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 March 31, 2018
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 May 1, 2018 was 11,401,650.
Track Group,
Inc.
FORM 10-Q
For the Quarterly Period Ended March 31, 2018
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Page
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PART I. FINANCIAL INFORMATION
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PART II. OTHER INFORMATION
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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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March 31,
2018
(unaudited)
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September 30,
2017
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Current assets:
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Cash
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$2,661,829
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$2,027,321
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Accounts
receivable, net of allowance for doubtful accounts of $3,532,609
and $3,268,095, respectively
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4,926,116
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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
expense and other
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5,143,501
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854,122
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Inventory,
net of reserves of $26,934, respectively
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269,924
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261,810
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Total
current assets
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13,236,103
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8,816,550
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Property
and equipment, net of accumulated depreciation of $1,950,847 and
$1,778,634, respectively
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913,232
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903,100
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Monitoring
equipment, net of accumulated depreciation of $5,045,835 and
$4,906,925, respectively
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3,149,664
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3,493,012
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Intangible
assets, net of accumulated amortization of $10,984,263 and
$9,839,032, respectively
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23,902,278
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24,718,655
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Goodwill
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8,207,990
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8,226,714
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Other
assets
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202,581
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2,989,101
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Total
assets
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$49,611,848
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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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2,731,842
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2,769,835
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Accrued
liabilities
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9,109,373
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6,650,291
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Current
portion of long-term debt, net of discount of $74,324 and $185,811,
respectively
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30,370,943
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30,270,531
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Total
current liabilities
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42,212,158
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39,690,657
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Long-term
debt, net of current portion
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3,451,588
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3,480,717
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Total
liabilities
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45,663,746
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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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301,038,832
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300,717,861
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Accumulated
deficit
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(296,846,405)
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(294,067,329)
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Accumulated
other comprehensive loss
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(245,371)
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(675,822)
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Total
equity
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3,948,102
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5,975,758
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Total
liabilities and stockholders’ equity
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$49,611,848
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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
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Six
Months Ended
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March
31,
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March
31,
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March
31,
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March
31,
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2018
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2017
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2018
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2017
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Monitoring
services
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$7,162,205
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$6,986,612
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$14,513,010
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$14,419,889
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Other
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153,971
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233,431
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293,860
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471,644
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Total
revenue
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7,316,176
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7,220,043
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14,806,870
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14,891,533
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Cost
of revenue:
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Monitoring,
products & other related services
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2,827,842
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2,654,305
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5,369,849
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6,336,368
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Depreciation &
amortization
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467,666
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515,574
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944,808
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961,067
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Total cost of
revenue
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3,295,508
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3,169,879
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6,314,657
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7,297,435
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Gross profit
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4,020,668
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4,050,164
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8,492,213
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7,594,098
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Operating
expenses:
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General &
administrative
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3,495,343
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2,355,156
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7,153,081
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5,530,210
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Loss on sale of
asset
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-
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766,031
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-
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766,031
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Restructuring
costs
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-
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4,070
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570,400
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Selling &
marketing
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518,993
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624,210
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928,730
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1,213,978
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Research &
development
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182,808
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679,238
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346,754
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1,167,416
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Depreciation &
amortization
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539,537
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633,273
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1,104,277
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1,208,384
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Total operating
expenses
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4,736,681
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5,061,978
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9,532,842
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10,456,419
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Loss
from operations
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(716,013)
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(1,011,814)
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(1,040,629)
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(2,862,321)
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Other
income (expense):
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Interest expense,
net
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(805,966)
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(797,333)
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(1,479,793)
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(1,444,436)
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Currency exchange
rate gain (loss)
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(221,048)
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10,335
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(276,120)
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(106,107)
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Other income,
net
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6,542
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222,414
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17,466
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222,707
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Total
other income (expense)
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(1,020,472)
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(564,584)
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(1,738,447)
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(1,327,836)
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Loss
before income taxes
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(1,736,485)
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(1,576,398)
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(2,779,076)
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(4,190,157)
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Income
tax expense
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-
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9,099
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-
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9,099
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Net
loss attributable to common shareholders
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(1,736,485)
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(1,585,497)
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(2,779,076)
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(4,199,256)
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Foreign currency
translation adjustments
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241,726
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(15,615)
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430,451
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(509,187)
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Comprehensive
loss
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$(1,494,759)
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$(1,601,112)
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$(2,348,625)
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$(4,708,443)
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Basic and diluted
loss per common share
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$(0.17)
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$(0.15)
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$(0.27)
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$(0.41)
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Weighted average
common shares outstanding, basic and diluted
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10,462,433
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10,352,485
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10,469,466
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10,342,948
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
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March 31,
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2018
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2017
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Cash flows from operating activities:
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Net loss
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$(2,779,076)
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$(4,199,256)
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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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2,049,085
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2,169,451
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Bad
debt expense
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287,618
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668,441
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Amortization
of debt discount
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111,487
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111,487
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Stock
based compensation
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1,345,097
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(122,678)
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Loss
on monitoring equipment in cost of revenue
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223,114
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134,787
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Loss
on sale of asset
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-
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766,031
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Gain
on settlement of milestone payments
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-
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(213,940)
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Change
in assets and liabilities:
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Accounts
receivable, net
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308,839
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758,184
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Inventories
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-
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57,700
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Prepaid
expenses and other
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(1,225,045)
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(437,576)
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Accounts
payable
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(43,724)
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807,185
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Accrued
expenses
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1,496,549
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1,497,141
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Net
cash provided by operating activities
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1,773,944
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1,996,957
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Cash flow from investing activities:
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Purchase
of property and equipment
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(124,720)
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(34,529)
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Capitalized
software
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(502,851)
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(1,028,368)
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Purchase
of monitoring equipment and parts
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(494,254)
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(960,425)
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Proceeds
from sale of assets
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-
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510,000
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Net
cash used in investing activities
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(1,121,825)
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(1,513,322)
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Cash flow from financing activities:
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Principal
payments on notes payable
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(36,632)
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(34,779)
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Net
cash used by financing activities
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(36,632)
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(34,779)
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Effect of exchange rate changes on cash
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19,021
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(78)
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Net increase in cash
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634,508
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448,778
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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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$2,661,829
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$2,218,699
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Cash
paid for interest
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$22,483
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$10,065
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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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$88,242
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$309,710
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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 March 31, 2018, and results of its
operations for the three and six months ended March 31,
2018. 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
and six months ended March 31, 2018 may not be indicative of the
results for the fiscal year ending September 30,
2018.
As of March 31, 2018 and 2017, the Company had an accumulated
deficit of $296,846,405 and $293,540,759, respectively. The Company
incurred a net loss of $2,779,076 and $4,199,256 for the six months
ended March 31, 2018 and 2017, respectively. The Company may
continue to incur losses and require additional financial
resources. The Company also has debt maturing in the next six
months. The Company’s successful development and transition
to attaining profitable operations is dependent upon achieving a
level of revenue adequate to support its cost structure. 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 next 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.
(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 March 31, 2018, 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)” requiring the
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 in 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) 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
(5) 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.
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive income (loss) includes net income (loss) as currently
reported under 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 March 31, 2018.
(7) 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 March 31,
2018 and 2017, there were 573,800 and 434,419 outstanding common
share equivalents, respectively, that were not included in the
computation of Diluted EPS for the three and six months ended March
31, 2018 and 2017, respectively, as their effect would be
anti-dilutive. The common stock equivalents outstanding as of March
31, 2018 and 2017 consisted of the following:
|
|
March 31,
|
March 31,
|
|
|
2018
|
2017
|
|
Exercisable
common stock options and warrants
|
573,800
|
434,419
|
|
Total
common stock equivalents
|
573,800
|
434,419
|
(8) PREPAID EXPENSE AND OTHER
The carrying amounts reported in the balance sheets for prepaid
expense and other current assets approximate their fair market
value based on the short-term maturity of these instruments. As of
March 31, 2018, and September 30, 2017, the outstanding balance of
prepaid and other expense was $5,143,501 and $854,122,
respectively. The $5,143,501 as of March 31, 2018 is comprised
largely of performance bond deposits, tax deposits, vendor deposits
and other prepaid supplier expense. The increase in prepaid and
other expense at March 31, 2018 was primarily due to a cash
collateralized performance bond for an international customer of
$2,944,631, which is scheduled to be repaid in the third fiscal
quarter and was re-classified as a short-term asset in the
three-month period ended December 31, 2017, as well as increases in
a new performance bond, prepaid taxes, vendor deposits and
insurance.
(9) 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 March 31, 2018 and
September 30, 2017, respectively, inventory consisted of the
following:
|
|
March 31,
|
September 30,
|
|
|
2018
|
2017
|
|
Finished
goods inventory
|
$296,858
|
$288,744
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$269,924
|
$261,810
|
(10) PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at March 31,
2018 and September 30, 2017, respectively:
|
|
March 31,
2018
|
September 30,
2017
|
|
Equipment,
software and tooling
|
$1,054,252
|
$1,028,081
|
|
Automobiles
|
40,182
|
52,230
|
|
Leasehold
improvements
|
1,460,796
|
1,307,802
|
|
Furniture
and fixtures
|
308,849
|
293,621
|
|
Total
property and equipment before accumulated depreciation
|
2,864,079
|
2,681,734
|
|
Accumulated
depreciation
|
(1,950,847)
|
(1,778,634)
|
|
Property
and equipment, net of accumulated depreciation
|
$913,232
|
$903,100
|
Property and equipment depreciation expense for the three months
ended March 31, 2018 and 2017 was $87,466 and $127,298,
respectively. Property and equipment depreciation expense for the
six months ended March 31, 2018 and 2017 was $201,883 and $177,588,
respectively.
(11) 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 March 31, 2018 and September 30, 2017 was as
follows:
|
|
March 31,
2018
|
September 30,
2017
|
|
Monitoring
equipment
|
$8,195,502
|
$8,399,937
|
|
Less:
accumulated depreciation
|
(5,045,838)
|
(4,906,925)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$3,149,664
|
$3,493,012
|
Depreciation of monitoring equipment for the three months ended
March 31, 2018 and 2017 was $343,494 and $403,074, respectively.
Depreciation of monitoring equipment for the six months ended March
31, 2018 and 2017 was $696,521 and $736,067, respectively.
Depreciation expense for monitoring devices is recognized in cost
of revenue. During the three months ended March 31, 2018 and March
31, 2017, the Company recorded charges of $127,297 and $60,000
respectively, for devices that were lost, stolen, damaged or
otherwise impaired. During the six months ended March 31, 2018 and
March 31, 2017, the Company recorded charges of $223,114 and
$134,787 respectively, for devices that were lost, stolen, damaged
or otherwise impaired. Lost, stolen and damaged items are included
in Monitoring, products & other related services in the
Condensed Consolidated Statement of Operations.
As part of a loss on sale of assets, the Company disposed of
$771,568 of monitoring equipment and $361,463 of related
accumulated depreciation in the three and six month periods ended
March 31, 2017.
(12) INTANGIBLE ASSETS
The following table summarizes intangible assets at March 31, 2018
and September 30, 2017, respectively:
|
|
March 31,
2018
|
September 30,
2017
|
|
Other
intangible assets:
|
|
|
|
Patent
& royalty agreements
|
21,170,565
|
21,170,565
|
|
Developed
technology
|
11,444,880
|
11,116,738
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
332,895
|
332,183
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
34,886,541
|
34,557,687
|
|
Accumulated
amortization
|
(10,984,263)
|
(9,839,032)
|
|
Intangible
assets, net
|
$23,902,278
|
$24,718,655
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through March 2018. The assets
have useful lives ranging from three to twenty years. Amortization
expense for the three months ended March 31, 2018 and 2017 was
$576,244 and $618,475, respectively. Amortization expense for the
six months ended March 31, 2018 and 2017 was $1,150,682 and
$1,255,796, respectively.
(13) GOODWILL
The following table summarizes the activity of goodwill at March
31, 2018 and September 30, 2017, respectively:
|
|
March 31,
|
September 30,
|
|
|
2018
|
2017
|
|
Balance
- beginning of
period
|
$8,226,714
|
$7,955,876
|
|
Effect
of foreign currency translation on goodwill
|
(18,724)
|
270,838
|
|
Balance
- end of period
|
$8,207,990
|
$8,226,714
|
|
|
||
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
March 31, 2018.
(14) OTHER ASSETS
As of March 31, 2018 and September 30, 2017, the outstanding
balance of other assets was $202,581 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 was re-classified as a current asset in the three-month
period ended December 31, 2017, and thus was classified as such for
the period ended March 31, 2018.
(15) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of March 31, 2018
and September 30, 2017:
|
|
March 31,
2018
|
September 30,
2017
|
|
Accrued
payroll, taxes and employee benefits
|
$1,948,281
|
$943,066
|
|
Deferred
revenue
|
241,458
|
43,333
|
|
Accrued
taxes - foreign and domestic
|
245,003
|
529,926
|
|
Accrued
settlement costs
|
-
|
200,000
|
|
Accrued
board of directors fees
|
439,722
|
125,000
|
|
Accrued
other expense
|
217,417
|
142,390
|
|
Accrued
legal costs
|
30,000
|
116,824
|
|
Accrued
cellular costs
|
24,000
|
81,100
|
|
Accrued
costs of revenue
|
278,770
|
141,884
|
|
Accrued
bond guarantee
|
196,494
|
23,548
|
|
Accrued
interest
|
5,488,228
|
4,303,220
|
|
Total
accrued liabilities
|
$9,109,373
|
$6,650,291
|
(16) 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 $365,000 at March 31, 2018,
under Section 6.3 of the Sapinda Loan Agreement,
as amended. The Company did not
draw on this line of credit, nor did the Company pay any interest
during the six months ended March 31, 2018. The undrawn balance of
this line of credit at March 31, 2018 was
$1,600,356.
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”) associated
with the Amended and Restated Unsecured Facility Agreement dated
June 30, 2015 (the “Facility
Agreement”) between
Conrent Invest S.A. and the Company. 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,
resulting in the termination of the Debt
Exchange.
On February 26, 2018, the Company proposed that the maturity date
of the Facility Agreement be extended from July 31, 2018 to April
1, 2019. On April 26, 2018,
the Noteholders approved the extension of the Facility Agreement
from July 31, 2018 to April 1, 2019, subject to the satisfaction of
certain conditions, which are currently under discussion by the
Company and Conrent.
Debt obligations as of March 31, 2018 and September 30, 2017,
respectively, are comprised of the following:
|
|
March 31,
2018
|
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 March 31, 2018, the remaining debt discount was
$74,324. We did not pay interest on this loan during the six months
ended March 31, 2018.
|
$30,325,676
|
$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.
|
86,432
|
123,393
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
10,779
|
14,022
|
|
|
|
|
|
Total
debt obligations
|
33,822,531
|
33,751,248
|
|
Less
current portion
|
(30,370,943)
|
(30,270,531)
|
|
Long-term
debt, net of current portion
|
$3,451,588
|
$3,480,717
|
The following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of March
31, 2018:
|
Twelve-month period ended
|
Total
|
|
|
|
|
March
31, 2019
|
$30,445,267
|
|
March
31, 2020
|
41,132
|
|
March
31, 2021
|
3,410,456
|
|
Thereafter
|
-
|
|
Debt
discount
|
(74,324)
|
|
Total
|
$33,822,531
|
(17) 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 $365,000 at
March 31, 2018, under Section
6.3 of the Sapinda Loan Agreement,
as amended, and the Company intends to offset Lender Penalties
against future payments due. We did not draw on this line of credit, nor
did we pay any interest during the six months ended March 31, 2018.
The undrawn balance of this line of credit at March 31, 2018 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
|
|
Mar. 31,
2018
|
Sept. 30,
2017
|
|
|
|
|
|
Related
party loan with an interest rate of 8% per annum for borrowed
funds. 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.
As of December 27, 2017 Sapinda was no longer a related party, as
4,871,745 or 46.5% of the Company’s common shares owned by
Sapinda were delivered to an unrelated entity.
(18) 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 six months
ended March 31, 2018, no shares of common stock were issued to
Board of Director members for their services earned in the first
two quarters of 2018. The Company has deferred the issuance of
shares of common stock and warrants since the fourth quarter of
2017, and $439,722 for unpaid Board of Director fees has been
accrued at March 31, 2018. See Note 22.
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 March 31, 2018, 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 six-month period ended
March 31, 2018. See Note 22.
In January 2018, the Board of Directors approved the grant of
450,000 shares of common stock valued at $472,500, as compensation
for services to the Company, of which 150,000 are vested, but have
not yet been issued. Also, in February 2018 and March 2018,
respectively, 12,500 and 30,000 shares of stock vested from
compensation for services, which have not been issued. See Note
22.
(19) 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 March 31, 2018, 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 six-month period ending March 31,
2018.
On January 26, 2017, the Board of Directors unanimously approved
the adjustment of the exercise price of 65,617 unexercised
warrants, with original exercise prices ranging from $1.43 to
$7.20, issued under the 2012 Plan to $1.15 and held by a member of
the Company’s Board of Directors whose unexercised warrants
were not repriced along with those that were adjusted on November
30, 2017, resulting in incremental stock-based compensation of
$12,530, which was expensed in the three-month period ending March
31, 2018.
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 six months ended March 31, 2018 and 2017, the Company
granted 30,797 and 125,073 options and warrants to purchase shares
of common stock under the 2012 Plan. The warrants for Board members
vest immediately and expire five years from grant date and warrants
or options issued to employees vest annually over either a two to
three-year period and expire five years after the final vesting
date of the grant. The Company recorded expense of $195,760
and $139,092 for the six months ended March 31, 2018 and 2017,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
The option and warrant grants for three months ended March 31, 2018
were valued using the Black-Scholes model with the following
weighted-average assumptions:
|
|
Six Months Ended
March 31
|
|
|
|
2018
|
2017
|
|
Expected
stock price volatility
|
102%
|
119%
|
|
Risk-free
interest rate
|
2.09%
|
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 six months
ended March 31, 2018 is presented below:
|
|
Shares Under Option (Warrant)
|
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 March 31, 2018
|
630,467
|
$1.78
|
4.38
years
|
$-
|
|
Exercisable
as of March 31, 2018
|
573,800
|
$1.84
|
4.43
years
|
$-
|
The intrinsic value of options and warrants outstanding and
exercisable is based on the Company’s share price of $1.02 at
March 31, 2018.
(20) 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 six months ended March 31, 2018 and 2017, the Company
incurred a net loss for income tax purposes of $2,779,076 and
$4,199,256, 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.
(21) 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. 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. Oral arguments took place on December
13, 2017 regarding a new statute which exempts providers of
electronic pretrial release and monitoring services from civil
liability for the criminal acts of the defendants it monitors. A
ruling should be issued before the end of July 2018. 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, 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.
Depositions have taken place for both parties. The discovery period
is scheduled to end in the near future, after which counsel will
prepare 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. The arbitrator requested legal briefings after
the hearing which were submitted in March 2018. The Company awaits
a decision from the arbitrator. 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. The court held an oral
hearing on the Company’s motion for Summary Judgment on April
25, 2018. A ruling should be made within 30 days from the hearing.
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. The Company filed a
motion for Summary Judgment on January 24, 2018. The Plaintiff was
granted additional time to conduct discovery. We believe the
allegations and claims are unfounded and without merit. 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. The Tribunal ruled
the claims should be resolved in the Civil Court. Following that
ruling the Supreme Court took action to resolve the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal. Counsel is studying the case to determine where the claim
should be resolved.
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 is forthcoming.
The Company expects the court to make a decision within three
months of the hearing date. We believe the allegations are
inaccurate and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
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. Plaintiff is
requesting damages of no less than $2.0 million. The
Company’s Answer and Appearance were filed August 13, 2017.
The discovery period will tentatively end June 2018. Once discovery
has ended the Company will file a dispositive
motion.
(22) SUBSEQUENT EVENTS
Issuance of Shares. On April
13, 2018 and May 1, 2018, the Company issued 939,217 shares of
common stock for services rendered to the Company. Of these shares,
266,358 were issued to pay Board of Director fees valued at
$364,722, and 672,859 shares were issued for services rendered by
employees valued at $940,141. All earned and vested awards were
previously expensed.
Extension of Facility Agreement Maturity Date.
On April 26, 2018, the Noteholders approved the extension of the
Facility Agreement from July 31, 2018 to April 1, 2019,
subject to the satisfaction of certain
conditions, which are currently under discussion by the Company and
Conrent. See
Note 16.
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
TrackerPALTM
software,
TrackerPALTM
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 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.
Business 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.
Recent Developments
Marion County Agreements
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 provides 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 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 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 monthly payments, the
sum of which shall be determined based
on installation fees and the duration of use
of individual units of equipment.
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 March 31, 2018 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, revenue and expense. 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 March 31, 2018, Compared to Three Months Ended
March 31, 2017
Revenue
For the three months ended March 31, 2018, the Company recognized
revenue from operations of $7,316,176 compared to $7,220,043 for
the three months ended March 31, 2017, an increase of $96,133 or
approximately 1%. The increase in revenue was principally the
result of (i) growth of offender monitoring in Chile, and (ii) an
increase in total growth of our North American monitoring
operations driven by clients in Indiana and Virginia, offset by the
loss of small domestic customers.
Other
revenue for the three months ended March 31, 2018 decreased to
$153,971 from $233,431 in the same period in 2017 largely due to
lower sales of consumable items and lower licensing revenue. We
will continue to focus on recurring subscription based
opportunities as opposed to equipment sales.
Cost of Revenue
During the three months ended March 31, 2018, cost
of revenue totaled $3,295,508 compared to cost of revenue during
the three months ended March 31, 2017 of $3,169,879, an increase of
$125,629 or approximately 4%. The increase in cost of
revenue was largely the result
of increases in device costs of
$111,364, higher server costs of $61,757, and higher communication costs of
$76,830, partially offset by lower monitoring costs of
$103,883.
Depreciation and amortization included in cost of
revenue for the three months ended March 31, 2018 and 2017 totaled
$467,666 and $515,574, respectively. These costs represent the
depreciation of ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
certain royalty agreements. We believe the amortization periods are
appropriate due to 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.
Gross Profit and Margin
During the three months ended March 31, 2018,
gross profit totaled $4,020,668, representing a decrease of $29,496
or less than 1% compared to the same period last year and resulting
in a gross margin of approximately 55% compared to $4,050,164 or a
gross margin of approximately 56% during the three months ended
March 31, 2017. The decrease in gross margin is largely due
to the higher costs of revenue mentioned above, as well as
incentives given to certain customers for assistance with the
evaluation of our new software
platform.
General and Administrative Expense
During
the three months ended March 31, 2018, general and administrative
expense totaled $3,495,343 compared to $2,355,156 for the three
months ended March 31, 2017. The increase of $1,140,187 or 48%
in general and administrative costs resulted largely from an
increase in non-cash stock-based compensation expense of $884,840,
higher legal and professional fees of $170,672, higher wages and
benefit costs of $146,318 and higher outside service costs of
$161,602, partially offset by lower bad debt expense of
$206,581.
Loss on Sale of Asset
During
the three months ended March 31, 2017, we incurred a loss on the
sale of non-core assets of $766,031 for which the Company received
cash of $860,000.
Restructuring Costs
During
the three months ended March 31, 2017, the Company recorded $4,070
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.
Selling and Marketing Expense
During
the three months ended March 31, 2018, selling and marketing
expense decreased to $518,993 compared to $624,210 for the three
months ended March 31, 2017. The reduction in expense of $105,217,
or approximately 17% is principally the result of lower wages and
benefits of $50,795, lower professional fees of $32,749 and lower
outside services of $9,118.
Research and Development Expense
During the three months ended March 31, 2018,
research and development expense totaled $182,808 compared to
$679,238 for the three months ended March 31, 2017, a decrease of
$496,430 or approximately 73%. The decrease resulted
largely from lower wages and benefits of $258,487 and lower outside
service costs of $243,419. 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, $247,952 was capitalized as developed
technology during the three months ended March 31, 2018 and
$458,275 was capitalized in the three months ended March 31, 2017.
A portion of this expense 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 March 31, 2018, depreciation and
amortization expense totaled $539,537 compared to $633,273 for the
three months ended March 31, 2017, a decrease of $93,736 or
approximately 15% largely the result of certain property and
equipment assets becoming fully depreciated.
Total Operating Expense
During
the three months ended March 31, 2018, total operating expense
decreased to $4,736,680 compared to $5,061,978 for the three months
ended March 31, 2017, a decrease of $325,298 or approximately 6%.
The decrease was largely due to a loss on sale of an asset which
occurred in 2017 of $766,031, lower selling and marketing expense
of $105,217, lower research and development expense of $496,430 and
lower depreciation and amortization expense of $93,736. These costs
were partially offset by higher general and administrative expense
of $1,140,187, largely made up of non-cash stock-based
compensation.
Other Income (Expense)
For the three months ended March 31, 2018, other
income (expense) totaled expense of $1,020,472 compared to expense
of $564,584 for the three months ended March 31, 2017, an increase
in net expense of $455,888 or approximately 81%.
The
increase in other income (expense) is due to income related to a
stock payable adjustment with a related party in 2017 of $213,940
and negative currency exchange rate movements of $231,383, largely
due to movement in the Canadian dollar.
Net Loss Attributable to Common Shareholders
The Company had net loss attributable to common
shareholders of $1,736,485 for the three months ended March 31,
2018, compared to a net loss attributable to common shareholders of
$1,585,497 for the three months ended March 31, 2017, an increase
of $150,988 or 10%. This increase in net
loss is largely due to an increase in
stock-based compensation, higher legal and professional fees,
higher outside service costs, higher wages and benefits and higher
other expense, net. These amounts were offset by absence of
restructuring costs, lower selling and marketing expense, lower
research and development costs and lower depreciation and
amortization.
Six Months Ended March 31, 2018, Compared to Six Months Ended March
31, 2017
Revenue
For
the six months ended March 31, 2018, the Company recognized revenue
from operations of $14,806,870, compared to $14,891,533 for the six
months ended March 31, 2017, a decrease of $84,663 or less than
1%. Of this revenue, $14,513,010 and $14,419,889,
respectively, were from monitoring and other related services, an
increase of $93,121 or 1%. The decrease in revenue was
principally the result of (i) a loss of a Caribbean customer whose
contract ended in November 2016 and (ii) lower sales of consumable
and non-monitoring revenue items, partially offset by (iii)
growth of offender monitoring in Chile and (iv) an increase in
total growth of our North American monitoring operations
driven by clients in Indiana and Virginia.
Other
revenue for the three months ended March 31, 2018 decreased to
$293,860 from $471,644 in the same period in 2017 largely due to
lower sales of consumable items and other non-monitoring revenue
items. We are continuing to focus on recurring subscription based
opportunities and not equipment sales.
Cost of Revenue
During the six months ended March 31, 2018, cost
of revenue totaled $6,314,657 compared to cost of revenue during
the six months ended March 31, 2017 of $7,297,435, a decrease of
$982,778 or approximately 13%. The decrease in cost of
revenue was largely the result of lower monitoring costs of $356,004, lower
communication costs of $209,496, lower repair and maintenance costs
by $325,943, lower customs expense of $201,062 and other
incremental revenue related costs, partially offset by higher
server costs of $128,376 and higher costs of lost and stolen
devices of $88,325. During the six-month period ended March 31,
2017, 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 six
months ended March 31, 2018. Excluding these one-time costs, cost
of revenue for the six-months ended March 31, 2018 would have
decreased $611,634, or approximately 9%, compared to the same
period in 2017.
Depreciation and amortization included in cost of
revenue for the six months ended March 31, 2018 and 2017 totaled
$944,808 and $961,067, respectively. This $16,259 or approximately
2% decrease in costs represents a drop in the depreciation
of ReliAlertTM
and other
monitoring devices. Devices are depreciated
over a one to five year useful life. Royalty agreements are being
amortized over a ten year useful life. The Company believes these
lives are appropriate due to changes in electronic monitoring
technology and the corresponding potential for obsolescence.
Management periodically assesses estimates for useful lives of
assets for appropriateness.
Gross Profit and Margin
During the six months ended March 31, 2018, gross
profit totaled $8,492,213, resulting in a gross margin of
approximately 57%, compared to $7,594,098, or a gross margin of
approximately 51% during the six months ended March 31,
2017. The increase in
absolute gross profit of $898,115 or approximately 12% is due to
lower costs of revenue. The increase in gross margin is due to the
decrease in certain aspects of cost of revenue, including
monitoring activity, communication costs, repairs and maintenance
and the absence of one-time costs of $371,144 incurred in the prior
year mentioned above.
General and Administrative Expense
During
the six months ended March 31, 2018, general and administrative
expense totaled $7,153,081 compared to $5,530,210 for the six
months ended March 31, 2017. The increase of $1,622,871 or
approximately 29% in general and administrative costs resulted
largely from higher non-cash stock-based compensation of
$1,447,056, legal and professional fees of $318,576, outside
consulting of $133,114 and higher wages and benefits expense of
$312,592, partially offset by a decrease in bad debt expense of
$379,223, lower training and recruiting of $78,270, lower rent
expense of $67,737 and lower repair and maintenance expense of
$66,474.
Loss on Sale of Asset
During
the six months ended March 31, 2017, we incurred a loss on the sale
of non-core assets of $766,031 for which the Company received cash
of $860,000.
Restructuring Costs
During
the six months ended March 31, 2017, we recorded $570,400 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.
Selling and Marketing Expense
During
the six months ended March 31, 2018, selling and marketing expense
totaled $928,730 compared to $1,213,978 for the six months ended
March 31, 2017. The $285,248, or approximately 23% decrease
resulted largely from lower outside service expense of $118,410,
lower wages and benefits of $83,197, lower legal and professional
fees of $32,749 and lower travel expense of $31,341.
Research and Development Expense
During
the six months ended March 31, 2018, research and development
expense totaled $346,754 compared to research and development
expense for the six months ended March 31, 2017 totaling
$1,167,416, a decrease of $820,662 or approximately 70%. The
decrease is largely due lower wages and benefits of $461,683 and
lower outside services of $356,215 as the Company begins to
complete its new technology platform. The Company is significantly
enhancing its technology platform to improve the efficiency of its
software, firmware, user interface, and automation. As a result of
these improvements, $502,851 was capitalized as developed
technology during the six months ended March 31, 2018 and
$1,028,368 was capitalized during the six months ended March
31, 2017. A portion of this expense would have been recognized as
research and development expense, absent the significant
enhancements to the technology.
Depreciation and Amortization Expense
During
the six months ended March 31, 2018, depreciation and amortization
expense totaled $1,104,277 compared to $1,208,384 for the six
months ended March 31, 2017. The $104,107, or approximately 9%
decrease was largely the result of certain property and equipment
assets becoming fully depreciated.
Total Operating Expense
During the six months ended March 31, 2018, total
operating expense decreased to $9,532,842 compared to
$10,456,419 for the six months ended March 31,
2017, a decrease of $923,577 or approximately 9%. The decrease was
largely due to a loss on sale of an asset of $766,031 and
restructuring costs of $570,400, which both occurred in 2017, and
lower selling and marketing expense of $285,248, lower research and
development expense of $820,882 and lower depreciation and
amortization expense of $104,107. These costs were partially offset
by higher general and administrative expense of $1,622,871, largely
made up of non-cash stock-based compensation.
Other Income (Expense)
For the six months
ended March 31, 2018, other
income (expense) totaled expense of $1,738,447 compared to expense of
$1,327,836 for the six months ended March 31, 2017. The
increase of $410,611 in net other expense resulted primarily from
income related to a stock payable adjustment with related party in
2017 of $213,940 and negative currency exchange rate movements of
$170,013.
Net Loss Attributable to Common Shareholders
The Company had a net loss from continuing
operations for the six months ended March 31, 2018 totaling
$2,779,076 compared to a net loss of $4,199,256 for the six months
ended March 31, 2017 representing, a decrease of $1,420,180 or
approximately 34%. This decrease in net
loss is largely due to lower cost of revenue, lower research and
development costs, lower selling and marketing expenses, the
absence of restructuring costs and loss on sale of assets which
occurred in 2017, offset by higher general and administrative
costs, largely stock-based compensation.
Liquidity and Capital Resources
Prior to the fiscal
year ended September 30, 2017, 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 March 31, 2018, excluding interest, $3.4
million was owed to Sapinda under the Sapinda Loan Agreement
and $30.4 million was owed to Conrent under the Facility. No borrowings
or sales of equity securities occurred during the six months ended
March 31, 2018 or in the prior fiscal year.
On February 26, 2018, the Company
proposed that the maturity date of the Facility Agreement be
extended from July 31, 2018 to April 1, 2019. On
April 26, 2018, the Noteholders
approved the extension of the Facility Agreement from July 31, 2018
to April 1, 2019, subject to the
satisfaction of certain conditions, which are currently under
discussion by the Company and Conrent, and subject to the execution of an amendment to
the Facility Agreement by both Conrent and the Company. Although no
assurances can be given, management anticipates that the parties
will execute such amendment prior to the maturity date of the
Facility Agreement. See Footnote 16 to the Condensed Consolidated
Financial Statements.
Net Cash Flows from Operating Activities.
During the six months ended March
31, 2018, we incurred a net
loss of $2,779,076 and we had cash flows from operating activities
of $1,773,944, compared to a net loss of $4,199,256 and cash flows
from operating activities of $1,996,957 for the six months ended March
31, 2017. The decrease of
cash from operations compared to the prior year period was largely
the result of an increase in prepaid expenses, largely for an
international performance bond and prepaid taxes and a decrease in
accounts payable, partially offset by improved operating
results.
Net Cash Flows from Investing Activities.
The Company used $1,121,825 of cash for investing
activities during the six months ended March
31, 2018, compared to
$1,513,322 of cash used during the six months ended March
31, 2017. 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 six months ended March 31,
2018.
Net Cash Flows from Financing Activities.
The Company used $36,632 of cash for financing
activities during the six months ended March
31, 2018, compared to $34,779
of cash used in financing activities during the six months ended March
31, 2017.
Liquidity, Working Capital and Management’s Plan
As of March
31, 2018, we had unrestricted
cash of $2,661,829, compared to unrestricted cash of $2,027,321 as
of September 30,
2017. As of
March
31, 2018, we had a working
capital deficit of $28,976,055, compared to a working capital
deficit of $30,874,107 as of September 30, 2017. This decrease
in working capital deficit is principally due to a transfer of a
short-term bond from a long-term asset of $2,944,631, and cash
provided by operations, partially offset by a decrease in cash due
to additional capitalized software of $502,851, purchases of
monitoring equipment of $494,254 and purchases of property and
equipment of $124,720.
On March 13, 2017, the Company successfully
extended the Sapinda Loan Agreement from September 30, 2017 to
September 30, 2020. In addition, on April 26, 2018, the Noteholders approved the
extension of the Facility Agreement from July 31, 2018 and April 1,
2019, subject to the
satisfaction of certain conditions, which are currently under
discussion by the Company and Conrent, and subject to
the execution of an amendment to the Facility Agreement by both
Conrent and the Company. Although no assurances can be given,
management anticipates that the parties will execute such amendment
prior to the maturity date of the Facility Agreement. See
Footnote 16 to the Condensed Consolidated Financial
Statements.
The Company
incurred a net loss of $2,779,076 and $4,199,256 for the six months
ended March 31, 2018 and 2017, respectively. The Company may
continue to incur losses until it is able to achieve a level of
revenue adequate to support its cost structure. In addition,
assuming the Company will successfully extend the maturity of the
Facility Agreement discussed in Footnote 16 to the Condensed
Consolidated Financial Statements, 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 next twelve months. However, in the event that we are unable to
execute an amendment to the Facility Agreement resulting in an
extension of the maturity date to April 2019, our available cash
resources together with cash flow from operations will be
inadequate to satisfy our working capital requirements. Management
will therefore seek additional sources of capital, and may consider
strategic or other transactions to continue as a going concern. No
assurances can be given that we will be successful in either
extending or restructuring our debt, raising additional debt or
equity capital, or consummating a strategic or other
transaction.
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
|
$302,498
|
$417,335
|
$36,754
|
$756,587
|
As
of March 31, 2018, the Company’s total future minimum
lease payments under non-cancelable operating leases were $756,587.
The Company’s facility leases typically have original terms
not exceeding five years and generally contain multi-year renewal
options.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The
Company footprint extends to a few countries outside the United
States, and we intend to continue to examine international
opportunities. As a result, our revenue 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 $5,263,868 and $5,124,913 in revenue from sources outside of
the United States for the six months ended March 31, 2018 and 2017,
respectively. We made and received payments in a foreign
currency during the periods indicated, which resulted in a foreign
exchange of $276,120 and $106,107 in the six months ended March 31,
2018 and 2017, 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 March 31, 2018 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
March 31, 2018.
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 March 31, 2018 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER
INFORMATION
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. 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. Oral arguments took place on December
13, 2017 regarding a new statute which exempts providers of
electronic pretrial release and monitoring services from civil
liability for the criminal acts of the defendants it monitors. A
ruling should be issued before the end of July 2018. 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, 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.
Depositions have taken place for both parties. The discovery period
is scheduled to end in the near future, after which counsel will
prepare 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. The arbitrator requested legal briefings after
the hearing which were submitted in March 2018. The Company awaits
a decision from the arbitrator. 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. The court held an oral
hearing on the Company’s motion for Summary Judgment on April
25, 2018. A ruling should be made within 30 days from the hearing.
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. The Company filed a
motion for Summary Judgment on January 24, 2018. The Plaintiff was
granted additional time to conduct discovery. We believe the
allegations and claims are unfounded and without merit. 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. The Tribunal ruled
the claims should be resolved in the Civil Court. Following that
ruling the Supreme Court took action to resolve the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal. Counsel is studying the case to determine where the claim
should be resolved.
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 is forthcoming.
The Company expects the court to make a decision within three
months of the hearing date. We believe the allegations are
inaccurate and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
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. Plaintiff is
requesting damages of no less than $2.0 million. The
Company’s Answer and Appearance were filed August 13, 2017.
The discovery period will tentatively end June 2018. Once discovery
has ended the Company will file a dispositive
motion.
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, including the risk that we may be unable to extend
approximately $30.4 million of debt as of March 31, 2018, which
debt matures on July 31, 2018. See Note 16 to the Condensed
Consolidated Financial Statements. 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 May 11, 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 January 18, 2018, by and between Track
Group Chile SpA and Gendarmeria de Chile (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
|
|
XBRL
INSTANCE DOCUMENT
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101.SCH
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XBRL
TAXONOMY EXTENSION SCHEMA
|
|
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101.CAL
|
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
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|
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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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|
|
|
|
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101.PRE
|
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
+
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.
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: May 11, 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: May 11, 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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-29-