan”) to streamline
operations by consolidating our headquarters from Salt Lake City,
Utah into our existing Chicagoland office. The Restructuring Plan,
which was completed in fiscal 2017, also included
outsourcing the
Company’s monitoring center that allowed a significant
head count reduction, lower future expenses, and improve the
Company's ability to align workforce costs with customer demands.
During the year ended September 30, 2017, the Company recognized
expenses for the Restructuring Plan of $558,833, including $435,643
of severance expense and $123,190 of lease and moving costs, all of
which were paid in fiscal 2017.
Total fiscal year 2017 restructuring charges and their utilization
are summarized as follows:
|
|
Employee
-related
|
Other
costs
|
Total
|
|
Liability
at September 30, 2016
|
$-
|
$-
|
$-
|
|
Accrued
expenses
|
435,643
|
123,190
|
$558,833
|
|
Payments
|
(435,643)
|
(123,190)
|
(558,833)
|
|
Liability
at September 30, 2017
|
$-
|
$-
|
$-
|
|
(9)
|
Debt
Obligations
|
|
|
September 30,
2017
|
September 30,
2016
|
|
Debt
obligations as of September 30, 2017 and 2016 consisted of the
following:
|
|
|
|
Unsecured
facility agreement with an entity whereby, as of June 30, 2015, the
Company may borrow up to $30.4 million bearing interest at a rate
of 8% per annum, payable in arrears semi-annually, with all
principal and accrued and unpaid interest due on July 31, 2018. A
$1.2 million origination fee was paid and recorded as a debt
discount and will be amortized as interest expense over the term of
the loan. As of September 30, 2017, the remaining debt discount was
$185,811. We did not pay interest on this loan during the year
ended September 30, 2017.
|
$30,214,189
|
$29,991,216
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5.0 million at 8%
interest per annum on borrowed funds maturing on September 30,
2020.
|
3,399,644
|
3,399,644
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the G2 acquisition.
|
123,393
|
182,002
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
14,022
|
18,673
|
|
|
|
|
|
Total
debt obligations
|
33,751,248
|
33,591,535
|
|
Less
current portion
|
(30,270,531)
|
(3,245,732)
|
|
Long-term
debt, net of current portion
|
$3,480,717
|
$30,345,803
|
The following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of
September 30, 2017:
|
Fiscal Year
|
Total
|
|
2018
|
$30,456,342
|
|
2019
|
42,250
|
|
2020
|
3,437,765
|
|
2021
|
702
|
|
2022
& thereafter
|
-
|
|
Debt
discount
|
(185,811)
|
|
Total
|
$33,751,248
|
The following table summarizes our capital lease obligation
included in the schedules of debt and debt obligations above as of
September 30, 2017:
|
Fiscal Year
|
Total
|
|
2018
|
$4,440
|
|
2019
|
4,440
|
|
2020
|
4,440
|
|
2021
|
702
|
|
Thereafter
|
-
|
|
Total
minimum lease payments
|
14,022
|
|
Less:
amount representing interest
|
(1,686)
|
|
Present
value of net minimum lease payments
|
12,336
|
|
Less:
current portion
|
(4,440)
|
|
Obligation
under capital leases - long-term
|
$7,896
|
As
of September 30, 2017, and 2016, the Company had total capital
lease obligations of $14,022 and $14,968, the current portion being
$4,440 at September 30, 2017 and 2016, respectively. At September
30, 2017 and 2016, accumulated amortization of assets under capital
leases was $83,951 and $79,300,
respectively.
|
(10)
|
Preferred
Stock
|
The Company is authorized to issue up to 20,000,000 shares of
preferred stock, $0.0001 par value per share.
The Company’s Board of Directors has the authority to
amend our Certificate of Incorporation, without further shareholder
approval, to designate and determine, in whole or in part, the
preferences, limitations and relative rights of the preferred stock
before any issuance of the preferred stock and to create one or
more series of preferred stock. As of September 30, 2017, no shares
of preferred stock were outstanding.
|
(11)
|
Common Stock
|
Common Stock Issuances
The Company is authorized to issue up to 30,000,000 shares of
common stock, $0.0001 par value per share. During the fiscal year
ended September 30, 2017, the Company issued 147,468 shares of
Common Stock. Of these shares, 42,026 shares were issued for
services rendered to the Company, valued at $167,285; 10,602 shares
valued at $75,938 were issued in connection with the acquisition of
a subsidiary and for that subsidiary meeting performance
milestones; and 94,840 shares were issued to pay Board of Director
fees of $565,000. See Note 12 for additional Common Stock issued
under the 2012 Equity Compensation Plan.
During the fiscal year ended September 30, 2016, the Company issued
72,228 shares of Common Stock. Of these shares, 26,674 shares
were issued for services rendered to the Company valued at
$259,380; 32,490 shares valued at $211,531 were issued in
connection with the acquisition of a subsidiary and for that
subsidiary meeting performance milestones; and 13,064 shares were
issued to pay Board of Director fees of $97,168. See Note 12 for
additional Common Stock issued under the 2012 Equity Compensation
Plan.
|
(12)
|
Stock Options and Warrants
|
Stock Incentive Plan
At the Annual Meeting of Shareholders on December 21, 2011, the
shareholders approved the 2012 Equity Compensation Plan (the
“2012
Plan”), and at the Annual
Meeting of Shareholders on May 19, 2015, the
Company’s shareholders approved an amendment
increasing the number of shares of Common Stock available for
issuance under the 2012 Plan. The 2012 Plan provides for the
grant of incentive stock options and nonqualified stock options,
restricted stock, stock appreciation rights, performance shares,
performance stock units, dividend equivalents, stock payments,
deferred stock, restricted stock units, other stock-based awards
and performance-based awards to employees and certain non-employees
who have important relationships with the Company. At our May 11,
2017 Board of Directors meeting, the Board of Directors approved a
resolution extending the expiration date of 573,663 warrants of
five current board members and three members of management that
were granted during the fiscal year 2011 and fiscal years 2013
through 2017. These extensions were between one and five years, did
not affect the exercise price of the grants and resulted in
incremental stock-based compensation of $801,584, of which $790,314
was expensed in the three months ended June 30, 2017. All future
grants of warrants and options will have an expiration period of
five years. The warrants for Board members vest immediately and
warrants issued to employees vest annually over either a two or
three year period after the grant date. A total of 803,262 shares
are authorized for issuance pursuant to awards granted under the
2012 Plan. During the fiscal years ended September 30, 2017
and 2016, there were options to purchase 110,000 and 146,362 shares
of Common Stock granted under the 2012 Plan. During the year ended
September 30, 2017, the
Company issued 116,947 shares of Common Stock under this
plan. Of the 116,947 shares of Common Stock issued during 2017,
11,703 shares valued at $45,996 were issued in accordance with an
employee long-term incentive plan, which was the final payment of
this long-term incentive plan. All shares issued under this
employee long-term incentive plan were issued from the 2012 Plan.
As of September 30, 2017, 38,292 shares of Common Stock were
available for future grants under the 2012 Plan. The Company will
seek shareholder approval to increase its 2012 Plan shares of
Common Stock through an amendment at its Annual Shareholders
Meeting in February 2018.
All Options and Warrants
During the fiscal year ended September 30, 2017, the Company
granted 27,268 warrants to members of
the Company’s Board of Directors, valued at $75,000.
As of September 30, 2017, no compensation expense associated with
unvested stock options and warrants issued previously to members of
the Board of Directors will be recognized over the next
year.
During the fiscal year ended September 30, 2016, the Company
granted 146,362 warrants to members of
the Company’s Board of Directors, valued at $402,593.
As of September 30, 2016, $68,217 of compensation expense
associated with unvested stock options and warrants issued
previously to members of the Board of Directors will be recognized
over the next year.
The following are the weighted-average assumptions used for options
granted during the fiscal years ended September 30, 2017 and 2016
using the Black-Scholes model, respectively:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
2016
|
|
Expected
stock price volatility
|
120%
|
92%
|
|
Risk-free
interest rate
|
0.77%
|
0.74%
|
|
Expected
life of options/warrants
|
5
Years
|
2
Years
|
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
The expected life of stock options and warrants represents the
period of time that the stock options or warrants are expected to
be outstanding based on the simplified method allowed under
GAAP. The expected volatility is based on the historical price
volatility of the Company’s Common Stock. In fiscal year
2014, the
Company changed from a daily to weekly volatility. The
risk-free interest rate represents the U.S. Treasury bill rate for
the expected life of the related stock options and warrants. The
dividend yield represents our anticipated cash dividends over the
expected life of the stock option and warrants.
A summary of the compensation-based options and warrants activity
for the fiscal years ended September 30, 2017 and 2016 is presented
below:
|
|
Shares
Under Option
|
Weighted
Average
Exercise Price
|
Weighted Average Remaining Contractual
Life
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of September 30, 2015
|
381,656
|
$13.28
|
1.38
years
|
$-
|
|
Granted
|
146,362
|
$6.15
|
|
|
|
Expired
|
(23,027)
|
$10.55
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Outstanding
as of September 30, 2016
|
504,991
|
$10.78
|
1.15
years
|
$182,095
|
|
Granted
|
151,080
|
$3.77
|
|
|
|
Expired
|
(55,229)
|
$16.29
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Outstanding
as of September 30, 2017
|
600,842
|
$8.51
|
4.90 years
|
$-
|
|
Exercisable
as of September 30, 2017
|
490,842
|
$9.58
|
5.02
years
|
$-
|
The fiscal year end intrinsic values are based on a September 30,
2017 closing price of $1.43 per share.
|
(13)
|
Income
Taxes
|
The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary. Interest and penalties related to income tax
liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
For the fiscal years ended September 30, 2017 and 2016,
the Company incurred net losses for income tax purposes of
$4,725,826 and $8,495,621, respectively. The amount and
ultimate realization of the benefits from the net operating losses
is dependent, in part, upon the tax laws in effect, our future
earnings, and other future events, the effects of which cannot be
determined. The Company has established a valuation allowance for
all deferred income tax assets not offset by deferred income tax
liabilities due to the uncertainty of their
realization. Accordingly, there is no benefit for income taxes
in the accompanying statements of operations.
At September 30, 2017, the
Company had net carryforwards available to offset future
taxable income of approximately $155,000,000, which will begin to
expire in 2018. The utilization of the net loss carryforwards
is dependent upon the tax laws in effect at the time the net
operating loss carryforwards can be utilized. The Internal
Revenue Code contains provisions that likely could reduce or limit
the availability and utilization of these net operating loss
carryforwards. An ownership change generally affects the rate at
which NOLs and potentially other deferred tax assets are permitted
to offset future taxable income. Since the
Company maintains a full valuation allowance on all U.S. and
state deferred tax assets, the impact of prior
year ownership changes on the future realizability of U.S. and
state deferred tax assets did not result in an impact to the
provision for income taxes for the year ended September 30, 2017,
or on net deferred tax asset as of September 30,
2017.
The Company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The tax
provision for the year ended September 30, 2017 was due primarily
to taxes on the income of a foreign-based subsidiary and
U.S. state and local income taxes.
The deferred income tax assets (liabilities) were comprised of the
following for the periods indicated:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
2016
|
|
Net
loss carryforwards
|
$58,134,000
|
$56,716,000
|
|
Accruals
and reserves
|
1,319,000
|
1,013,000
|
|
Contributions
|
24,000
|
24,000
|
|
Depreciation
|
(113,000)
|
(470,000)
|
|
Stock-based
compensation
|
594,000
|
577,000
|
|
Valuation
allowance
|
(59,958,000)
|
(57,860,000)
|
|
Total
|
$-
|
$-
|
Reconciliations between the benefit for income taxes at the federal
statutory income tax rate and the Company's benefit for income
taxes for the years ended September 30, 2017 and 2016 are as
follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
2016
|
|
Federal
income tax benefit at statutory rate
|
$2,382,000
|
$2,889,000
|
|
State
income tax benefit, net of federal income tax
effect
|
231,000
|
280,000
|
|
Effect
of foreign income taxes
|
502,000
|
-
|
|
Change
in estimated tax rate and gain (loss) on non-deductible
expenses
|
(516,000)
|
1,073,000
|
|
Change
in valuation allowance
|
(2,097,000)
|
(4,242,000)
|
|
Provision
for income taxes
|
$502,000
|
$-
|
During the fiscal year ended September 30, 2014,
the
Company began recognizing revenues from international
sources from our products and monitoring services. During the
fiscal year ended September 30, 2014,
the Company began recognizing a liability for value-added
taxes, which will be due upon collection. At September 30,
2017,
the Company had a net receivable related to payments on VAT
tax of $137,560. During the year ended September 30, 2017, the
Company recorded income tax expense of $501,651 related to a
foreign jurisdiction, which is included in income tax expense on
the Consolidated Statements of Operations.
The Company’s open tax years for federal and state income tax
returns are for the tax years ended September 30,
2014 through September 30, 2017.
|
(14)
|
Commitments
and Contingencies
|
Legal Matters
Lazar
Leybovich et al. v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie
Leybovich and Ben Leybovich filed a complaint in the 11th Circuit
Court in and for Miami-Dade County, Florida alleging breach of
contract with regard to certain Stock Redemption Agreements. On May
2, 2016, the Court resolved this case in favor of the Company by
granting the Company's motion for Summary Judgment. The Plaintiffs
filed a Notice of Appeal on June 1, 2016 challenging the
Court’s ruling on the motion for Summary Judgment. An oral
argument has been set for December 2017. We intend to defend the
case vigorously.
Boggs
et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et
al. On December 3, 2015, Candace Boggs et al. filed a
complaint in the State Court of Dougherty County, Georgia, alleging
breach of contract and negligence in monitoring of certain
offenders in Dougherty County, Georgia, as well as a request for
punitive damages in an amount sufficient to deter similar conduct
in the future. Plaintiffs withdrew their complaint in February
2016, but refiled the complaint on October 12, 2016. The
Company’s motion for Summary Judgment was denied on February
27, 2017 and a Notice of Appeal was filed by The Company’s
counsel on April 15, 2017. An oral argument has been scheduled for
December 2017. We believe the allegations are inaccurate and are
defending the case vigorously. We believe the probability of
incurring a material loss to be remote.
Track
Group, Inc. v. I.C.S. of the Bahamas Co. Ltd. On May 18, 2016, the Company filed a complaint in
the District Court of the Third Judicial District in Salt Lake
County, Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid
principal and interest on the Promissory Note are in the amount of
$230,000.00, plus per annum interest. The Defendant’s initial
Counterclaims were dismissed, however the Court granted the
Defendant leave to amend. The Amended Counter Claims were filed on
June 23, 2017. The Company’s Motion to Dismiss the Amended
Counterclaims was denied on September 19, 2017. The Company filed
an Answer to the Amended Counterclaims on October 3, 2017. Once the
discovery period is completed, the Company will proceed with a
Motion for Summary Judgment. We believe we will be successful in
this action for amounts owed under the loan agreement and
promissory note; however, the Company may encounter problems
enforcing a favorable judgment in the foreign jurisdiction where
ICS resides.
Track
Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016 the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by I.C.S. of the Bahamas
Co. Ltd. (“ICS”). Under the terms of the Commercial and
Monitoring Representative Agreement dated November 30, 2010 (the
“C&M
Agreement”) between the
Company and ICS any dispute must be resolved by binding
arbitration. The Company asserts that ICS has failed to pay the
Company fees owed to it under the C&M Agreement. The amount
owed to the Company is upwards of $1 million. Depositions were
completed in August of 2017. The arbitration hearing is tentatively
scheduled for January 31, 2018. The Company is confident it will be
successful in the arbitration; however, the Company may encounter
problems enforcing a successful arbitration award in the foreign
jurisdiction where ICS resides.
John
Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with
a complaint filed by John Merrill, the former Chief Financial
Officer of the Company, in District Court of the Third Judicial
District in Salt Lake County, Utah alleging breach of contract,
among other causes of action, related to Mr. Merrill’s
termination of employment. Mr. Merrill is seeking not less than
$590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated
effective September 27, 2016. The Company filed an Answer with
Counter Claims on December 21, 2016. The Company plans to file a
motion for Summary Judgment by the end of the year. We intend to
defend the case vigorously and believe the allegations and claims
are without merit.
Michael
Anthony Johnson v. Community Corrections of Marion County and Track
Group, Inc. On February 28, 2017 the Company was notified that
Mr. Johnson, the Plaintiff, had filed a pro se complaint in the United States District Court for
the Southern District of Indiana, asserting violations of his
rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at
least $250,000. We believe the allegations and claims are unfounded
and without merit. The Company’s Answer was filed April 27,
2017, and we are currently responding to the Defendant’s
discovery. We will defend the case vigorously and believe the
probability of incurring a material loss to be
remote.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, against the
failure by Defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
the Organo Administrativo Desconcentrado Prevencion y Readaptacion
Social of the then Public Security Department, and presently, an
agency of the National Security Commission of the Department of the
Interior, and SecureAlert, Inc., presently Track Group, Inc. The
Company’s claim amount is upwards of $6 million. On March 28,
2017, the Federal Administrative Tribunal rejected our claim, under
the consideration that this case should be resolved by a Civil
Court and not by the Federal Administrative Tribunal. For that
reason, on April 25, 2017, the Company filed an appeal before the
Collegiate Tribunals against the decision of the Federal
Administrative Tribunal. Counsel estimates the Tribunal should have
a ruling on or before June 30, 2018. If the Company’s appeal
is successful, the case will be sent back to the Federal
Administrative Tribunal for a resolution on the merits of the
case.
Inversiones
Tecnologicas SpA v. Track Group Chile SpA. On October 10, 2014, Inversiones Tecnologicas SpA
(a.k.a. Position) filed a complaint before the Civil Court of
Santiago, in order to collect $1.0 million of fees for alleged
services rendered with occasion of the public tender for the
adjudication of the contract ID 634-66-LP13 labeled
“Telematics Surveillance of Convicts”. On April 13,
2017, the Court issued its decision, rejecting the
Plaintiff’s claim, under the consideration that insufficient
evidence of a service agreement between Track Group Chile SpA
(formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA,
was submitted to the Court. Moreover, the fact that Secure Alert
Chile SpA was incorporated after the facts on which the lawsuit is
based, led to the complete dismissal of the claim. Position filed
an appeal on May 4, 2017. A hearing on the Appeal will be scheduled
for February, 2018. The Company expects the court to make a
decision within three months of the hearing
date.
Pablo
Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al.
On June 9, 2017 Plaintiff, Pablo
Gonzalez-Cruz, and relatives of the Plaintiff, filed a Complaint in
the Court of First Instance, San Juan Superior Court, Common Wealth
of Puerto Rico against the Company, and associated parties alleging
the death of his daughter was as a direct and immediate result of
the gross negligence and guilty indifferent actions and omissions
of all the defendants. Plaintiff is requesting damages at no less
than $2.0 million. The Company’s Answer and Appearance were
filed August 13, 2017.
Operating Lease Obligations
The following table summarizes our contractual obligations as of
September 30, 2017:
|
Fiscal Year
|
Total
|
|
|
|
|
2018
|
$333,506
|
|
2019
|
244,629
|
|
2020
|
158,937
|
|
2021
|
88,915
|
|
2022
|
80,860
|
|
Thereafter
|
-
|
|
Total
|
$906,847
|
The total operating lease obligations of $906,847 is largely
related to facilities operating leases. During the years ended
September 30, 2017 and 2016,
the Company paid $545,228 and $543,068, in lease payment
obligations, respectively.
|
(15)
|
Intangible
Assets
|
The following table summarizes the activity of intangible assets
for the years ended September 30, 2017 and 2016,
respectively:
|
2017
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
|
Net Book Value
|
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
$21,170,565
|
$(6,415,229)
|
$-
|
$14,755,336
|
|
Developed
technology
|
8.22
|
11,116,738
|
(2,301,259)
|
-
|
8,815,479
|
|
Customer
relationships
|
7.70
|
2,590,683
|
(1,039,336)
|
(499,759)
|
1,051,588
|
|
Trade
name
|
9.57
|
332,183
|
(240,941)
|
-
|
91,242
|
|
Website
|
3.00
|
78,201
|
(73,191)
|
-
|
5,010
|
|
Total
|
|
$35,288,370
|
$(10,069,956)
|
$(499,759)
|
$24,718,655
|
|
2016
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
|
Net Book Value
|
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
$21,170,565
|
$(5,078,709)
|
$-
|
$16,091,856
|
|
Developed
technology
|
7.50
|
9,651,074
|
(2,187,825)
|
-
|
7,463,249
|
|
Customer
relationships
|
8.06
|
2,555,086
|
(708,494)
|
-
|
1,846,592
|
|
Trade
name
|
9.56
|
319,383
|
(213,638)
|
-
|
105,745
|
|
Website
|
3.00
|
78,201
|
(44,993)
|
-
|
33,208
|
|
Total
|
|
$33,774,309
|
$(8,233,659)
|
$-
|
$25,540,650
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through September 30, 2017. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the years ended September 30, 2017 and
2016 was $2,416,092 and $2,550,882, respectively.
The Company disposed of $1,600,000 of intangible assets and
$734,074 of accumulated amortization related to the sale of assets
during the year ended September 30, 2017. See Note 5. In connection
with
the Company’s annual impairment testing performed by
an independent valuation firm, a non-cash impairment charge of
$506,413 was recorded during the year ended September 30, 2017
related to a legacy non-core facet of the business. This charge is
included in Impairment of intangible assets on the Consolidated
Statements of Operations.
The following table summarizes the future maturities of
amortization of intangible assets as of September 30,
2017:
|
Fiscal
Year
|
Amortization
|
Patent
|
STOP
Royalty
|
|
2018
|
$2,367,359
|
$5,556
|
$450,000
|
|
2019
|
2,362,348
|
1,852
|
450,000
|
|
2020
|
2,362,348
|
-
|
450,000
|
|
2021
|
2,211,708
|
-
|
450,000
|
|
2022
|
2,081,529
|
-
|
450,000
|
|
Thereafter
|
10,438,455
|
-
|
637,500
|
|
Total
|
$21,823,747
|
$7,408
|
$2,887,500
|
Goodwill – During the
year ended September 30, 2017, the
Company recognized goodwill as a result of acquisitions
discussed in the Acquisitions footnote. In accordance with
accounting principles generally accepted in the United States of
America, we do not amortize goodwill. These principles require the
Company to periodically perform tests for goodwill impairment, at
least annually, or sooner if evidence of possible impairment
arises. We evaluated the goodwill for impairment as of September
30, 2017. Based on the evaluation made, the
Company concluded that no impairment of goodwill was
necessary.
Goodwill, as of September 30 consisted of the
following:
|
|
September 30,
|
|
|
|
2017
|
2016
|
|
Balance
- beginning of year
|
$7,955,876
|
$7,782,903
|
|
Effect
of foreign currency translation on goodwill
|
270,838
|
172,973
|
|
Balance
- end of year
|
$8,226,714
|
$7,955,876
|
|
(16)
|
Subsequent
Events
|
Marion County Agreements
The Company is working on finalizing two contracts with Marion
County Community Corrections (“Agency”), the largest county in
the state of Indiana. On October 19, 2017, the Agency’s
Advisory Board approved a multi-year contract for the Company to
provide electronic monitoring services (“Monitoring Contract”) across the
full range of sentences under the Agency’s oversight. On
November 28, 2017, the Marion County Information Technology Board
approved both the Monitoring Contract and a multi-year contract for
the Company to provide analytics
software.
Contract with the Gendarmeria de Chile
The previous multi-year agreement
signed between Gendarmeria de Chile, the Republic of Chile's
uniformed prison service, and Track Group in 2013, ended in October
of 2017 although services have continued uninterrupted. In March
2017, a public tender process commenced as required. After
submissions and reviews were complete, the results of the tender
were suspended by the Chilean Court of Public Buyers following
formal complaints filed by the Company and another competitor. The
Company's Chilean subsidiary and Gendarmeria de Chile signed a new
agreement on December 7, 2017 ("New
Agreement") to provide
electronic monitoring of offenders commencing on October 18, 2017
for a period of 365 days to supply monitoring services totaling up
to approximately $10.6 million. The New Agreement is subject to
approval by the Oficina de la Contraloria General de la
República which the Company anticipates receiving within the
next 30 days.
Debt Exchange Agreement
On October 9, 2017, the Company
entered into a Debt Exchange Agreement with Conrent Invest S.A.
(“Conrent”), a public limited liability company
incorporated under the laws of the Grand Duchy of Luxembourg
regarding total debt and unpaid interest of approximately $34.7
million as of October 31, 2017 (the “Debt”) (the “Debt
Exchange”). The Debt
Exchange called for the Company to exchange newly issued shares of
preferred stock for the entire Debt subject to approval by the
investors who purchased securities from Conrent to finance the Debt
(the “Noteholders”). On November 2, 2017, Conrent convened a
meeting of the Noteholders to approve the Debt Exchange; however,
the quorum required to approve the Debt Exchange was not achieved.
Management continues to negotiate with Conrent regarding terms for
the Debt Exchange acceptable to Noteholders with the objective of
reaching an agreement acceptable to both Conrent and the
Noteholders before the Debt matures on July 31,
2018.
Management has reviewed and evaluated additional subsequent events
and transactions occurring after the balance sheet date through the
filing of this Annual Report on Form 10-K and determined that,
other than as disclosed above, no subsequent events
occurred.
F-29