Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2017
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ___________ to
____________
Commission file number: 0-23153
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 Number)
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200 E. 5th Avenue Suite 100, Naperville, IL 60563
(Address of principal executive offices) (Zip
Code)
(877) 260-2010
(Registrant’s telephone number, including area
code)
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 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 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 [
]
(Do not check if a smaller reporting company)
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Smaller reporting company [X]
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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 Exchange Act). Yes [ ]
No [X]
The number of shares outstanding of the registrant’s common
stock as of February 1, 2018 was 10,462,433.
Track Group, Inc.
FORM 10-Q
For the Quarterly Period Ended December 31, 2017
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PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
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Assets
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December 31,
2017
(unaudited)
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September 30,
2017
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Current assets:
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Cash
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$1,755,437
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$2,027,321
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Accounts
receivable, net of allowance for doubtful accounts of $3,432,985
and $3,268,095, respectively
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5,526,000
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5,438,564
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Note
receivable, current portion
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234,733
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234,733
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Prepaid
expenses and other
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4,219,135
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854,122
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Inventory,
net of reserves of $26,934, respectively
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172,347
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261,810
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Total
current assets
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11,907,652
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8,816,550
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Property
and equipment, net of accumulated depreciation of $1,862,347 and
$1,778,634, respectively
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883,039
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903,100
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Monitoring
equipment, net of accumulated amortization of $4,767,061 and
$4,906,925, respectively
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3,460,685
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3,493,012
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Intangible
assets, net of accumulated amortization of $10,444,569 and
$9,839,032, respectively
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24,410,468
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24,718,655
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Goodwill
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8,275,308
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8,226,714
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Other
assets
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785,195
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2,989,101
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Total
assets
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$49,722,347
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$49,147,132
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts
payable
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2,529,632
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2,769,835
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Accrued
liabilities
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8,021,419
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6,650,291
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Current
portion of long-term debt, net of discount of $130,067 and
$185,811, respectively
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30,322,191
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30,270,531
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Total
current liabilities
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40,873,242
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39,690,657
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Long-term
debt, net of current portion
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3,466,468
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3,480,717
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Total
liabilities
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44,339,710
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43,171,374
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Stockholders’ equity:
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Common
stock, $0.0001 par value: 30,000,000 shares authorized;
10,462,433 and 10,480,984 shares outstanding,
respectively
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1,046
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1,048
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Additional
paid-in capital
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300,978,608
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300,717,861
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Accumulated
deficit
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(295,109,920)
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(294,067,329)
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Accumulated
other comprehensive loss
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(487,097)
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(675,822)
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Total
equity
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5,382,637
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5,975,758
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Total
liabilities and stockholders’ equity
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$49,722,347
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$49,147,132
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE
LOSS
(Unaudited)
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Three Months Ended
December 31,
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2017
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2016
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Revenues:
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Monitoring
services
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$7,350,805
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$7,265,013
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Other
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139,889
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406,477
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Total
revenues
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7,490,694
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7,671,490
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Cost of revenues:
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Monitoring,
products and other related services
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2,542,007
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3,607,276
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Depreciation
& amortization included in cost of revenues
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477,142
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445,493
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Impairment
of monitoring equipment and parts
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-
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74,787
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Total
cost of revenues
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3,019,149
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4,127,556
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Gross profit
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4,471,545
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3,543,934
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Operating expenses:
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General
& administrative
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3,657,738
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3,175,054
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Restructuring
costs
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-
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566,330
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Selling
& marketing
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409,737
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589,768
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Research
& development
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163,946
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488,178
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Depreciation
& amortization
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564,740
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575,111
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Total
operating expenses
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4,796,161
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5,394,441
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Loss from operations
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(324,616)
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(1,850,507)
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Other income (expense):
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Interest
expense, net
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(673,827)
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(647,103)
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Currency
exchange rate loss
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(55,072)
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(116,442)
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Other
income/expense, net
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10,924
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293
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Total other income (expense)
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(717,975)
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(763,252)
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Net loss attributable to common shareholders
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(1,042,591)
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(2,613,759)
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Foreign
currency translation adjustments
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188,725
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(493,572)
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Comprehensive loss
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$(853,866)
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$(3,107,331)
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Net
loss per common share, basic and diluted
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$(0.10)
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$(0.25)
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Weighted
average common shares outstanding, basic and diluted
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10,476,346
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10,333,516
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH
FLOWS
(Unaudited)
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Three Months
Ended
December 31,
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2017
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2016
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Cash flows from operating activities:
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Net
loss
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$(1,042,591)
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$(2,613,759)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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1,041,882
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1,020,604
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Impairment
of monitoring equipment and parts
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-
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74,787
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Bad
debt expense
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186,910
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359,551
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Accretion
of debt discount
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55,744
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55,743
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Stock
based compensation
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787,590
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225,374
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Loss
on monitoring equipment included in cost of sales
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95,817
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-
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Other
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(36,454)
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-
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Change
in assets and liabilities:
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Accounts
receivable, net
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(354,633)
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660,834
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Inventories
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69,836
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57,700
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Prepaid
expenses and other assets
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(1,009,813)
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149,428
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Accounts
payable
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(238,490)
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684,987
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Accrued
expenses
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772,412
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1,461,547
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Net
cash provided by operating activities
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328,210
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2,136,796
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Cash flow from investing activities:
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Purchase
of property and equipment
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(28,685)
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(12,762)
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Capitalized
software
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(254,899)
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(570,093)
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Purchase
of monitoring equipment and parts
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(311,142)
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(818,600)
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Net
cash used in investing activities
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(594,726)
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(1,401,455)
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Cash flow from financing activities:
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Principal
payments on notes payable
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(17,289)
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(17,266)
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Net
cash used in financing activities
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(17,289)
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(17,266)
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Effect of exchange rate changes on cash
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11,921
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(1,606)
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Net increase (decrease) in cash
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(271,884)
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716,469
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Cash, beginning of period
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2,027,321
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1,769,921
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Cash, end of period
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$1,755,437
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$2,486,390
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Cash
paid for interest
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$10,708
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$4,587
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Supplemental schedule of non-cash investing and financing
activities:
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Non-cash
transfer of inventory to monitoring equipment
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$81,893
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$62,193
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial information
of Track Group, Inc. and subsidiaries (collectively, the
“Company” or “Track Group”) has been prepared in accordance with the
Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission
(“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information
contains all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the Company’s
financial position as of December 31, 2017, and results of its
operations for the three months ended December 31, 2017. These
financial statements should be read in conjunction with the audited
annual consolidated financial statements and notes thereto that are
included in the Company’s Annual Report on Form 10-K for the
year ended September 30, 2017 filed with the SEC on December 19,
2017. The results of operations for the three months ended
December 31, 2017 may not be indicative of the results for the
fiscal year ending September 30, 2018.
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 (See Note
4).
Business condition
- As of December 31, 2017 and
2016 the Company had an accumulated deficit of $295,109,920 and
$291,955,262, respectively. The Company incurred a net loss of
$1,042,592 and $2,613,759 for the three months ended December 31,
2017 and 2016, respectively. The Company may continue to incur
losses and require additional financial resources. The Company also
has debt maturing in the next 12 months. The Company’s
successful development and transition to attaining profitable
operations is dependent upon achieving a level of revenues adequate
to support its cost structure. Management has evaluated the
significance of these negative conditions and has determined that
the Company can meet its operating obligations for a reasonable
period of time. The Company expects to fund operations using cash
on hand, through operational cash flows and the restructuring of
its existing debt agreement. Management of the Company believes
that the availability of financing from these sources is adequate
to fund operations through the upcoming twelve
months.
(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the
accounts of Track Group 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.
(3) RECENT ACCOUNTING STANDARDS
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 the Company as of the specified effective date.
During the three months ended December 31, 2017, there were no new
accounting pronouncements that had a material impact on the
Company’s consolidated financial
statements.
Recently adopted accounting standards
In July 2015, the FASB issued ASU No. 2015-11,
“Inventory (Topic 330) -
Simplifying the Measurement of Inventory” (“ASU 2015-11”), which dictates that an entity should
measure inventory within the scope of this update at the lower of
cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The Company adopted this standard in the first
quarter of fiscal year 2018. The Company’s adoption
of ASU 2015-11 did not have a material impact on
its Consolidated Financial Statements.
Recently issued accounting standards
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 August 2016, the FASB issued ASU 2016-15 - Statement of Cash
Flows (Topic 230) classification of certain cash receipts and cash
payments 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 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 May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with
Customers” which supersedes the guidance in “Revenue
Recognition (Topic 605)”
(“ASU
2014-09”) and requires
entities to recognize revenue is a way that depicts the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in
exchange for those goods or services. ASU 2014-09 is effective for
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period and is to be
applied retrospectively, with early application not permitted. The
Company has evaluated the new standard and anticipates a change in
the reporting of revenue as enhanced disclosures will be required.
The Company does not anticipate a significant impact on our
financial statements due to the nature of our revenue streams and
our revenue recognition policy.
(4) IMMATERIAL ERROR CORRECTIONS
This Quarterly Report on Form 10-Q of the Company for the period
ended December 31, 2017 includes the revision of the
Company’s previously filed consolidated income statements for
the three months ended December 31, 2016.
Management concluded that the general and administrative section of
the Condensed Consolidated Income Statement contained an error and
that for comparative purposes in fiscal year 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, we have 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 income (loss) and
shareholders’ equity were not affected by the
reclassification. The effect of these revisions on the
Company’s results of operations for the three months ended
December 31, 2016 previously reported are as follows:
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Three months ended
December 31,
2016
Previously
Reported
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Net Change
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Three months ended
December 31,
2016
(Revised)
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Cost
of revenues:
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Monitoring,
products & other related services
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$2,933,622
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$673,654
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$3,607,276
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General
& administrative expenses
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3,768,099
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(593,045)
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3,175,054
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Selling
& marketing
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627,749
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(37,981)
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589,768
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Research
& development
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530,806
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(42,628)
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488,178
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(5) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate that the book value of
an asset may not be recoverable and in the case of goodwill, at
least annually. The Company evaluates whether events and
circumstances have occurred which indicate possible impairment as
of each balance sheet date. 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. The
Company recorded $0 and $74,787 of impairment expenses related to
monitoring equipment for the three months ended December 31, 2017
and 2016, respectively.
(6) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the
acquisition method of accounting as indicated in ASC 805, Business
Combinations, which requires the acquiring entity in a business
combination to recognize the fair value of all assets acquired,
liabilities assumed, and any non-controlling interest in the
acquiree, and establishes the acquisition date as the fair value
measurement point. Accordingly, the Company recognizes assets
acquired and liabilities assumed in business combinations,
including contingent assets and liabilities and non-controlling
interest in the acquiree, based on fair value estimates as of the
date of acquisition. In accordance with ASC 805, the Company
recognizes and measures goodwill as of the acquisition date, as the
excess of the fair value of the consideration paid over the fair
value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a
business combination is incomplete by the end of the reporting
period in which the combination occurs, but during the allowed
measurement period not to exceed one year from the acquisition
date, the Company retrospectively adjusts the provisional amounts
recognized at the acquisition date, by means of adjusting the
amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company has agreed to pay additional
amounts to sellers contingent upon achievement by the acquired
businesses of certain future goals, which may include revenue
milestones, new customer accounts, and earnings targets. The
Company records contingent consideration based on its estimated
fair value as of the date of the acquisition. The Company evaluates
and adjusts the value of contingent consideration, if necessary, at
each reporting period based on the progress toward and likely
achievement of certain targets on which issuance of the contingent
consideration is based. Any differences between the
acquisition-date fair value and the changes in fair value of the
contingent consideration subsequent to the acquisition date are
recognized in current period earnings until the arrangement is
settled. If there is uncertainty surrounding the value of
contingent consideration, then the Company’s policy is to
wait until the end of the measurement period before making an
adjustment.
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive income (loss) includes net income (loss) as currently
reported under U.S. GAAP and other comprehensive income (loss).
Other comprehensive income (loss) considers the effects of
additional economic events, such as foreign currency translation
adjustments, that are not required to be recorded in determining
net income (loss), but rather are reported as a separate component
of stockholders’ equity. The Chilean Peso, New Israeli Shekel
and the Canadian Dollar are used as functional currencies of the
following 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 prevailing
exchange rate at December 31, 2017.
(8) 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 shareholders 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 shareholders by the sum of the
weighted-average number of common shares outstanding and the
weighted-average dilutive common share equivalents
outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an
anti-dilutive effect.
Common share equivalents consist of shares issuable upon the
exercise of common stock options and warrants. As of December
31, 2017 and 2016, there were 570,467 and 526,901 outstanding
common share equivalents, respectively, that were not included in
the computation of Diluted EPS for the three months ended December
31, 2017 and 2016, respectively, as their effect would be
anti-dilutive. The common stock equivalents outstanding as of
December 31, 2017 and 2016 consisted of the following:
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December 31,
|
December 31,
|
|
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2017
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2016
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Exercisable
common stock options and warrants
|
570,467
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526,901
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Total
common stock equivalents
|
570,467
|
526,901
|
(9) PREPAID EXPENSES AND
OTHER
The carrying amounts reported in the balance sheets for prepaid
expenses and other current assets approximate their fair market
value based on the short-term maturity of these instruments. As of
December 31, 2017, and September 30, 2017, the outstanding balance
of prepaid and other expenses was $4,219,135 and $854,122,
respectively. The $4,219,135 as of December 31, 2017 is
comprised largely of performance bond deposits, tax deposits,
vendor deposits and other prepaid supplier expenses. The increase
in prepaid and other expenses at December 31, 2017 was primarily
due to a cash collateralized performance bond for an international
customer of $2,860,358, which is scheduled to be repaid in the
third fiscal quarter and has been re-classified as a short-term
asset in the three-month period ended December 31, 2017, as well as
increases in prepaid taxes, vendor deposits and
insurance.
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable
value. Cost is determined using the first-in, first-out
(“FIFO”) method. Net realizable value is determined
based on the estimated selling prices on the ordinary course of
business less reasonably predictable costs of completion, disposal
and transportation. Inventory is periodically reviewed in order to
identify obsolete, damaged or impaired items.
Inventory consists of finished goods that are to be shipped to
customers and parts used for minor repairs of
ReliAlertTM,
Shadow, and other tracking devices. Completed and shipped
ReliAlertTM
and other tracking devices are
reflected in Monitoring Equipment. As of December 31, 2017 and
September 30, 2017, respectively, inventory consisted of the
following:
|
|
December 31,
|
September 30,
|
|
|
2017
|
2017
|
|
Finished
goods inventory
|
$199,281
|
$288,744
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$172,347
|
$261,810
|
(11) PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at December
31, 2017 and September 30, 2017, respectively:
|
|
December 31,
2017
|
September 30,
2017
|
|
Equipment,
software and tooling
|
$1,045,090
|
$1,028,081
|
|
Automobiles
|
40,048
|
52,230
|
|
Leasehold
improvements
|
1,351,025
|
1,307,802
|
|
Furniture
and fixtures
|
309,223
|
293,621
|
|
Total
property and equipment before accumulated depreciation
|
2,745,386
|
2,681,734
|
|
Accumulated
depreciation
|
(1,862,347)
|
(1,778,634)
|
|
Property
and equipment, net of accumulated depreciation
|
$883,039
|
$903,100
|
Property and equipment depreciation expense for the three months
ended December 31, 2017 and 2016 was $114,417 and $50,291,
respectively.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is amortized using the straight-line method over an
estimated useful life of one to five years. Monitoring equipment as
of December 31, 2017 and September 30, 2017 was as
follows:
|
|
December 31,
2017
|
September 30,
2017
|
|
Monitoring
equipment
|
$8,227,746
|
$8,399,937
|
|
Less:
accumulated amortization
|
(4,767,061)
|
(4,906,925)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$3,460,685
|
$3,493,012
|
Amortization of monitoring equipment for the three months ended
December 31, 2017 and 2016 was $353,027 and $332,993, respectively.
These expenses were recognized in cost of revenues.
(13) INTANGIBLE ASSETS
The following table summarizes intangible assets at December 31,
2017 and September 30, 2017, respectively:
|
|
December 31,
2017
|
September 30,
2017
|
|
Other
intangible assets:
|
|
|
|
Patent
& royalty agreements
|
21,170,565
|
21,170,565
|
|
Developed
technology
|
11,410,921
|
11,116,738
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
335,350
|
332,183
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
34,855,037
|
34,557,687
|
|
Accumulated
amortization
|
(10,444,569)
|
(9,839,032)
|
|
Intangible
assets, net
|
$24,410,468
|
$24,718,655
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through December 2017. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the three months ended December 31, 2017
and 2016 was $574,438 and $637,320, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwill at December
31, 2017:
|
|
Three months ended December 31,
|
|
|
2017
|
|
Balance
- beginning of period
|
$8,226,714
|
|
Effect
of foreign currency translation on goodwill
|
48,594
|
|
Balance
- end of period
|
$8,275,308
|
Goodwill is recognized in connection with acquisition transactions
in accordance with ASC 805. The Company performs an impairment test
for goodwill annually or more frequently if indicators of potential
impairment exist. No impairment of goodwill was recognized through
December 31, 2017.
(15) OTHER ASSETS
As of December 31, 2017 and September 30, 2017, the outstanding
balance of other assets was $785,195 and $2,989,101, respectively.
A cash collateralized performance bond for an international
customer, which is expected to be repaid in the third fiscal
quarter has been re-classified as a current asset in the
three-month period ended December 31, 2017.
(16) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of December 31,
2017 and September 30, 2017:
|
|
December 31,
2017
|
September 30,
2017
|
|
Accrued
payroll, taxes and employee benefits
|
$1,573,440
|
$943,066
|
|
Accrued
consulting
|
8,954
|
11,631
|
|
Accrued
taxes - foreign and domestic
|
573,322
|
529,926
|
|
Accrued
settlement costs
|
50,000
|
200,000
|
|
Accrued
board of directors fees
|
275,000
|
125,000
|
|
Accrued
other expenses
|
151,804
|
178,092
|
|
Accrued
legal costs
|
57,394
|
116,824
|
|
Accrued
cellular costs
|
25,000
|
81,100
|
|
Accrued
manufacturing costs
|
100,000
|
137,884
|
|
Accrued
bond guarantee
|
304,270
|
23,548
|
|
Accrued
interest
|
4,902,235
|
4,303,220
|
|
Total
accrued liabilities
|
$8,021,419
|
$6,650,291
|
(17) 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 which allowed a significant head count reduction and lower
future expenses, and improved the Company’s ability to align
workforce costs with customer demands. During the twelve-months
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 the fiscal year ended September 30,
2017.
Total restructuring charges for the three-months ended December 31,
2016 and their utilization are summarized as follows:
|
|
Employee
-related
|
Other
costs
|
Total
|
|
Liability
at September 30, 2016
|
$-
|
$-
|
$-
|
|
Accrued
expenses
|
448,330
|
118,000
|
$566,330
|
|
Payments
|
-
|
-
|
-
|
|
Liability
at December 31, 2016
|
$448,330
|
$118,000
|
$566,330
|
(18) DEBT OBLIGATIONS
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.
On March 13, 2017 (the “Execution
Date”), 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. Further, Amendment Number One provides
that all failure to fund penalties (“Lender
Penalties”) accrued under
the Sapinda Loan Agreement
through the Execution Date are forgiven. Per Amendment Number One,
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, 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 Lender Penalties, amounting to $275,000 at December 31,
2017, under Section 6.3 of the Sapinda Loan Agreement,
as amended. We did not
draw on this line of credit, nor did we pay any interest during the
three months ended December 31, 2017. The undrawn balance of this
line of credit at December 31, 2017 was $1,600,356.
Further
advances under the Sapinda Loan Agreement
are not currently expected to be forthcoming.
On May 1, 2016, the Company entered into an unsecured Loan
Agreement with Conrent Invest S.A., a public limited liability
company incorporated under the laws of the Grand Duchy of
Luxembourg (“Conrent”), acting with respect to its Compartment
Safety III (the “Conrent Loan
Agreement”). Pursuant to its terms, available
borrowing capacity under the Conrent Loan Agreement was $5.0
million; however, due to the failure of the lender to satisfy
certain conditions precedent to its obligation to fund, the Company
has not received funds under the Conrent Loan Agreement as of
December 31, 2017, and no proceeds thereunder are
anticipated.
On October 9, 2017, the Company entered into a Debt Exchange
Agreement with Conrent Invest S.A. 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.
Debt obligations as of December 31, 2017 and September 30, 2017,
respectively, are comprised of the following:
|
|
December 31,
2017
|
September 30,
2017
|
|
|
|
|
|
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 December 31, 2017, the remaining debt discount was
$130,067. We did not pay interest on this loan during the three
months ended December 31, 2017.
|
$30,269,933
|
$30,214,189
|
|
|
|
|
|
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.
|
105,593
|
123,393
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
13,489
|
14,022
|
|
|
|
|
|
Total
debt obligations
|
33,788,659
|
33,751,248
|
|
Less
current portion
|
(30,322,191)
|
(30,270,531)
|
|
Long-term
debt, net of current portion
|
$3,466,468
|
$3,480,717
|
The following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of
December 31, 2017:
|
Fiscal Year
|
Total
|
|
2018
|
$30,452,258
|
|
2019
|
43,842
|
|
2020
|
3,422,626
|
|
2021
|
-
|
|
2022
|
-
|
|
Debt
discount
|
(130,067)
|
|
Total
|
$33,788,659
|
(19) RELATED-PARTY TRANSACTIONS
Related-Party
Loan Agreement
On September 25, 2015, the Company entered into the Sapinda Loan
Agreement with 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.
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. Further, Amendment Number One provides
that all Lender Penalties accrued under the Sapinda Loan Agreement
through the Execution Date are forgiven. Per Amendment Number One,
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, 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 Lender Penalties, amounting to $275,000 at
December 31, 2017, under Section
6.3 of the Sapinda Loan Agreement,
as amended. We did not
draw on this line of credit, nor did we pay any interest during the
three months ended December 31, 2017. The undrawn balance of this
line of credit at December 31, 2017 was $1,600,356.
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.
Additional Related-Party Transactions and Summary of All
Related-Party Obligations
|
|
Dec. 31,
2017
|
Sept. 30,
2017
|
|
|
|
|
|
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
|
Each of the foregoing related-party transactions was reviewed and
approved by disinterested and independent members
of the Company’s Board of
Directors.
(20) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of
common stock, $0.0001 par value per share. During the three months
ended December 31, 2017, no shares of common stock were issued to
Board of Director members for their services earned in the first
quarter of 2018. The Company has deferred the issuance of shares of
common stock and warrants since the fourth quarter of 2017, and
$275,000 for unpaid Board of Director fees has been accrued at
December 31, 2017.
The Company is authorized to issue up to 20,000,000 shares of
preferred stock, $0.0001 par value per share. The Company’s
Board of Directors has the authority to amend the Company’s
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 December 31, 2017, there were no shares
of preferred stock outstanding.
In November 2017, the Board of Directors approved the grant of
241,935 shares of common stock valued at $300,000, as compensation
for services rendered to the Company, which have not yet been
issued. In addition, the Company issued 30,797 warrants to a member
of the Company’s Board of Directors in exchange for 18,551
shares of common stock the director previously received for
services provided during the period of October 2016 to June 2017,
which shares were thereby cancelled in the three month period ended
December 31, 2017.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholders on March 21, 2011, the
shareholders approved the 2012 Equity Compensation Plan (the
“2012
Plan”). The 2012
Plan provides for the grant of incentive stock options and
nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units, other stock-based awards and performance-based awards to
employees and certain non-employees who provide services to the
Company in lieu of cash. A total of 90,000 shares were initially
authorized for issuance pursuant to awards granted under the 2012
Plan. At the 2015 annual meeting of shareholders held on May 19,
2015, our stockholders approved a 713,262 share increase to the
total number of shares authorized under the 2012
Plan. 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.
As of December 31, 2017, 27,218 shares of common stock were
available for future grants under the 2012 Plan.
All Options
and Warrants
On November 30, 2017, the Board of Directors unanimously approved
the adjustment of the exercise price of 605,678 unexercised
warrants, with original exercise prices ranging from $1.81 to
$19.46, issued under the 2012 Plan to $1.24, resulting in
incremental stock-based compensation of $149,088, which was
expensed in the three-month period ending December 31,
2017.
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
During the three months ended December 31, 2017 and 2016, the
Company granted 30,797 and 154,410, respectively, options and
warrants to purchase shares of common stock under the 2012 Plan.
Excluding the incremental stock-based compensation mentioned above,
the Company recorded expense of $638,502 and $200,374 for the three
months ended December 31, 2017 and 2016, respectively, related to
the issuance and vesting of outstanding stock options and
warrants.
The option and warrant grants for three months ended December 31,
2017 were valued using the Black-Scholes model with the following
weighted-average assumptions:
|
|
Three Months Ended
December 31
|
|
|
|
2017
|
2016
|
|
Expected
stock price volatility
|
120%
|
119%
|
|
Risk-free
interest rate
|
1.92%
|
0.60%
|
|
Expected
life of options/warrants
|
5
years
|
2
Years
|
The expected life of stock options (warrants) represents the period
of time that the stock options or warrants are expected to be
outstanding based on the simplified method allowed under GAAP. The
expected volatility is based on the historical price volatility of
the Company’s common stock. The risk-free interest rate
represents the U.S. Treasury bill rate for the expected life of the
related stock options (warrants). The dividend yield represents the
Company’s anticipated cash dividends over the expected life
of the stock options (warrants).
A summary of stock option (warrant) activity for the three months
ended December 31, 2017 is presented below:
|
|
Shares Under Option
|
Weighted Average
Exercise
Price
|
Weighted Average
Remaining
Contractual
Life
|
Aggregate Intrinsic
Value
|
|
Outstanding
as of September 30, 2017
|
600,842
|
$8.51
|
4.90
years
|
$-
|
|
Granted
|
30,797
|
$4.87
|
|
|
|
Expired/Cancelled
|
(1,172)
|
$(19.29)
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Outstanding
as of December 31, 2017
|
630,467
|
1.78
|
4.63
|
$-
|
|
Exercisable
as of December 31, 2017
|
570,467
|
1.84
|
4.67
|
$-
|
The intrinsic value of options and warrants outstanding and
exercisable is based on the Company’s share price of $1.05 at
December 31, 2017.
(22) 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 three months ended December 31, 2017 and 2016, the Company
incurred a net loss for income tax purposes of $1,042,591 and
$2,613,759, respectively. The amount and ultimate realization
of the benefits from the net operating losses is dependent, in
part, upon the tax laws in effect, the Company’s future
earnings, and other future events, the effects of which cannot be
determined. The Company has established a valuation allowance
for all deferred income tax assets not offset by deferred income
tax liabilities due to the uncertainty of their
realization. Accordingly, there is no benefit for income taxes
in the accompanying statements of operations.
In computing income tax, we recognize an income tax provision in
tax jurisdictions in which we have pre-tax income for the period
and are expecting to generate pre-tax book income during the fiscal
year.
(23) COMMITMENTS AND CONTINGENCIES
Legal Matters
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.
Plaintiff’s appeal succeeded and will result in a trial
occurring within the next four to eight months. 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. We are awaiting a ruling on an oral
argument that took place on December 13, 2017 regarding a new
statute which exempts vendors who assist law enforcement officials.
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 ends on March 30, 2018, 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 ICS. Under the terms of
the Commercial and Monitoring Representative Agreement dated
November 30, 2010 (the “C&M
Agreement”) by and
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 approximately $1.0 million. Depositions were
completed in August of 2017. The arbitration hearing took place on
January 31, 2018 and we expect a ruling within 30 days. 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 filed a motion for
Summary Judgment on January 16, 2018 and we expect a ruling within
six months. 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
plans to file a motion for Summary Judgment before the end of
February 2018. 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, asserting 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
and between 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 $6.0
million. On March 28, 2017, the Federal Administrative Tribunal
rejected our claim, based on its determination 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 may be scheduled
in late 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, the
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 a direct
and immediate result of the gross negligence and guilty indifferent
actions and omissions of all the defendants. Plaintiff is
requesting damages of no less than $2.0 million. The
Company’s Answer and Appearance were filed August 13, 2017.
We are currently in the discovery period.
(23) SUBSEQUENT EVENTS
Effective January 1, 2018, the Company entered into a multi-year
Monitoring Services Agreement with Marion County Community
Corrections Agency, by and through the Marion County Community
Corrections Board (collectively, “Marion
County”), pursuant to
which the Company shall provide Marion County with GPS and alcohol
monitoring equipment, certain services, and software to be used for
offenders ordered into the Marion County Community Corrections
program by the courts. In exchange for the products and services
provided by the Company, Marion County shall make periodic
payments, the sum of which shall be determined based on the
duration of use of individual units of
equipment.
On January 18, 2018, the Company entered into a Monitoring Services
Agreement (the “Gendarmeria
Agreement”) with
Gendarmeria de Chile, the Republic of Chile’s uniform prison
service (“Gendarmeria”), for services the Company began offering
to Gendarmeria in October 2017. The Company currently provides
Gendarmeria with GPS monitoring devices, certain services, and
software to be used for offenders ordered into a corrections
program by the Chilean courts. In exchange for the products and
services provided by the Company, Gendarmeria shall make periodic
payments, the sum of which shall be determined based on
installation fees and the duration of use of individual units of
equipment. Pursuant to its terms, the Gendarmeria Agreement will
expire in October 2018.
In accordance with the Subsequent Events Topic of the FASB ASC 855,
we have evaluated subsequent events, through the filing date and
noted that, other than as disclosed above, no additional subsequent
events have occurred that are reasonably likely to impact the
financial statements.
___________________________________________________________________________________
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This Report contains information that constitutes
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Generally, the statements
contained in this Quarterly Report on Form 10-Q that are not purely
historical can be considered to be “forward-looking
statements.” These statements represent our
expectations, hopes, beliefs, anticipations, commitments,
intentions, and strategies regarding the future. They may be
identified by the use of words or phrases such as
“believes,” “expects,”
“intends,” “anticipates,”
“should,” “plans,” “estimates,”
“projects,” “potential,” and
“will,” among others. Forward-looking statements
include, but are not limited to, statements contained in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations regarding our financial performance,
revenue, and expense levels in the future and the sufficiency of
our existing assets to fund future operations and capital spending
needs. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. These risks and uncertainties include, but are
not limited to, those described in “Risk Factors” in
our most recent Annual Report on Form 10-K, and those described
from time to time in our reports filed with the SEC.
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form
10-K, for the fiscal year ended September 30, 2017, and Current
Reports on Form 8-K that have been filed with the SEC through the
date of this Report. Except as otherwise indicated, as used in this
Report, the terms “the Company,” “Track Group,” “we,” “our,” “us,” refer to Track Group, Inc., a Delaware
corporation.
General
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.
Our devices consist principally of the
ReliAlertTM
product line, which is supplemented by
the Shadow product line. These devices are generally leased on
a daily rate basis and may be combined with our monitoring center
services, proprietary software and data analytics subscription to
provide an end-to-end PaaS.
ReliAlertTM
and
Shadow. Our tracking
devices utilize patented technology and are securely attached
around an offender’s ankle with a tamper resistant strap that
cannot be adjusted or removed without detection, unless by a
supervising officer, and which is activated through services
provided by our monitoring centers. The
ReliAlertTM
and Shadow units are intelligent
devices with integrated computer circuitry, utilizing both GPS and
RF, and constructed from case-hardened plastics designed to
promptly notify the intervention centers of any attempt made to
breach applicable protocols, or to remove or otherwise tamper with
the device or optical strap housing. The
ReliAlertTM
platform also incorporates voice
communication technology that provides officers with 24/7/365 voice
communication with the offenders. Both devices are FCC, CE and
PTCRB certified and protected by numerous patents and
trademarks.
Monitoring Center
Services. Our
monitoring center facilities 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, we staff our centers 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
back-up and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in the U.S. and Chile. In
addition, the Company has assisted in the establishment of
monitoring centers for customers and local partners in other global
locations
Data Analytics
Services. Our
TrackerPAL software, TrackerPAL Mobile, combined with our Data
Analytic analysis tools, provide an integrated platform allowing
case managers and law enforcement officers’ quick access
views of an offender’s travel behavior, mapping, and provide
inference on patterns. Our advanced data analytics service
offers a highly complex predictive reporting mechanism that
combines modern statistical methods, developed using computer
science and used by intelligence agencies that separate noteworthy
events from normal events, rank offender cases according to their
need for supervision, and relate decision-relevant metrics to
benchmarks in real-time.
Strategy
Our
global growth strategy is to continue to expand service offerings
on a subscription basis that empower professionals in security, law
enforcement, corrections and rehabilitation organizations worldwide
with a single-sourced, real-time, end-to-end offender management
solution that integrates reliable intervention technologies to
support re-socialization, monitoring, and predictive analytics for
offenders. In selective circumstances, we will also assist agencies
by operating offender pay programs. To accomplish these objectives,
we have and will continue to innovate and grow our portfolio of
proprietary and non-proprietary real-time monitoring and
intervention products and services, including smartphone
applications. These products include GPS, RF, drug and alcohol
testing for offenders, domestic violence applications and
predictive analytics. Given the flexibility of our platform,
our device technology, tracking, monitoring, and analytical
capabilities, we believe that our solutions may apply to other
industry verticals that require tracking, monitoring and predictive
analytics such as those entities responsible for pre-trial
participants or individuals on bail.
Critical Accounting Policies
From
time to time, management reviews and evaluates certain accounting
policies that are considered to be significant in determining our
results of operations and financial position.
A description of the
Company’s critical accounting policies that affect the
preparation of the Company’s financial statements is set
forth in the Company’s Annual Report on Form 10-K for the
year ended September 30, 2017,
filed with the SEC on December 19, 2017.
During the three
months ended December 31, 2017 there have been no material changes
to the Company's critical accounting
policies.
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 judgments are subject to an inherent degree of
uncertainty. We assess the reasonableness of our estimates,
including those related to bad debts, inventories, estimated useful
lives, intangible assets, warranty obligations, product liability,
revenue, legal matters and income taxes. We base our estimates on
historical experience as well as available current information on a
regular basis. Management uses this information to form the
basis for making judgments about the carrying value of assets and
liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
Results of Operations
Three Months Ended December 31, 2017, Compared to Three Months
Ended December 31, 2016
Revenue
For
the three months ended December 31, 2017, the Company recognized
revenue from operations of $7,490,694 compared to $7,671,490 for
the three months ended December 31, 2016, a decrease of $180,796 or
2%. The decrease in revenue was principally the result of (i)
a loss of a Caribbean customer whose contract ended in November
2016, partially offset by (ii) an increase in total growth of
our North American monitoring operations driven by clients in
Indiana and Virginia, and (iii) growth of offender monitoring in
Chile.
Other
revenue for the three months ended December 31, 2017 decreased to
$139,889 from $406,477 in the same period in 2016 largely due to
lower sales of consumable items. We will continue to focus on
recurring subscription based opportunities as opposed to equipment
sales.
Cost of Revenue
During the three months ended December 31, 2017,
cost of revenue totaled $3,019,149 compared to cost of revenue
during the three months ended December 31, 2016 of $4,127,556, a
decrease of $1,108,407 or 27%. The decrease in cost of
revenue was largely the result
of decreases in device costs of
$437,307, lower communication
costs of $286,326, lower customs costs of $189,879 and lower
monitoring costs of $158,554. During the three-month period ended
December 31, 2016, we incurred one-time costs of $371,144, which is
reflected in monitoring, products and other related services in the
condensed consolidated income statement, that did not reoccur in
the three months ended December 31, 2017. Excluding these one-time
costs, cost of revenue for the three-months ended December 31, 2017
would have decreased $575,206, or 15%, compared to the same period
in 2016.
Depreciation and amortization included in cost of
revenue for the three months ended December 31, 2017 and 2016
totaled $477,142 and $445,493, respectively. These costs represent
the depreciation of TrackerPAL™, ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
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 three months ended December 31, 2017
and 2016 were $0 and $74,787, 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 three months ended December 31, 2017,
gross profit totaled $4,471,545, representing an increase of
$927,611 or 26% compared to the same period last year and resulting
in a gross margin of 60% compared to $3,543,934 or a gross margin
of 46% during the three months ended December 31, 2016. The
increase in gross margin is largely due
to the lower costs of revenue mentioned above. Excluding the
one-time costs of revenue previously mentioned, gross profit for
the three-months ended December 31, 2016 would have been $3,915,078
and gross profit margin would have been 51%.
General and Administrative Expense
During
the three months ended December 31, 2017, general and
administrative expense totaled $3,657,738 compared to $3,175,054
for the three months ended December 31, 2016. The increase of
$482,684 or 15% in general and administrative costs resulted
largely from an increase in stock-based compensation expense of
$562,216, higher legal and professional fees of $147,903 and higher
wages and benefit costs of $137,161, partially offset by lower bad
debt expense of $172,642, lower recruiting costs of $63,303, lower
repair and maintenance costs of $52,776, lower rent expense of
$36,125 and lower outside labor expenses of $28,283.
Restructuring Costs
During
the three months ended December 31, 2016, we recorded $566,330 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. All costs related to
the relocation were paid in the fiscal year ended September 30,
2017. See Note 17 to the Condensed Consolidated Financial
Statements.
Selling and Marketing Expense
During
the three months ended December 31, 2017, selling and marketing
expense decreased to $409,737 compared to $589,768 for the three
months ended December 31, 2016. The reduction in expenses of
$180,031, or approximately 31% decrease is principally the result
of lower outside service costs of $84,438, lower travel related
expenses of $41,489 and lower wages and benefits of
$31,546.
Research and Development Expense
During the three months ended December 31, 2017,
research and development expense totaled $163,946 compared to
$488,178 for the three months ended December 31, 2016, a decrease
of $324,232 or approximately 66%. The decrease resulted
largely from lower wages and benefits of $203,349 and lower outside
service costs of $96,078. 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, $254,899 was capitalized as developed
technology during the three months ended December 31, 2017 and
$570,093 was capitalized in the three months ended December 31,
2016. A portion of these expenses would have been recognized as
research and development expense, absent the significant
enhancements to the technology.
Depreciation and Amortization Expense
During
the three months ended December 31, 2017, depreciation and
amortization expense totaled $564,740 compared to $575,111 for the
three months ended December 31, 2016, a decrease of $10,371 or
approximately 2%.
Other Income and Expense
For the three months ended December 31, 2017,
other income (expense) totaled $717,975 compared to $763,252 for
the three months ended December 31, 2016, a decrease in net expense
of $45,277 or approximately 6%. The decrease in other
income (expense) is due to positive currency exchange rate
movements, partially offset by higher interest expense,
net.
Net Loss Attributable to Common Shareholders
The Company had Net loss attributable to common
shareholders of $1,042,591 for the three months ended December 31,
2017, compared to a Net loss attributable to common shareholders of
$2,613,759 for the three months ended December 31, 2016, a decrease
of $1,571,168 or 60%. This decrease in net
loss is largely due to higher gross profit, the
absence of restructuring costs, lower selling and marketing
expense, lower research and development costs and lower currency
exchange expense. These amounts were offset by higher stock-based
compensation costs.
Liquidity and Capital Resources
Historically, we have
been unable to finance our business solely from cash flows from
operating activities. During prior periods, the Company
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 December 31, 2017,
excluding interest, $3.4 million was owed to Sapinda under
the Sapinda Loan Agreement
and $30.4 million was owed to Conrent under the Conrent Loan Agreement.
No borrowings or sales of equity securities occurred during the
three months ended December 31, 2017.
On October 9, 2017, the Company entered into a
Debt Exchange Agreement with Conrent 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.
Net Cash Flows from Operating Activities.
During the three months ended
December 31, 2017, we incurred
a net loss of $1,042,591 and we had cash flows from operating
activities of $328,210, compared to a net loss from continuing
operations of $2,613,759 and cash flows from operating activities
of $2,136,796 for the three months ended
December 31, 2016. The
decrease of cash from operations compared to the prior year period
was largely the result of an increase in prepaid expenses and
deposits, a decrease in accounts payable, and higher accounts
receivable, partially offset by improved operating
results.
Net Cash Flows from Investing Activities.
The Company used $594,726 of cash for investing
activities during the three months ended
December 31, 2017, compared to
$1,401,455 of cash used during the three months ended
December 31, 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 three months ended December 31,
2017.
Net Cash Flows from Financing Activities.
The Company used $17,289 of cash for financing
activities during the three months ended
December 31, 2017, compared to
$17,266 of cash used in financing activities during the
three
months ended December 31, 2016.
Liquidity, Working Capital and Management’s Plan
As of December
31, 2017, we had unrestricted
cash of $1,755,437, compared to unrestricted cash of $2,027,321 as
of September 30,
2017. As of
December
31, 2017, we had a working
capital deficit of $28,965,590, compared to a working capital
deficit of $30,874,107 as of September 30, 2017. This increase
in working capital is principally due to a transfer of a short-term
bond from a long-term asset of $2,860,358, partially offset by a
decrease in cash due to additional capitalized software of $254,899
and purchases of monitoring equipment of
$311,142.
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 or extending the maturity of the Conrent
Loan Agreement.
The
Company incurred a net loss of $1,042,591 and $2,613,759 for the
three months ended December 31, 2017 and 2016, respectively. The
Company may continue to incur losses until it is able to achieve a
level of revenues adequate to support its cost structure. In
addition, 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 has evaluated the
significance of all conditions and determined that it will have
adequate cash flow from operations to meet its operating
obligations and provide for its working capital requirements for
the upcoming twelve months. However, in the event we are unable to
successfully restructure the debt under the Conrent Loan Agreement,
our available cash resources together with cash flow from
operations will be inadequate to satisfy out working capital
requirements.
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.
|
|
Payments due in less than 1 year
|
Payments due in 1 – 3 years
|
Payments due in 3 – 5 years
|
Total
|
|
Operating
leases
|
$329,252
|
$479,023
|
$58,808
|
$867,083
|
As
of December 31, 2017, the Company’s total future minimum
lease payments under noncancelable operating leases were $867,083.
The Company’s facility leases typically have original terms
not exceeding 5 years and generally contain multi-year renewal
options.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
The
Company footprint extends to several countries outside the United
States, and we intend to continue to examine international
opportunities. As a result, our revenues and results of
operations are affected by fluctuations in currency exchange rates,
interest rates, transfer pricing changes, taxes and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
Foreign Currency Risks
We
had $2,561,305 and $2,795,781 in revenue from sources outside the
United States for the three months ended December 31, 2017 and
2016, respectively. We made and received payments in a foreign
currency during the periods indicated, which resulted in a foreign
exchange of $55,072 and $116,442 in the three months ended December
31, 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 4. 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 December 31, 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
December 31, 2017.
Changes in Internal Controls
We
maintain a system of internal control over financial reporting that
is designed to provide reasonable assurance that our books and
records accurately reflect our transactions and that our
established policies and procedures are followed. There was no
change in our internal control over financial reporting during our
quarter ended December 31, 2017 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER
INFORMATION
Item 1. 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.
Plaintiff’s appeal succeeded and will result in a trial
occurring within the next four to eight months. 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. We are awaiting a ruling on an oral
argument that took place on December 13, 2017 regarding a new
statute which exempts vendors who assist law enforcement officials.
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 ends on March 30, 2018, 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 ICS. Under the terms of
the Commercial and Monitoring Representative Agreement dated
November 30, 2010 (the “C&M
Agreement”) by and
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 approximately $1.0 million. Depositions were
completed in August of 2017. The arbitration hearing took place on
January 31, 2018 and we expect a ruling within 30 days. 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 filed a motion for
Summary Judgment on January 16, 2018 and we expect a ruling within
six months. 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
plans to file a motion for Summary Judgment before the end of
February 2018. 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, asserting 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
and between 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 $6.0
million. On March 28, 2017, the Federal Administrative Tribunal
rejected our claim, based on its determination 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 may be scheduled
in late 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, the
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 a direct
and immediate result of the gross negligence and guilty indifferent
actions and omissions of all the defendants. Plaintiff is
requesting damages of no less than $2.0 million. The
Company’s Answer and Appearance were filed August 13, 2017.
We are currently in the discovery period.
Item
1A. Risk Factors
Our results of
operations and financial condition are subject to numerous risks
and uncertainties described in our Annual Report on Form 10-K for
our fiscal year ended September 30, 2017, filed on December 19,
2017. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of February 8, 2018, there have been
no material changes to the disclosures made in the above-referenced
Form 10-K.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon
Senior Securities
None.
Item 4. Mine Safety
Disclosures
Not
applicable.
None.
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(a)
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Exhibits Required by Item 601 of Regulation S-K
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Exhibit Number
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Title of Document
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Monitoring Services Agreement, dated December 18, 2017, by and
between Track Group, Inc. and Marion County Community Corrections
Agency, by and through Marion County Community Corrections Board
(filed herewith).
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Certification of Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
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Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
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Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) (filed herewith).
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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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+ Confidential treatment has been requested for certain
confidential portions of this exhibit pursuant to Rule 24b-2
under
the Securities Exchange Act of 1934. In accordance with Rule 24b-2,
these confidential portions have been omitted
from this exhibit and filed separately with the Securities and
Exchange Commission.
SIGNATURES
Pursuant
to the requirements 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.
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Track Group, Inc.
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||
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Date: February 8, 2018
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By:
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/s/ Derek Cassell
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Derek Cassell
Principal Executive Officer
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Date: February 8, 2018
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By:
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/s/ Peter K. Poli
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Peter K. Poli, Chief Financial Officer
(Principal Accounting Officer)
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-26-