Track Group, Inc. - Annual Report: 2016 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016
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: 000-23153

 

TRACK GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		87-0543981
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1215 W. Lakeview Court Romeoville, Illinois 60446

(Address of principal executive offices, Zip Code)

 

(877) 260-2010

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

 

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

 

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

 

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

 

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

 

 

 

 

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

 

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

 

Large Accelerated Filer	[   ]	Non-Accelerated Filer	[   ]
Accelerated Filer	[   ]	Smaller Reporting Company	[X]

 

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

 

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant computed by reference to the closing price on March 31, 2016 was $20.6 million. As of December 6, 2016, there were 10,333,516 shares of Common Stock issued and outstanding.

 

 

 

 

Track Group, Inc. FORM 10-K For the Fiscal Year Ended September 30, 2016   INDEX
							Page
PART I
Item 1	Business						1
Item 1A	Risk Factors						9
Item 2	Properties						17
Item 3	Legal Proceedings						17
PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities						18
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations						20
Item 7A	Quantitative and Qualitative Disclosures About Market Risk						27
Item 8	Financial Statements and Supplementary Data						27
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure						27
Item 9A	Controls and Procedures						27
Item 9B	Other Information						28
PART III
Item 10	Directors, Executive Officers and Corporate Governance						29
Item 11	Executive Compensation						29
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters						29
Item 13	Certain Relationships and Related Transactions, and Director Independence						29
Item 14	Principal Accounting Fees and Services						29
PART IV
Item 15	Exhibits and Financial Statement Schedules						30
Signatures							32

 

 

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate. Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to the factors discussed under the section of this Annual Report entitled “Risk Factors.”

 

PART I

 

Item 1.       Business

 

Track Group, Inc., a Delaware corporation, formerly SecureAlert, Inc., was incorporated in 1995 as a Utah corporation. Our principal place of business is located at 1215 W. Lakeview Court, Romeoville, Illinois 60446. Our telephone number is (877) 260-2010. We maintain a corporate website at www.trackgrp.com. Our common stock, par value $0.0001 (“Common Stock”), is currently listed for quotation on the OTCQX Premier marketplace (“OTCQX”) under the symbol TRCK. Unless specified otherwise, as used in this Form 10-K, “we,” “us,” “our,” “Track Group” or the “Company” refer to Track Group, Inc. and its subsidiaries.

 

Company Background

 

The Company designs, manufactures, and markets location tracking devices and develops and sells a variety of related software, services, accessories, networking solutions, and monitoring applications. The Company’s products and services include ReliAlert™ XC3 ®, Shadow™, TrackerPAL™, TrackerPAL Mobile™, a portfolio of software applications including predictive analytics, a device-agnostic operating systems, and a variety of accessory, service and support offerings. In January 2016, the Company announced Shadow™, which is currently available worldwide, and Track Group Analytics™, which became available in late 2015. The Company sells its products worldwide through its direct sales force, as well as through value-added resellers. The Company sells to government customers on federal, state and local levels in the US and to members of the Ministry of Justice (MOJ) Internationally.

 

Business Strategy

 

The Company is committed to increasing public safety by helping its customers improve offender rehabilitation and re-socialization outcomes through its innovative hardware, software and services. The Company treats its business as a service business. Although they still manufacture patented tracking technology, they see the physical goods as only a small part of the integrated offender monitoring solutions they provide. So, rather than receiving a stream of ongoing revenue just for a piece of manufactured equipment, the Company is now receiving a steady stream of revenue for ongoing device agnostic subscription contracts that help make the administration of justice better, faster, and less expensive for taxpayers. As part of its strategy, the Company continues to expand its device-agnostic platform to not only collect, but store, analyze, assess and correlate location data for reasons of both accountability and auditing as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. The Company believes a high-quality customer experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes building and expanding its own direct sales force and its third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. The Company believes continual investment in research and development (“R&D”), marketing and branding is critical to the development and sale of innovative technologies and integrated solutions.

 

 

Recent Developments

 

Reincorporation to Delaware

 

On August 5, 2016 (the “Effective Date”), the Company filed the following documents to change its state of incorporation from the State of Utah to the State of Delaware (the “Reincorporation”): (i) articles of transfer (the “Utah Articles of Transfer”) with the Utah Division of Corporations and Commercial Code, and (ii) a certificate of conversion (the “Delaware Certificate of Conversion”) and a certificate of incorporation (the “Delaware Certificate of Incorporation”) with the Delaware Division of Corporations. In connection with the Reincorporation, the Company also adopted new bylaws, which became effective on the Effective Date (the “Delaware Bylaws”). In addition to the adoption of the Delaware Certificate of Incorporation and the Delaware Bylaws, the following changes took effect as a result of the Reincorporation on the Effective Date:

 

 

 

 

 

Certain rights of the Company's shareholders changed on the Effective Date as a result of the Reincorporation, which are more fully described in the Company's Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on July 5, 2016.

 

The Reincorporation did not involve any change in the business, properties, corporate headquarters or management of the Company and there was no change in the operations, assets, liabilities or obligations of the Company as a result of the Reincorporation.

 

Marion County Agreement

 

On May 5, 2016, the Company executed an agreement with Marion County Community Corrections ("Agency"), the largest county in the state of Indiana, to provide electronic monitoring services across the full range of sentences under the Agency's oversight. Under the terms of the Agreement, the Company will provide solutions based on GPS and alcohol monitoring technology to monitor over 2,300 offenders and defendants. This includes the Company's newest tracking device, Shadow, which is the smallest, lightest and most advanced device. The term of the Agreement is eighteen months, and is expected to contribute over $4.0 million in revenue over the 18 month term of the agreement.

 

Conrent Loan Agreement

 

On May 1, 2016 we entered into an unsecured Loan Agreement with Conrent Invest S.A., acting with respect to its Compartment Safety III (the "Conrent Loan Agreement"). Under the Conrent Loan Agreement, the Company can borrow $5.0 million for working capital, repayment of debt, and operating purposes. The Conrent Loan Agreement contains a condition precedent, which provides that the lender is not obligated to fund the loan until it has received total proceeds of $5.0 million from the sale of fixed rate notes, which are to be issued by the lender through its Compartment Safety III. As of September 30, 2016 this condition precedent has not been satisfied. When funded, the loan will bear interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued unpaid interest due on July 31, 2018. In addition, the Company anticipates paying the lender an arrangement fee of $112,500 when it receives proceeds from this loan. As of September 30, 2016, the Company had not received the funds under the Conrent Loan Agreement.

 

 

Increase in Authorized Common Stock.

 

On February 26, 2016, our Board of Directors and the holder of a majority of our outstanding voting stock, acting by written consent, approved an amendment to our Amended and Restated Articles of Incorporation to increase the total number of shares of Common Stock authorized thereunder from 15.0 million shares to 30.0 million.

 

Products and Services

 

Devices

 

ReliAlert™XC 3

ReliAlert™XC3 is the Company’s flagship GPS device that sets the standard for reliability and performance in the offender monitoring industry. Advanced features enable agencies to more effectively track offender movements and communicate directly with offenders in real-time, through a patented, on-board two/three-way voice communication technology. This device includes an enhanced GPS antenna and GPS module for higher sensitivity GPS, enhanced voice audio quality, increased battery performance of 50+ hours, 3G cellular capabilities, improved tamper sensory and durability enhancements.

 

Shadow™

Driven by customer demand to improve the performance and affordability of offender tracking devices, Shadow™ is the smallest and lightest device of its kind with a sleek, modern design featuring an enhanced mobile charging capability that makes it easier to use. The device is 3G compliant and fully supported by all global mobility providers.

 

Operating System Software

 

TrackerPAL™

TrackerPAL™ is a secure, cloud-based monitoring system that gives customers the ability to not only collect, but store, analyze, assess and correlate offender data for reasons of both accountability and auditing as well as to use with predictive analytics applications and assess criminal behavior and rehabilitation opportunities.

 

Application Software

 

TrackerPAL™ Mobile

A mobile application of the TrackerPAL™ software is available for Android and iOS devices.

 

Data Analytics

Track Group’s data analytics services help facilitate the discovery and communication of meaningful patterns in diverse data that address strategic and tactical information needs. The Company’s analytics applications use various combinations of statistical analysis procedures, data and text mining, and predictive modeling to proactively analyze information on community-released offenders to discover hidden relationships and patterns in their behaviors and to predict future outcomes.

 

Real-Time Alcohol Monitoring

BACtrack is the world’s first smartphone-based remote alcohol monitoring system. The award-winning BACtrack Mobile integrates a smartphone app and police-grade breathalyzer to bring blood-alcohol content (BAC) wirelessly to a mobile device. We can quickly and easily estimate an enrollee’s blood alcohol content (BAC) and track the results over time. The smartphone monitoring application allows supervisors to send scheduled or random notifications to enrollees to take BAC tests, providing photo/location-verified and time stamped results. There's also an onboard calendar reminding an enrollee of court dates, testing dates, medications to take, mandatory events to attend and other matters.

 

Victim and Survivor Support

Track Group’s Domestic Violence Smartphone Application creates a mobile geo-zone around a survivor of domestic abuse and communicates with the offender’s tracking device – providing an early-warning notification to survivor if they are in proximity of the offender or group of offenders.

 

Accessories

 

SecureCuff™

 

The SecureCuff™ is a patented, optional accessory available exclusively for ReliAlert™XC3 and is the only uncuttable strap in the industry specifically made for high-risk offenders. SecureCuff™ has encased, hardened steel bands that provide extreme cut-resistance and includes the same fiber-optic technology as the standard strap for tampering notification.

 

RF Beacon™

The Beacon™ is a completely self-contained, short-range transmitting station that provides a Radio Frequency (RF) signal communicating with assigned offender GPS devices to increase the ability to maintain critical offender location information and provide agencies with an effective way to more accurately “tether” an offender to a specific location.

 

Product Support and Services

 

Monitoring Center

The Company’s monitoring center provides 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 backup and triple redundancy in voice, data, and IP. The Company has established monitoring centers in Salt Lake City, Utah USA, and Santiago, Chile, SA. In addition the Company has assisted in the establishment of monitoring centers for customers and local partners in the Bahamas and in Puerto Rico.

 

Customer Care

The Company offers a range of support options for its customers. These include assistance that is built into software products, printed and electronic product manuals, online support including comprehensive product information as well as technical assistance.

 

Research and Development Program

 

During the fiscal year ended September 30, 2016, we incurred research and development expense of $2,627,228 compared to those costs recognized during fiscal year 2015 totaling $1,562,566. The $1,064,622 increase in research and development cost reflects costs to (i) streamline our device hardware, therefore expediting manufacturing time, and (ii) enhance both the firmware and software of our devices to improve the overall user experience. As a result of these improvements, $1,949,813 was capitalized as developed technology during the twelve months ended September 30, 2016. A portion of these expenses would have been recognized as research and development expense, absent the software enhancements.

 

Competition

 

The markets for the Company’s products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and technological advances. The Company’s competitors who sell tracking devices have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product features, relative price/performance, product quality and reliability, design innovation, a strong software ecosystem, service and support and corporate reputation.

 

The Company is focused on expanding its market opportunities related to offender monitoring. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify significantly as competitors attempt to imitate some of the features of the Company’s products and applications within their own products or, alternatively, collaborate with third-party providers to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of customers.

 

 

The Company’s future financial condition and operating results depend on the Company’s ability to continue to win large contracts and develop and offer new innovative products and services in the markets in which it competes. The Company believes it offers superior innovation and integration of the entire offender monitoring solution including the hardware (ReliAlert and Shadow), software (TrackerPAL), and applications (Analytics, Domestic Violence, and Alcohol). Some of the Company’s current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company’s offerings.

 

Dependence on Major Customers

 

We had sales to entities, one of which represents more than ten percent of gross revenues as follows for the years ended September 30, 2016 and 2015  

 

	2016	%	2015	%
Customer A	$7,543,116	28%	$3,930,167	19%
Customer B	$2,013,929	7%	$-	0%
Customer C	$1,449,500	5%	$1,437,033	7%
Customer D	$1,178,439	4%	$1,535,203	7%

 

Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2016 and 2015, respectively, are shown in the table below:   

 

	2016	%	2015	%
Customer A	$2,476,168	36%	$1,127,044	19%
Customer B	$899,428	13%	$-	0%
Customer C	$1,151,859	17%	$900,834	15%
Customer D	$512,800	7%	$498,944	8%

 

Dependence on Major Suppliers

 

We purchase cellular services from several suppliers. The cost to us for these services during the fiscal years ended September 30, 2016 and 2015 was approximately $790,829 and $718,333, respectively. The 10% increase in cellular service expense in 2016 compared to 2015 resulted from increased costs associated with higher revenue and resulting cost of sales.

 

During the years ended September 30, 2016 and 2015, we also purchased a significant portion of our inventory and monitoring equipment from certain suppliers. The cost of these purchases was $1,488,515 and $1,095,903, respectively. The 36% increase was due to higher demand for products purchased from these suppliers.

 

Intellectual Property

 

The Company currently holds rights to patents and copyrights relating to certain aspects of its hardware devices, accessories, software and services. The Company has registered or has applied for trademarks and service marks in the U.S. and a number of foreign countries. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on the ownership thereof, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.

 

 

The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents around the world. The Company holds copyrights relating to certain aspects of its products and services. No single patent or copyright is solely responsible for protecting the Company’s products. The Company believes the duration of its patents is adequate relative to the expected lives of its products.

 

Many of the Company’s products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of its products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of the Company’s products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties. 

 

Trademarks.  We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own 11 trademarks that are registered with the United States Patent and Trademark Office, plus one trademark registered in Mexico and one in Canada.  In addition, we have one trademark registered in Europe.

 

We will file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements.  Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States.

 

The following table summarizes our trademark registrations and applications:

 

Trademark	Application  Number	Registration Number	Status/  Next Action
Mobile911 Siren with 2-Way Voice Communication & Design®	76/013,886	2,595,328	Registered
PAL Services®	78/514,514	3,100,192	Registered
TrackerPAL®	78/843,035	3,345,878	Registered
Mobile911®	78/851,384	3,212,937	Registered
TrackerPAL®	CA 1,315,487	749,417	Registered
TrackerPAL®	MX 805,365	960954	Registered
Foresight®	77/137/822	3481509	Registered
ReliAlert™	85/238,049	4200738	Registered
HomeAware™	85/238,064	4111064	Registered
SecureCuff™	85/238,058	4271621	Registered
TrueDetect™	85/237,202	4365120	Registered
SecureAlert™	86/031,550	4623370	Registered
TrackGroup™	86/301716	4701636	Registered
Track Group™ and Design	86/469103	4793747	Registered
Track Group™ and Design	1257077	1257077	Registered

 

Patents. We have 21 patents issued and two patents pending in the United States. At foreign patent offices we have seven patents issued and 16 patents pending. We are also preparing patents that will be filed in other countries in the coming year.

 

 

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

 

US Patents	Application Serial No.	Date Filed	Patent No.	Issue Date
Remote Tracking and Communication Device	11/202427	10-Aug-05	7330122	12-Feb-08

Remote Tracking and Communications Device	12/028088	8-Feb-08	7804412	28-Sep-10
Remote Tracking and Communications Device	12/875,988	3-Sep-10	8031077	4-Oct-11
Alarm and Alarm Management System for Remote Tracking Devices	11/486992	14-Jul-06	7737841	15-Jun-10
Alarm and Alarm Management System for Remote Tracking Devices	12/792,572	2-Jun-10	8013736	6-Sep-11
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center	11/486989	14-Jul-06	8797210	5-Aug-14
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center	14/323,831	3-Jul-14	9491289	8-Nov-16
A Remote Tracking System with a Dedicated Monitoring Center	11/486976	14-Jul-06	7936262	3-May-11
Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors	11/486991	14-Jul-06	7545318	9-Jun-09
Tracking Device Incorporating Enhanced Security Mounting Strap	12/818,453	18-Jun-10	8,514,070	20-Aug-13
Tracking Device Incorporating Cuff with Cut Resistant Materials	14/307,260	17-Jun-14	9129504	8-Sep-15
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device	12/399151	6-Mar-09	8232876	31-Jul-12
Panic Button Phone	09/044497	19-Mar-98	6044257	28-Mar-00
Emergency Phone for Automatically Summoning Multiple Emergency Response Services	09/173645	16-Oct-98	6226510	1-May-01
Combination Emergency Phone and Personal Audio Device	09/185191	3-Nov-98	6285867	4-Sep-01
Emergency Phone with Single-Button Activation	11/174191	30-Jun-05	7251471	31-Jul-07

Biometric Identification System Using Pulse Waveform (PWId)	13/079,219	4-Apr-11	8,773,239	8-Jul-14
Breath Alcohol Sampling System With Spirometric Client Identity Confirmation (Breath Print)	13/169,603	27-Jun-11	9,192,324	24-Nov-15
System for Biometric Identity Confirmation (BPWId)	13/739,224	11-Jan-13	9,274,509	1-Mar-16
System for Biometric Identity Confirmation (U-Key)	13/706,610	6-Dec-12	TBD	Allowed
Biometric Identification System Using Pulse Waveform (PWId CIP)	13/916,818	13-Jun-13	9,223,298	29-Dec-15
Removable Tamper-Resistant Breath Alcohol Sampling System	14/729,361	3-Jun-15		Pending
System for Biometric Identity Confirmation	15/051,935	16-Jun-16		Pending

 

 

 

International Patents	Application Serial No.	Date Filed	Patent No.	Issue Date
Remote Tracking and Communication Device - Brazil	PI0614742.9	4-Aug-06		Pending

Remote Tracking and Communication Device - Canada	2617923	4-Aug-06	2617923	7-Jun-16
Remote Tracking and Communication Device - Mexico	MX/a/2008/001932	4-Aug-06	278405	24-Aug-10
A Remote Tracking System with a Dedicated Monitoring Center - EPO	07812596.0	3-Jul-07		Pending
A Remote Tracking System with a Dedicated Monitoring Center - Brazil	PI0714367.2	3-Jul-07		Pending
Secure Strap Mounting System For an Offender Tracking Device - EPO	10009091.9	9-Jan-10		Pending
Secure Strap Mounting System For an Offender Tracking Device - Brazil	PI11001593	28-Feb-11		Pending
Secure Strap Mounting System For an Offender Tracking Device - Mexico	MX/a/2011/002283	28-Feb-11	319057	4-Apr-14
Secure Strap Mounting System For an Offender Tracking Device - Mexico - DIV	MX/a/2013/12524	28-Feb-11		Pending
Secure Strap Mounting System For an Offender Tracking Device - Canada	2732654	25-Oct-13		Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Brazil	PI0909172-6	1-Sep-10		Pending
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Canada	2717866	3-Sep-10	2717866	17-May-16
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - EPO	09 716 860.3	6-Oct-10	2260482	9-Jan-13
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - United Kingdom	Refer to EP Patent # 2260482
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device - Mexico	MX/a/2010/009680	2-Sep-10	306920	22-Jan-13

System for Biometric Identity Confirmation - Australia	2012-240307	3-Apr-12		Pending
System for Biometric Identity Confirmation - Canada	2,832,315	3-Apr-12		Pending
System for Biometric Identity Confirmation - Israel	228,691	3-Apr-12		Pending
System for Biometric Identity Confirmation - Europe	12-768-677.2	3-Apr-12		Pending
Biometric Identification System Using Pulse Waveform - Australia	2014278558	5-Jun-14		Pending
Biometric Identification System Using Pulse Waveform - Canada	2,915,265	3-Apr-12		Pending
Biometric Identification System Using Pulse Waveform - Israel	228,691	3-Apr-12		Pending

Biometric Identification System Using Pulse Waveform - Europe

12-768-677.2

3-Apr-12

Pending

 

 

Trade Secrets.  We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.

 

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

 

Seasonality

 

Given the consistency in recurring domestic monitoring revenues by customers throughout 2016, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic device deployment opportunities typically slow down in the months of July and August. We believe this is due to the unavailability of judicial and corrections officials who observe a traditional vacation season during this period.

 

Employees

 

As of November 25, 2016, we had 223 full-time employees and 10 part-time employees. None of the employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and management believes that relations with employees are good.

 

Additional Available Information

 

We make available, free of charge, at our corporate website copies of our annual reports filed with the United States Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request.

 

All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549.  

 

Item 1A.    Risk Factors

 

Our business is subject to significant risks. You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K, including our financial statements and related notes, before you decide to invest in our Common Stock. If any of the following risks or uncertainties actually occurs, our business, results of operations or financial condition could be materially harmed, the trading price of our Common Stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.

 

Risks Related to Our Business, Operations and Industry 

 

We face risks related to our substantial indebtedness, including the risk related to the repayment of our short-term indebtedness.  

 

As of September 30, 2016, we had $34,000,319 of indebtedness outstanding, of which approximately $3,468,705 becomes due and payable within the next 12 months. Our significant indebtedness could adversely affect our ability to raise additional capital to fund our operations, make interest payments as they come due, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under our outstanding debt instruments. As a result, we may have to raise additional capital or restructure such indebtedness during the next 12 months, and no assurances can be given that we may be successful in that regard. 

 

 

Our high degree of leverage could have adverse consequences to us, including:

 

●	making it more difficult for us to make payments on our debt;
●	increasing our vulnerability to general economic and industry conditions;
●	requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
●	restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
●	limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
●	limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.

 

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness.

 

These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity difficulties and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or the proceeds that we realize from them may not be adequate to meet the debt service obligations then due.

 

There is no certainty that the market will continue to accept or expand the use of our products and services.  

 

Our targeted markets may be slow to or may never expand the use of our products or services. Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to other available methods of tracking or incarceration. In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control. No assurance can be given that key decision-makers will continue to accept or expand the use of our products, which could have a material adverse effect on our business, financial condition and results of operations.

  

Budgetary issues faced by government agencies could adversely impact our future revenue. 

 

Our revenues are primarily derived from contracts with state, local and county government agencies in the United States and governments of Caribbean and Latin American nations. Many of these government agencies are experiencing budget deficits and may continue to do so. As a result, we may experience delays in payment on customer invoices, the amount spent by our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated, and it may be more difficult to attract additional government clients. Furthermore, the industry has experienced a general decline in average daily lease rates for GPS tracking devices. As a result of these factors, our ability to maintain or increase our revenues may be negatively affected.

 

 

Certain individuals and groups own or control a significant number of our outstanding shares.  

 

Certain groups or persons beneficially own a substantial number of shares of our outstanding Common Stock or securities and debt instruments. As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve significant risk to us or our other shareholders. Additionally, they may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. 

 

We were without a chief financial officer subsequent to the end of the fiscal year and were dependent upon the services of our senior management team; the failure to retain members of our senior management team could adversely affect our operations.  

 

We are dependent on the services, abilities and experience of our executive officers. The permanent loss of the services of any of these senior executives and any change in the composition of our senior management team may have a negative impact on our ability to execute on our business and operating strategies. In addition, in September 2016, our chief financial officer’s employment was terminated and his successor resigned for personal reasons as of November 15, 2016. Mr. Guy Dubois, our current chief executive officer, will execute the responsibilities of the Company’s principal financial and accounting officer until a new chief financial officer begins work on January 6, 2017. A failure to retain senior management could negatively affect our operations, and challenge our ability to obtain financing.

 

The lack of segregation between our principal executive officer and principal accounting and financial officer may cause our internal controls over financial reporting to be ineffective.

 

As a result of the resignation of our Chief Financial Officer, our Chief Executive Officer now acts as both our principal executive officer and principal financial and accounting officer. This has caused a lack of segregation between the duties typically assigned to the principal executive officer and principal financial and accounting officer and may lead to inadequate supervision within the bookkeeping and accounting operations of the Company, which could give rise to lack of proper internal controls over financial reporting, which, in turn, would cause our internal controls over financial reporting to be ineffective. If we are unable to maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, which may have an impact on our results of operations. We have hired a new chief financial officer who will formally join the Company on January 6, 2017 and assume the role of principle financial and accounting officer.

 

We rely on significant suppliers for key products and cellular access. If we do not renew these agreements when they expire we may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as we have in the past, which could adversely affect our results of operations or financial condition. 

 

We have entered into an agreement with three national providers for cellular services. We also rely currently on a single source for the large majority of the manufacturing of our products. If any of these significant suppliers were to cease providing products or services to us, we would be required to seek alternative sources. No assurances can be provided that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.

 

 

Our research, development and marketing activities are subject to government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. 

  

Our products and services are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies for use in the United States or internationally must be manufactured in compliance with applicable rules and regulations of specific governmental agencies. There can be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations. We may be required to comply with regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions.  

 

We face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence.  

 

Our current and expected markets are rapidly changing. Although we believe our technology has advantages over competing systems, there can be no assurance that those advantages are significant. Many of our competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field. Moreover, competitors may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our products. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.

 

We are dependent upon certain customers, the loss of which may adversely affect our results of operations and business condition.  

 

During fiscal year 2016, four of our customers in aggregate accounted for 45% of total sales. The loss of any of these customers may have a material adverse effect on our business (See Note 2 and Note 13 to the Consolidated Financial Statements).

 

Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets.  

 

There can be no assurance that our research and development efforts will be successful. In addition, the technology which we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets. GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user, which, under some circumstances may limit the effectiveness of GPS tracking.  

 

We face risks of litigation and regulatory investigation and actions in connection with our operations.

 

Lawsuits, including regulatory actions, may seek recovery of large, indeterminate amounts or otherwise limit our operations, and their existence and magnitude may remain unknown for substantial periods of time. Relevant authorities in the markets in which we operate may investigate us in the future. These investigations may result in significant penalties in multiple jurisdictions, and we may become involved in disputes with private parties seeking compensation for damages resulting from the relevant violations. Such legal liability or regulatory action could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and credibility. In addition, our business activities are subject to various governmental regulations in countries where we operate, which include investment approvals, export regulations, tariffs, antitrust, anti-bribery, intellectual property, consumer and business taxation, foreign trade, exchange controls, and environmental and recycling requirements. These regulations limit, and other new or amended regulations may further limit, our business activities or increase operating costs. In addition, the enforcement of such regulations, including the imposition of fines or surcharges for violation of such regulations, may adversely affect our results of operations, financial condition, cash flows, reputation and credibility.

 

 

Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights.  

 

We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. Our inability to obtain or to maintain patents on our key products could adversely affect our business. We currently own 23 patents issued and have filed and intend to file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop. There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.  

 

Our success will also depend, in part, on our ability to avoid infringing the patent rights of others. We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services. Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities. If patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there is no assurance given that we will be able to obtain any necessary licenses on commercially favorable terms, if at all. Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition.  

 

We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable. These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We seek to protect this un-patentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.

 

We conduct business internationally with a variety of sovereign governments.

 

Our business is subject to a variety of regulations and political interests that could affect the timing of payment for services and the duration of our contracts. We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust. The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. In addition, because our customers in these foreign jurisdictions are sovereign governments or governmental departments or agencies, it may be difficult for us to enforce our agreements with them in the event of a breach of those agreements, including, but not limited to, the failure to pay for services rendered or to complete projects that we have commenced.

 

We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses, malicious cyber-attacks or hardware failures.  

 

Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services. Historically, we have experienced temporary interruptions of telecommunications or power outages, which were promptly mitigated. Such instances may result in loss of customer accounts or similar problems if they occur again in the future. Given rapidly changing technologies, we are not certain that we will be able to adapt the use of our services to permit, upgrade, and expand our systems or to integrate smoothly with new technologies. Network and information systems and other technologies are critical to our business activities. Network and information systems-related events, including those caused by us, our service providers or by third parties, such as computer hacking, cyber-attacks, computer viruses, or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities or any combination of the foregoing could result in a degradation or disruption of our services. These types of events could result in a loss of customers and large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar events.

 

 

 Risks Related to Acquisitions

 

The success of our business depends on achieving our strategic objectives, including acquisitions, dispositions and restructurings.  

 

Our acquisitions, as well as potential restructuring actions, may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges, such as personnel and technology. In addition, we may not achieve anticipated cost savings from restructuring actions, which could result in lower operating margins. If we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. After reaching an agreement with a buyer or seller for the acquisition or disposition of a business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing the transaction.

 

We may not be able to grow successfully through our recent acquisitions or through future acquisitions, we may not successfully manage future growth, and we may not be able to effectively integrate businesses that we may acquire.

 

We plan to continue to grow organically as well as through strategic acquisitions of other businesses. In order to complete acquisitions, we would expect to require additional debt and/or equity financing, which may increase our interest expense, leverage, and increase the number of shares outstanding. Businesses that we acquire may not perform as expected. Future revenues, profits and cash flows of an acquired business may not materialize due to the failure or inability to capture expected synergies, increased competition, regulatory issues, changes in market conditions, or other factors beyond our control. In addition, we may not be successful in integrating these acquisitions into our existing operations. Competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions. Additional risks related to acquisitions include, but are not limited to:

 

●	the potential disruption of our existing business;
●	entering new markets or industries in which we have limited prior experience;
●	difficulties integrating and retaining key management, sales, research and development, production and other personnel or diversion of management attention from ongoing business concerns to integration matters;
●	difficulties integrating or expanding information technology systems and other business processes or administrative infrastructures to accommodate the acquired businesses;
●	complexities associated with managing the combined businesses due to multiple physical locations;
●	risks associated with integrating financial reporting and internal control systems; and
●	whether any necessary additional debt or equity financing will be available on terms acceptable to us, or at all, and the impact of such financing on our operating performance and results of operations.

 

Risks Related to International Operations

 

We are exposed to fluctuations in currency exchange rates.

 

Our financial results are reported in U.S. dollars, but operations are conducted internationally. Currency exchange rates have, and may continue to have, a significant impact on our operating results. The Company does not utilize hedging techniques to minimize its exposure. As a result, an investment in our Common Stock may expose shareholders to fluctuations in exchange rates.

 

 

The dollar cost of our operations internationally could increase to the extent of increases or decreases in the rate of inflation or devaluation in relation to the dollar, which may harm our results of operations.

 

The dollar cost of our international operations is expected to be influenced by any increase in inflation or is not offset by the devaluation of the local currency in relation to the dollar. As a result, we are exposed to the risk that foreign currencies will appreciate in relation to the dollar. We cannot predict whether the foreign currencies will appreciate or depreciate against the dollar in the future.

 

International political, economic and military instability may impede our ability to execute our plan of operations. 

 

Political, economic and military conditions internationally may affect our business. We cannot predict whether or in what manner these problems may occur. Acts of random terrorism periodically occur which could affect our operations or personnel. Ongoing or revived hostilities or other factors could harm our operations and could impede our ability to execute our plan of operations. Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products. In addition, our business insurance may not cover losses that may occur as a result of events associated with the security situation. Any losses or damages incurred by us could have a material adverse effect on our business and financial condition.

 

Risks Related to Our Common Stock

 

Our largest shareholder’s beneficial ownership is over 50%, and is therefore able to exert control over us, which may limit your ability to influence corporate matters.

 

Sapinda Asia Limited and Mr. Lars Windhorst (collectively “Sapinda Asia”) beneficially own more than 50% of the outstanding voting securities of the Company. As a result, Sapinda Asia will control the outcome of any shareholders’ meeting for the foreseeable future, including having the power to determine the composition of our board of directors and control the outcome of the voting on any significant corporate transactions or other matters submitted to our shareholders for approval. The interests of Sapinda Asia may not be aligned with or be in the best interests of other shareholders. This concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to other shareholders.

 

Our Board of Directors may authorize the issuance of preferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing shareholders without their approval.  

 

Our Articles of Incorporation authorize us to issue up to 20,000,000 shares of preferred stock, par value $0.0001. The Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of preferred stock. The Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the Common Stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or Common Stock. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the Common Stock and reduce the likelihood that common shareholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of preferred stock may also adversely affect an acquisition or change in control of the Company. As of September 30, 2016, there were no outstanding shares of preferred stock issued or contemplated for issuance.

 

Sales by certain of our shareholders of a substantial number of shares of our Common Stock in the public market could adversely affect the market price of our Common Stock.  

 

A large number of outstanding shares of our Common Stock are held by several of our principal shareholders. If any of these principal shareholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of our Common Stock to decline.

 

 

A decline in the price of our Common Stock could affect our ability to raise additional working capital and adversely impact our operations and would severely dilute existing or future investors if we were to raise funds at lower prices.  

 

A prolonged decline in the price of our Common Stock could result in a reduction of our ability to raise capital. Because our operations have been financed in part through the sale of equity securities, a decline in the price of our Common Stock could be especially detrimental to our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. We believe the following factors could cause the market price of our Common Stock to continue to fluctuate widely:

 

●	actual or anticipated variations in our interim or annual results;
●	announcements of new services, products, acquisitions or strategic relationships within the industry;
●	changes in accounting treatments or principles;
●	changes in earnings estimates by securities analysts and in analyst recommendations; and
●	general political, economic, regulatory and market conditions.

 

Any failure to meet these expectations, even if minor, could materially adversely affect the market price of our Common Stock.

 

If we issue additional shares of Common Stock in the future, it will result in the dilution of our existing shareholders.

 

Our Articles of Incorporation authorize the issuance of 30,000,000 shares of Common Stock. Our Board of Directors has the authority to issue additional shares of Common Stock up to the authorized capital stated in the Articles of Incorporation. The issuance of any such shares of Common Stock will result in a reduction in value of our outstanding Common Stock. If we do issue any such additional shares of Common Stock, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders. Further, any such issuance may result in a change of control of the Company.

  

Trading of our Common Stock may be volatile and sporadic, which could depress the market price of our Common Stock and make it difficult for our shareholders to resell their shares. 

 

There is currently a limited market for our Common Stock and the volume of our Common Stock traded on any day may vary significantly from one day to the other. Our Common Stock is quoted on the OTCQX. Trading in stock quoted on the OTCQX is often thin, volatile, and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the issuer’s operations, results or business prospects. The availability of buyers and sellers represented by this volatility could lead to a market price for our Common Stock that is unrelated to operating performance. Moreover, the OTCQX is not a stock exchange, and trading of securities quoted on the OTCQX is often more volatile than the trading of securities listed on a stock exchange like NASDAQ or NYSE:MKT.

 

 

 Item 2.       Properties

  

Our headquarters is approximately 4,200 square feet of commercial office space located at 1215 Lakeview Court, Romeoville, Illinois. The original lease for this office space began on August 1, 2014 and expires on July 31, 2017. An amendment and expansion to the original lease began on December 18, 2014 and expires on July 31, 2017. Combined monthly lease payments are approximately $6,000 per month.

 

Our primary monitoring facility is housed in approximately 8,600 square feet of commercial office space located at 405 South Main Street, Suite 700, Salt Lake City, Utah. Lease payments are approximately $15,200 per month. This lease expires on August 31, 2017.

 

We lease commercial office space in Indianapolis, Indiana of approximately 2,000 square feet, which began on August 1, 2014 and terminating on July 31, 2016. Lease payments are approximately $3,600 per month. In addition, we lease a second location with approximately 2,000 square feet in Indianapolis, Indiana. This lease was executed on January 1, 2014 and expires on December 31, 2018. Monthly lease payments for this facility are approximately $3,200.

 

Track Group Analytics, Inc. operations are located in approximately 4,200 square feet of office space in Bedford, Nova Scotia, Canada. The lease for this office space began on July 1, 2015 and expires on June 30, 2020. Monthly lease payments are approximately $5,600.

 

Item 3.       Legal Proceedings

 

We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.

 

Lazar Leybovich et al v. SecureAlert, Inc.  On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The plaintiffs subsequently withdrew the complaint. The plaintiffs filed an amended complaint on November 15, 2012. 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.

 

Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc.  On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against the Company and its subsidiary. The case resulted from actions of a former agent of the Company’s subsidiary. The Company continues to defend itself in this matter. A trial date has been set for January 3, 2017. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with outside legal counsel.

 

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. 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 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. We believe we will be successful in this action to recover the unpaid balance and interest under the loan agreement and promissory note.

 

Track Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016 the Company filed a Notice of Arbitration with the International Centre for Dispute Resolution, alleging breach of contract by I.C.S. of the Bahamas Co. Ltd. (“ICS”). Under the terms of the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) between the Company and ICS any dispute must be resolved by binding arbitration. The Company asserts that ICS had failed to pay the Company fees owed to it under the C&M Agreement. The Company is confident it will be successful in the arbitration.

 

 

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 filed 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. We believe the allegations and claims are unfounded, are without merit, and provide the basis for counterclaims against Mr. Merrill. We intend to defend the case vigorously and believe the probability of incurring a material loss to be remote.

 

PART II

 

Item 5.       Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our Common Stock is traded on the OTCQX under the symbol “TRCK.” The following table sets forth the range of high and low sales prices of our Common Stock as reported on the OTCQX for the periods indicated.  

 

Fiscal Year Ended September 30, 2016	High	Low
First Quarter ended December 31, 2015	$9.50	$2.00
Second Quarter ended March 31, 2016	$9.00	$3.15
Third Quarter ended June 30, 2016	$6.75	$2.60
Fourth Quarter ended September 30, 2016	$8.45	$3.51

 

Fiscal Year Ended September 30, 2015	High	Low
First Quarter ended December 31, 2014	$17.50	$12.30
Second Quarter ended March 31, 2015	$14.99	$10.05
Third Quarter ended June 30, 2015	$11.99	$9.10
Fourth Quarter ended September 30, 2015	$10.50	$7.10

 

Holders

 

As of November 21, 2016 we had 1,001 holders of record of our Common Stock and 10,333,516 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 504,991 shares of Common Stock.  

 

Dividends

 

Since incorporation, we have not declared any cash dividends on our Common Stock. We do not anticipate declaring cash dividends on our Common Stock for the foreseeable future. The Series D Preferred is entitled to dividends at the rate equal to 8% per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of Common Stock at the sole discretion of the Board of Directors. All dividends payable on our preferred stock outstanding have been paid by issuance of shares of common or preferred stock. At September 30, 2016, there were no shares of Series D Preferred issued and outstanding, as the remaining shares of Series D Preferred were repurchased during fiscal 2014. As a result, during the fiscal years ended September 30, 2016 and 2015, we recorded zero dividend expenses, payable with respect to our outstanding preferred stock.

 

Dilution

 

The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of Common Stock are reserved for issuance upon exercise of outstanding options and warrants and achievement of certain milestones contained in acquisition agreements.

 

The issuance of any shares of Common Stock for any reason will result in dilution of the equity and voting interests of existing shareholders.

 

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York, 11219.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The 2012 Stock Incentive Plan

 

The Company’s 2012 Equity Compensation Plan, as amended (the “2012 Plan”), was first approved by our Board of Directors and shareholders at the Annual Meeting of Shareholders held on December 21, 2011, and amended following our Annual Meeting of Shareholders on May 19, 2015. We believe that incentives and stock-based awards focus and align employees on the objective of creating shareholder value and promoting the success of the Company, and that incentive compensation plans like the 2012 Plan are an important attraction, retention and motivation tool for participants in the plan.

 

Under the 2012 Plan, up to 803,262 options or shares of Common Stock may be awarded.  As of the date of this report, 135,012 shares of Common Stock and options for the purchase of 365,743 shares of Common Stock have been awarded under the 2012 Plan.

 

The following table includes information as of September 30, 2016 for our equity compensation plans:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	365,743	$10.35	668,250
Equity compensation plans not approved by security holders	-	-	-
Total	365,743	$10.35	668,250

 

Recent Sales of Unregistered Securities

 

No securities were issued without registration under the Securities Act during the fiscal year ended September 30, 2016, nor were any securities issued subsequent to September 30, 2016.

 

 

Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. All statements contained in this Annual Report on Form 10-K other than statements of historical fact are forward-looking statements. When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “may,” “will,” “should,” “seeks” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see Item 1A., “Risk Factors” in Part I of this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of this Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand Track Group, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to fiscal year 2016 refers to the year ended September 30, 2016. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2016 and 2015 and the accompanying notes thereto contained in this report. This introduction summarizes MD&A, which includes the following sections:

 

 

 

 

 

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

 

Overview

 

Our core business is based on the manufacture and leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (PaaS) business model. Currently, the Company deploys 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.

 

Recent Developments

 

Reincorporation to Delaware

 

On August 5, 2016 (the “Effective Date”), the Company filed the following documents to change its state of incorporation from the State of Utah to the State of Delaware (the “Reincorporation”): (i) articles of transfer (the “Utah Articles of Transfer”) with the Utah Division of Corporations and Commercial Code, and (ii) a certificate of conversion (the “Delaware Certificate of Conversion”) and a certificate of incorporation (the “Delaware Certificate of Incorporation”) with the Delaware Division of Corporations. In connection with the Reincorporation, the Company also adopted new bylaws, which became effective on the Effective Date (the “Delaware Bylaws”). In addition to the adoption of the Delaware Certificate of Incorporation and the Delaware Bylaws, the following changes took effect as a result of the Reincorporation on the Effective Date:

 

 

 

 

 

 

Certain rights of the Company's shareholders changed on the Effective Date as a result of the Reincorporation, which are more fully described in the Company's Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on July 5, 2016.

 

The Reincorporation did not involve any change in the business, properties, corporate headquarters or management of the Company and there was no change in the operations, assets, liabilities or obligations of the Company as a result of the Reincorporation.

 

Marion County Agreement

 

On May 5, 2016, the Company executed an agreement with Marion County Community Corrections ("Agency"), the largest county in the state of Indiana, to provide electronic monitoring services across the full range of sentences under the Agency's oversight. Under the terms of the Agreement, the Company will provide solutions based on GPS and alcohol monitoring technology to monitor over 2,300 offenders and defendants. This includes the Company's newest tracking device, Shadow, which is the smallest, lightest and most advanced device. The term of the Agreement is eighteen months, and is expected to contribute over $4.0 million in revenue over the 18-month term of the agreement.

 

Conrent Loan Agreement

 

On May 1, 2016 we entered into an unsecured Loan Agreement with Conrent Invest S.A., acting with respect to its Compartment Safety III (the "Conrent Loan Agreement"). Under the Conrent Loan Agreement, the Company can borrow $5.0 million for working capital, repayment of debt, and operating purposes. The Conrent Loan Agreement contains a condition precedent, which provides that the lender is not obligated to fund the loan until it has received total proceeds of $5.0 million from the sale of fixed rate notes, which are to be issued by the lender through its Compartment Safety III. As of September 30, 2016 this condition precedent has not been satisfied. When funded, the loan will bear interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued unpaid interest due on July 31, 2018. In addition, the Company anticipates paying the lender an arrangement fee of $112,500 when it receives proceeds from this loan. As of September 30, 2016, the Company had not received the funds under the Conrent Loan Agreement.

 

Increase in Authorized Common Stock.

 

On February 26, 2016, our Board of Directors and the holder of a majority of our outstanding voting stock, acting by written consent, approved an amendment to our Amended and Restated Articles of Incorporation to increase the total number of shares of Common Stock authorized thereunder from 15.0 million shares to 30.0 million.

 

 

 

Net Revenue

 

During the fiscal year ended September 30, 2016, we had net revenues of $27,193,807 compared to net revenues of $20,792,715 for the fiscal year ended September 30, 2015, an increase of $6,401,092, or approximately 31%. Of these revenues, $25,684,097 and $20,067,966 were from monitoring and other related services during the 2016 and 2015 period, respectively, an increase of $5,616,131 or 28%. Growth in revenue during the year ended September 30, 2016 was principally due to (i) the expansion and growth of offender monitoring in Chile - both intensive probation and standard probation programs; (ii) increases in the total growth of our North American monitoring operations specifically Indiana and Virginia; and (iii) increases in our data analytics service offerings.

 

Product revenues decreased $288,043 from $666,536 for the year ended September 30, 2015, to $378,493 for the year ended September 30, 2016. The 43% decrease in product revenue is the result of a continued focus on recurring subscription based sales and not product sales events. The Company does not expect to eliminate product sales but anticipates a continued decline of product revenue for the foreseeable future as it continues to focus its sales efforts on a subscription based model.

   

Cost of Revenue

 

During the year ended September 30, 2016, cost of revenue totaled $10,533,229 compared to cost of revenue during the year ended September 30, 2015 of $8,282,106, an increase of $2,251,123. This increase is largely due to increases in total monitoring and other related services revenue recognized both domestically and internationally and, to a lesser extent, increases in analytics services. Increases in cost of revenue include but are not limited to personnel costs, commissions, SIM card charges and other incremental revenue related costs.

 

Although management expects the cost of revenue to continue to increase in subsequent periods due an increase in revenue generated by recently acquired operations, the Company expects the cost of revenue as a percentage of total revenue to decrease in the foreseeable future due to economies of scale of purchasing, lower device costs and efficiencies of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs.

 

Depreciation and amortization included in cost of revenue for the fiscal years ended September 30, 2016 and 2015, totaled $2,009,437 and $1,467,410, respectively. These costs represent the depreciation of TrackerPAL™ and ReliAlert™ devices, and are based on a three to five-year useful life. The Company believes this life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales.

 

Impairment cost for equipment and parts for the fiscal years ended September 30, 2016 and 2015 were $80,000 and $225,523, respectively. These costs resulted from the disposal of obsolete inventory, monitoring equipment and parts as we continue to make enhancements to the device.

 

We expect the cost of revenue, excluding impairment of equipment and parts, as a percentage of revenue to decrease in the foreseeable future due to (i) lower manufacturing costs, (ii) procurement and fulfillment outsourcing, and (iii) efficiencies due to further increases in automation of our proprietary software.

 

 

 

General and Administrative Expense

 

During the fiscal year ended September 30, 2016, our general and administrative expense totaled $14,712,650, compared to $14,057,657 for the fiscal year ended September 30, 2015. The increase of $654,993 (5%) in general and administrative cost resulted largely from an increase in bad debt expense and higher outside services, partially offset by decrease in wages and benefits, and Board of Director fees.

 

Selling and Marketing Expense

 

For the fiscal year ended September 30, 2016, our selling and marketing expense was $2,269,233 compared to $2,183,688 for the year ended September 30, 2015. The $85,545, or 4% increase was principally the result of increased sales resources related to the launch and communication of new products.

 

Research and Development Expense

 

During the fiscal year ended September 30, 2016, we incurred research and development expense of $2,627,228 compared to those costs recognized during fiscal year 2015 totaling $1,562,566. The increased investment in research and development costs were incurred to (i) streamline our device hardware, therefore expediting manufacturing time, and (ii) enhance both the firmware and software of our devices to improve the overall user experience. The Company is currently significantly enhancing its software platform. As a result of these improvements, $1,949,813 was capitalized as developed technology during the year ended September 30, 2016. A portion of these expenses would have been recognized as research and development expense, absent the software enhancements.

 

Depreciation and Amortization Expense

 

The Company maintains a significant portion of its tangible and intangible assets that are amortized or depreciated. During the fiscal year ended September 30, 2016, depreciation and amortization included in operating expense totaled $2,709,918, compared to $2,932,172 for the fiscal year ended September 30, 2015. This decrease of $222,254 (8%) was largely due to fully depreciated assets in 2016.

 

Other Income and Expense

 

Other income (expense) decreased by $5.5 million during the year ended September 30, 2016 largely due to the $4.9 million disgorgement profits received in 2015, an increase in interest expense of $138,599 and lower gains on disposal of equipment in 2016.

 

Other income (expense) improved by $4.9 million during the year ended September 30, 2015, as the result of a disgorgement of profits from one of our shareholders, pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in January and April 2015. See Note 5, “Certain Relationships and Related Transactions” to the audited Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on this disgorgement pursuant to Section 16(b).

 

Net Loss

 

We had a net loss for the fiscal year ended September 30, 2016 totaling $8,495,621 or ($0.83) loss per common share, compared to a net loss of $5,668,701 or ($0.56) per common share for the fiscal year ended September 30, 2015. The year over year increase in net loss is the result largely of $4,915,236 in disgorgement funds received in 2015, an increase in research and development costs related to enhancing the firmware and software of our devices of $1,064,662 in 2016 and an increase in bad debt in 2016 of $1,491,897. These amounts were offset by an increase in revenue of $6,401,092, and a corresponding increase in cost of goods sold of $2,251,123.

 

 

As of September 30, 2016, we had unrestricted cash of $1,769,921, compared to unrestricted cash of $4,903,045 as of September 30, 2015. As of September 30, 2016, we had a working capital surplus of $344,283, compared to a working capital surplus of $7,397,132 as of September 30, 2015. This decrease in working capital was largely due to an increase in short-term debt of $2,449,507 and a decrease in cash due to additional capitalized software of $2,090,962 and purchases of monitoring equipment of $2,861,000.

  

During fiscal year 2016, we provided $907,563 in cash from operating activities, compared to a use of cash of $915,225 in operating activities during fiscal year 2015. The increase of cash from operations in 2016 compared to 2015 was largely the result of an increase in accounts payable and accrued expenses. 

 

The Company used $5,057,183 of cash for investing activities during the fiscal year ended September 30, 2016, compared to $4,238,945 of cash used during fiscal year 2015. Cash used for investing activities was used for significant enhancements of its software platform and used for purchases of monitoring and other equipment to meet demand during the twelve months ended September 30, 2016.

 

The Company provided $978,168 of cash for financing activities during the fiscal year ended September 30, 2016, compared to $986,711 of cash used in financing activities during fiscal year 2015. During the fiscal year ended September 30, 2016, we made principal payments of $1,021,832 on notes payable and we received cash proceeds totaling $2,000,000 from the issuance of notes payable.

 

During the fiscal year ended September 30, 2015, we made principal payments of $5,053,989 on notes and related–party notes payable. During fiscal year 2015, we received cash proceeds totaling $4,077,778 from the issuance of notes and related-party notes payable.

 

During the fiscal year ended September 30, 2016, we incurred a net loss of $8,495,621 and we had cash flows from operating activities of $907,563, compared to a net loss from continuing operations of $5,668,701 and negative cash flows from operating activities of $915,225 for fiscal year 2015. As of September 30, 2016, our stockholders’ equity was $8,690,616 and the accumulated deficit totaled $289,341,503.

 

Inflation

 

We do not believe that inflation has had a material impact on our historical operations or profitability.

 

 

Critical Accounting Policies

 

In Note 2, “Summary of Significant Accounting Policies” to the audited Consolidated Financial Statements included in this Annual Report on Form 10-K, we discuss those accounting policies that are considered to be significant in determining the results of operations and our financial position.

 

The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

  

With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivable, we apply critical accounting policies discussed below in the preparation of our financial statements.

  

Inventory Reserves

 

The nature of our business requires maintenance of sufficient inventory on hand at all times to meet the requirements of our customers. We record inventory and raw materials at the lower of cost, or market, which approximates actual cost. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things:

 

●	Current inventory quantities on hand;

 

●	Product acceptance in the marketplace;

 

●	Customer demand;

 

●	Historical sales;

 

●	Forecast sales;

 

●	Product obsolescence; and

 

●	Technological innovations.

 

Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management.

 

Revenue Recognition

 

Our revenue is historically derived from two sources: (i) monitoring services, and (ii) product sales.

 

Monitoring Services

 

Monitoring services include two components: (i) lease contracts in which we provide monitoring services and lease devices to distributors or end users and we retain ownership of the leased device; and (ii) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use our monitoring services.

 

We typically lease our devices under multi-year contracts with customers that opt to use our monitoring services. However, some of these contracts may be cancelled by either party at any time upon 30 days’ notice. Under our standard leasing contract, the leased device becomes billable on the date of activation or seven to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned. We recognize revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue.

 

 

Product Sales

 

We may sell monitoring devices in certain situations to our customers. In addition, we may sell equipment in connection with the building out and setting up a monitoring center on behalf of customers. We recognize product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL, ReliAlert, Shadow or R.A.D.A.R. devices), customers may, but are not required to, enter into one of our monitoring service contracts. We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.

 

We sell and install standalone tracking systems that do not require our ongoing monitoring. We have experience in component installation costs and direct labor hours related to this type of sale and can typically reasonably estimate costs, therefore we recognize revenue over the period in which the installation services are performed using the percentage-of-completion method of accounting for material installations. We typically use labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project’s progress toward completion. We evaluate our estimated labor hours and costs and determine the estimated gross profit or loss on each installation for each reporting period. If it is determined that total cost estimates are likely to exceed revenues, we accrue the estimated losses immediately.

Multiple Element Arrangements

 

The majority of our revenue transactions do not have multiple elements. However, on occasion, we enter into revenue transactions that have multiple elements. These may include different combinations of products or services that are included in a single billable rate. These products or services are delivered over time as the customer utilizes our services. For revenue arrangements that have multiple elements, we consider whether the delivered devices have standalone value to the customer, there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services, and the customer does not have a general right of return. Based on these criteria, we recognize revenue from the sale of devices separately from the services provided to the customer as the products or services are delivered.

 

Other Matters

 

We consider an arrangement with payment terms longer than our normal terms not to be fixed or determinable, and we recognize revenue when the fee becomes due. Normal payment terms for the sale of products and services are due upon receipt to 30 days. We sell our devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices we sell to them. Generally, title and risk of loss pass to the buyer upon delivery of the devices.

 

We estimate our product returns based on historical experience and maintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.

 

Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.

 

Impairment of Long-lived Assets

 

We review our long-lived assets including goodwill and intangibles for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are an identifiable fair market value that is independent of other groups of assets.

 

Allowance for Doubtful Accounts

 

We must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current macroeconomic and geopolitical trends, and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.

 

Recent Accounting Pronouncements 

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

 

 

Accounting for Stock-Based Compensation

 

We recognize compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. We estimate the fair value of stock options using a Black-Scholes option pricing model which requires us to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.

  

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

Our business extends to countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenues and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

 

We had $9,530,240 and $7,092,497 in revenue from sources outside the United States for the fiscal years ended September 30, 2016 and 2015, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange loss of $151,258 and $214,402 in fiscal years 2016 and 2015, respectively. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.

 

Item 8.       Financial Statements and Supplementary Data

 

The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.

 

Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of September 30, 2016.

 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.

  

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued in May 2013 and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2016.

 

This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fourth fiscal quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B.    Other Information

 

None.

 

 

PART III

 

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 30, 2017.

 

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 30, 2017.

 

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 30, 2017.

 

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 30, 2017.

 

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 30, 2017.

 

 

PART IV

 

Item 15.    Exhibits and Financial Statement Schedules

 

(a) The following documents are filed as part of this report:

 

1. Financial Statements

 

Report of Eide Bailly LLP	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss	F-5
Consolidated Statements of Cash Flows	F-7
Notes to the Consolidated Financial Statements	F-9

 

2.  Financial Statement Schedules.    

 

3. Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:

 

Exhibit Number		Title of Document
3(i)(1)		Articles of Transfer of Track Group, Inc., a Utah corporation, dated August 5, 2016 (previously filed on August 9 2016 as Exhibit 3(i)(3) to the Form 10-Q for the quarter ended June 30, 2016).
3(i)(2)		Certificate of Conversion Converting Track Group, Inc., a Utah corporation, to Track Group, Inc., a Delaware corporation, dated August 5, 2016 (previously filed on August 9, 2016 as Exhibit 3(i)(4) to the Form 10-Q for the quarter ended June 30, 2016).
3(i)(3)		Certificate of Incorporation of Track Group, Inc., a Delaware corporation (previously filed on August 9, 2016 as Exhibit 3(i)(5) to the Form 10-Q for the quarter ended June 30, 2016).
3(ii)(2)		ByLaws of Track Group, Inc., a Delaware corporation (previously file on August 9, 2016 as Exhibit 3(ii)(2) to the Form 10-Q for the quarter ended June 30, 2016).

 

4.01	2006 Equity Incentive Award Plan (previously filed in August 2006 as an Exhibit to the Form 10- Q for the nine months ended June 30, 2006).
4.02	2012 Equity Incentive Award Plan (previously filed as Exhibit to Definitive Proxy Statement, filed October 25, 2011, and amended in accordance with the Company’s Definitive Proxy Statement, filed April 9, 2015).

 

10.1	Facility Agreement between Tetra House Pte. Ltd. and SecureAlert, Inc., dated January 3, 2014 (incorporated by reference to our Current Report on Form 8-K, filed in January 2014).
10.2	Supplemental Settlement Agreement between Satellite Tracking of People, LLC and SecureAlert, Inc., effective March 1, 2014 (incorporated by reference to our Form 10-Q for the three months ended March 31, 2015).

10.3	Amended and Restated Facility Agreement, dated June 30, 2015, by and between Track Group, Inc. and Conrent Invest S.A, acting on behalf of its compartment “Safety 2” (incorporated by reference to our Current Report on Form 8-K, filed on July 15, 2015).

 

10.4	Loan Agreement between Sapinda Asia Limited and Track Group, Inc., dated September 14, 2015 (incorporated by reference to our Current Report on Form 8-K, filed on September 28, 2015).
10.5	Agreement between the Virginia Department of Corrections and the Company dated September 21, 2015 (incorporated by reference to our Current Report on Form 8-K, filed on October 2, 2015).
10.6	Executive Employment Agreement, by and between Track Group, Inc. and John Merrill, dated November 20, 2014 (incorporated by reference to our Current Report on Form 8-K, filed November 25, 2014.
10.7	Loan Agreement, by and between Conrent Invest S.A., acting with respect to its Compartment Safety III, and Track Group, Inc., dated May 1, 2016 (previously filed in August 2016 as an Exhibit to the Form 10-Q for the nine months ended June 30, 2016).
10.8	Employment Agreement, by and between Track Group, Inc. and Mark Attarian, dated September 13, 2016 (incorporated by reference to our Current Report on Form 8-K, filed October 1, 2016.)

 

10.9	Employment agreement, by and between Track Group Inc. and Peter Poli, dated December 12, 2016 (incorporated by reference to our Current Report on Form 8-K, filed December 16, 2016).
14.1	Code of Ethics (incorporated by reference from Exhibit 14.1 to our Annual Report on Form 10-K filed January 14, 2014).
21	Subsidiaries of the Registrant (incorporated by reference from Exhibit 21 to our Annual Report on Form 10-K filed January 14, 2014).
31(i)	Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31(ii)	Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32	Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).

 

101.INS	XBRL INSTANCE DOCUMENT
101.SCH	XBRL TAXONOMY EXTENSION SCHEMA
101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF	XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB	XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Track Group, Inc.

 

By: /s/ Guy Dubois

Guy Dubois, (Principal Executive Officer)

 

Date: December 20, 2016

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Guy Dubois		Director,		December 20, 2016
Guy Dubois		(Principal Executive Officer, Acting Principal Financial and Accounting Officer)
/s/ David S. Boone		Director		December 20, 2016
David S. Boone
/s/ Dirk K. van Daele		Director		December 20, 2016
Dirk K. van Daele
/s/ Karen Macleod		Director		December 20, 2016
Karen Macleod
/s/ Eric Rosenblum		Director		December 20, 2016
Eric Rosenblum
/s/ Ray Johnson		Director		December 20, 2016
Ray Johnson

 

 

 

Index to Consolidated Financial Statements

 

		Page
Report of Eide Bailly LLP		F-2
Consolidated Balance Sheets as of September 30, 2016 and 2015		F-3
Consolidated Statements of Comprehensive Loss for the fiscal years ended September 30, 2016 and 2015		F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 2016 and 2015		F-5
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2016 and 2015		F-7
Notes to Consolidated Financial Statements		F-9

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and

Shareholders of Track Group, Inc.

 

We have audited the accompanying consolidated balance sheets of Track Group, Inc. and Subsidiaries (collectively the Company) as of September 30, 2016 and 2015 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Track Group, Inc. as of September 30, 2016 and 2015 and the consolidated results of its operations, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ Eide Bailly LLP

Salt Lake City, Utah

December 20, 2016

 

 

TRACK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2016 AND 2015

 

Assets	2016	2015
Current assets:
Cash	$1,769,921	$4,903,045
Accounts receivable, net of allowance for doubtful accounts of $2,335,508 and $4,150,000, respectively	6,894,095	6,044,931
Note receivable, current portion	334,733	306,434
Prepaid expenses and other	816,708	1,266,277
Inventory, net of reserves of $98,150 and $225,900, respectively	521,851	741,514
Total current assets	10,337,308	13,262,201
Property and equipment, net of accumulated depreciation of $1,421,389 and $2,822,166, respectively	1,226,461	1,697,630
Monitoring equipment, net of accumulated amortization of $3,438,074 and $2,225,480, respectively	4,358,117	2,784,595
Intangible assets, net of accumulated amortization of $8,233,659 and $5,628,308, respectively	25,540,650	25,884,087
Other assets	2,900,911	2,619,035
Goodwill	7,955,876	7,782,903
Total assets	$52,319,323	$54,030,451
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	2,771,101	2,363,441
Accrued liabilities	3,976,192	2,705,403
Current portion of long-term debt, net of discount of $222,973 and $222,973, respectively	3,245,732	796,225
Total current liabilities	9,993,025	5,865,069
Stock payable - related party	3,289,879	3,501,410
Long-term debt, net of current portion and discount of $185,811 and $408,784, respectively	30,345,803	30,189,188
Other long-term liabilities	-	106,671
Total liabilities	43,628,707	39,662,338
Stockholders’ equity:
Common stock, $0.0001 par value: 30,000,000 shares authorized; 10,333,516 and 10,261,288 shares outstanding, respectively	1,034	1,026
Additional paid-in capital	298,876,399	297,591,034
Accumulated deficit	(289,341,503)	(280,845,882)
Accumulated other comprehensive loss	(845,314)	(2,378,065)
Total equity	8,690,616	14,368,113
Total liabilities and stockholders’ equity	$52,319,323	$54,030,451

 

 

TRACK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2015

 

	2016	2015
Revenues:
Products	$378,493	$666,536
Monitoring services	25,684,097	20,067,966
Other	1,131,217	58,213
Total revenues	27,193,807	20,792,715
Cost of revenues:
Products	559,887	518,155
Monitoring and other related services	7,883,905	6,071,018
Depreciation and amortization included in cost of revenues	2,009,437	1,467,410
Impairment of monitoring equipment and parts (Note2)	80,000	225,523
Total cost of revenues	10,533,229	8,282,106
Gross profit	16,660,578	12,510,609
Operating expenses:
General & administrative	14,712,650	14,057,657
Selling & marketing	2,269,233	2,183,688
Research & development	2,627,228	1,562,566
Depreciation & amortization	2,709,918	2,932,172
Loss from operations	(5,658,451)	(8,225,474)
Other income (expense):
Gain/loss on disposal of equipment	15,655	339,858
Interest income	114,235	148,795
Interest expense	(2,829,003)	(2,690,404)
Currency exchange rate loss	(151,258)	(214,402)
Disgorgement funds received (note 5)	-	4,915,236
Other income/expense, net	13,201	78,046
Net loss before tax	(8,495,621)	(5,648,345)
Income Tax	-	(20,356)
Net loss attributable to common shareholders	(8,495,621)	(5,668,701)
Foreign currency translation adjustments	1,532,751	(2,106,111)
Comprehensive loss	$(6,962,870)	$(7,774,812)
Net loss per common share, basic and diluted	$(0.83)	$(0.56)
Weighted average common shares outstanding, basic and diluted	10,285,947	10,159,000

 

 

TRACK GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2015 AND 2016

 

	Shares	Amount	Capital	Deficit	Comprehensive Loss	Total
Balance as of October 1, 2014	10,093,130	$1,009	$295,364,173	$(275,177,181)	$(271,954)	$19,916,047
Issuance of Common Stock for:
Acquisitions of subsidiaries	98,777	10	1,148,731	-	-	1,148,741
Services	28,753	3	306,574	-	-	306,577
Board of director fees	40,628	4	438,413	-	-	438,417
Vesting of stock options	-	-	258,731	-	-	258,731
Cash paid for repurchase of Series D preferred stock warrants	-	-	(10,500)	-	-	(10,500)
Issuance of Common Stock warrants for Board of Director fees	-	-	84,912	-	-	84,912
Foreign currency translation adjustments	-	-	-	-	(2,106,111)	(2,106,111)
Net loss	-	-	-	(5,668,701)	-	(5,668,701)
Balance as of September 30, 2015	10,261,288	$1,026	$297,591,034	$(280,845,882)	$(2,378,065)	$14,368,113

 

 

TRACK GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2015 AND 2016 (continued)

 

	Shares	Amount	Capital	Deficit	Comprehensive Loss	Total
Balance as of October 1, 2015	10,261,288	$1,026	$297,591,034	$(280,845,882)	$(2,378,065)	$14,368,113
Issuance of Common Stock for:
Recognition of milestone achievement	32,490	3	211,528	-	-	211,531
Services	26,674	3	259,378	-	-	259,381
Board of director fees	13,064	2	97,167	-	-	97,169
Vesting of stock options	-	-	300,873	-	-	300,873
Issuance of Common Stock warrants for Board of Director fees	-	-	416,419	-	-	416,419
Foreign currency translation adjustments	-	-	-	-	1,532,751	1,532,751
Net loss	-	-	-	(8,495,621)	-	(8,495,621)
Balance as of September 30, 2016	10,333,516	$1,034	$298,876,399	$(289,341,503)	$(845,314)	$8,690,616