Track Group, Inc. - Annual Report: 2017 (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, 2017
or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________  to  ___________

 

Commission file number: 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.)

 

200 E. 5th Avenue Suite 100 Naperville, Illinois 60563

(Address of principal executive offices, Zip Code)

 

(877) 260-2010

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

Large accelerated filer   [  ]	Accelerated filer                      [  ]
Non-accelerated filer     [  ]	Smaller reporting company    [X]
(Do not check if a smaller reporting company)	Emerging growth company    [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant computed by reference to the closing price on March 31, 2017 was $10.9 million. As of December 1, 2017, there were 10,480,984 shares of Common Stock issued and outstanding.

 

 Documents Incorporated by Reference

 

The registrant incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to portions of the registrant's definitive proxy statement with respect to its 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended September 30, 2017, pursuant to Regulation 14A.

 

 

Track Group, Inc.   FORM 10-K For the Fiscal Year Ended September 30, 2017     INDEX
		Page
PART I
Item 1	Business	1
Item 1A	Risk Factors	9
Item 2	Properties	16
Item 3	Legal Proceedings	16
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	28
Item 8	Financial Statements and Supplementary Data	28
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
Item 9A	Controls and Procedures	28
Item 9B	Other Information	28
PART III
Item 10	Directors, Executive Officers and Corporate Governance	30
Item 11	Executive Compensation	30
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30
Item 13	Certain Relationships and Related Transactions, and Director Independence	30
Item 14	Principal Accounting Fees and Services	30
PART IV
Item 15	Exhibits and Financial Statement Schedules	31
Signatures		33

 

 

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 since 2016 and previously incorporated in 1995 as a Utah corporation, has its principal place of business at 200 E. 5th Avenue Suite 100, Naperville, Illinois 60563. Our telephone number is (877) 260-2010. We maintain a corporate website at www.trackgrp.com. Our common stock, par value $0.0001 (“Common Stock”), is currently listed for quotation on the OTCQX Premier marketplace (“OTCQX”) under the symbol TRCK. Unless specified otherwise, as used in this Form 10-K, “we,” “us,” “our,” “Track Group” or the “Company” refer to Track Group, Inc. and its subsidiaries.

 

Company Background

 

The Company designs, manufactures, and markets location tracking devices and develops and sells a variety of related software, services, accessories, networking solutions, and monitoring applications. Our products and services include a full-range of one-piece GPS tracking devices, a device-agnostic operating system, a portfolio of software applications including smartphone, alcohol and predictive analytics, and a variety of accessory, service and support offerings. Our products and services are currently available worldwide and are sold through our direct sales force, as well as through value-added resellers. The Company sells to government customers on federal, state and local levels in the US and to members of the Ministry of Justice (MOJ) internationally. Track Group’s device-agnostic platform and expanded portfolio of integrated and complimentary monitoring-related services help reduce risk and make the administration of justice better, faster, and less expensive for taxpayers. As of September 30, 2017, The Company’s products and platform are used to monitor over 30,000 individuals globally.

 

Business Strategy

 

We are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software, and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. So, rather than receiving a stream of ongoing revenue just for a piece of manufactured equipment, the Company is now receiving a steady stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, we continue to expand our device-agnostic platform to not only collect, but also store, analyze, assess and correlate location data for both accountability and auditing reasons, as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience with knowledgeable salespersons who can convey the value of our products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related-service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development (“R&D”), including smartphone applications and other monitoring services is critical to the development and sale of innovative technologies and integrated solutions today and in the future.

 

 

Recent Developments

 

 

 

Products and Services

 

Devices

 

ReliAlert™XC 3

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

 

Shadow™

Driven by customer demand to improve the performance and affordability of offender tracking devices, Shadow™ is the smallest and lightest device of its kind with a sleek, modern design featuring an enhanced mobile charging capability that makes it easier to use. The device is 3G compliant and fully supported by all global mobility providers. Management anticipates that this product will increase the Company’s penetration into the offender monitoring marketplace.

 

Operating System Software

 

TrackerPAL™

TrackerPAL™ is a secure, cloud-based monitoring system that gives customers the ability to not only collect, but also store, analyze, assess and correlate offender data for both accountability and auditing reasons, as well as to use with predictive analytics applications and assess criminal behavior and rehabilitation opportunities. The Company is working on a successor software platform, IntelliTrackTM that will be introduced to customers in a controlled manner through the upcoming fiscal year.

 

Application Software

 

TrackerPAL™ Mobile

A mobile application of the TrackerPAL™ software is available for Android and iOS devices. The Company is also developing a similar application for IntelliTrackTM.

 

Data Analytics

Our data analytics services help facilitate the discovery and communication of meaningful patterns in diverse location and behavioral data that helps agencies reduce risks and improve decision making. Our analytics applications use various combinations of statistical analysis procedures, data and text mining, and predictive modeling to proactively analyze information on community-released offenders to discover hidden relationships and patterns in their behaviors and to predict future outcomes.

 

Real-Time Alcohol Monitoring

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

 

Victim and Survivor Support

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

 

 

Accessories

 

SecureCuff™

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

 

RF Beacon™

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

 

Product Support and Services

 

Monitoring Centers

Our monitoring centers provide live 24/7/365 monitoring of all alarms generated from our devices, as well as customer and technical support. Our monitoring center operators play a vital role, and as such, are staffed with highly trained, bi-lingual individuals. These operators act as an extension of agency resources receiving alarms, communicating and intervening with offenders regarding violations, and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power source, battery backup and triple redundancy in voice, data, and IP. We have assisted in the establishment of monitoring centers for customers and local partners in the United States, Chile and other global locations.

 

Customer Care

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

 

Research and Development Program

 

During the fiscal year ended September 30, 2017, we incurred research and development expense of $1,784,867, compared to $2,415,924 recognized during fiscal year 2016. The $631,057 decrease in research and development cost reflects plans implemented to lower contract labor, curtail outside services and reduce payroll costs. However, the Company also strategically invested in enhancing the firmware and software to improve the customer experience and completing the new software platform to increase scalability and add new features requested by government agencies. As a result of these investments and improvements, $2,416,804 was capitalized as developed technology during the twelve months ended September 30, 2017. This represented an increase of $325,842 over the $2,090,962 capitalized as developed technology during the twelve months ended September 30, 2016.

 

Competition

 

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

 

Our specific competitors vary from market to market and we compete against other international, national and regional companies, some of whom use local partners who have more knowledge of the local markets and the government decision making process. Some of our competitors are owned by large public companies and may have access to more resources than we do, while others are backed by private equity firms with large funds, or in some cases, work as part of consortium with extensive international experience. We expect competition in these markets to intensify significantly as competitors attempt to imitate some of the features of our products and applications within their own products or, alternatively, collaborate with third-party providers to offer solutions that are more competitive than those they currently offer.

 

 

Competitive Strengths

 

Industry leading Analytics Software. Remains the only fully functioning, revenue generating analytics software on the market today, specifically designed for the offender monitoring market. Several state department of corrections, county probation agencies and Sheriff’s offices have utilized this solution for more than two years.

 

Device Agnostic Software Platform. The Company’s software platform is device agnostic and currently accommodates offender monitoring of new products that we introduce, integrates with case management software utilized by sheriff, probation and pre-trial departments, and adds devices manufactured by competitors.

 

Smartphone Monitoring Pioneers in Criminal Justice. Today’s prison system incarcerates too many individuals who pose little threat to public safety, at far too great a cost. They serve their sentences in overcrowded, outdated institutions that expose them to hardened criminals. Upon release, their opportunities and lives have changed forever. Now, low-risk offender populations can serve their sentences virtually, holding jobs and taking care of family members, yet still feeling the weight of their punishment while seeing a clear path to avoiding trouble in the future. And taxpayers gain a clear cost advantage. Today, we have developed apps targeting alcohol monitoring, domestic violence and our core monitoring platform.

 

Experienced Senior Management Team. Our top executives have extensive experience in both the offender monitoring marketplace and their specific fields of expertise whether that be sales, customer care and technology. We also benefit from a diverse and experienced Board of Directors.

 

Recurring Revenue. The Company’s revenue is generated in large part by long-term customer contracts based on the size of the offender monitoring program throughout each month which creates a predictable, recurring revenue stream.

 

Relationships with High-Quality Government Customers. The Company has developed strong relationships with federal, state and county customers within the United States and with Ministries of Justice internationally.

 

Extensive Product Suite. The Company has a large variety of products that appeal to a broad range of government customers and greatly enhances our ability to attract and retain clients. These products include different GPS devices, alcohol monitoring and new smartphone applications including those that address adjacent market opportunities in both the public and private sectors and analytics software.

 

National Footprint with International Presence. The Company operates in approximately 42 states as well as select international locations including Chile. Our presence both within the United States and abroad better positions the Company to compete for new and expiring government contracts.

 

Sources and Availability of Raw Materials

 

We use various suppliers and contract manufacturers to supply parts and components for the manufacture and support of our product lines. Although our intention is to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements. We may not be able to procure these components from alternative sources at acceptable prices and quality within a reasonable time, or at all; therefore, the risk of loss or interruption of such arrangements could impact our ability to deliver certain products on a timely basis.

 

Dependence on Major Customers

 

We had sales to entities, two of which represents more than ten percent of gross revenues, as follows for the years ended September 30, 2017 and 2016:

 

	2017	%	2016	%
Customer A	$8,747,338	29%	$7,543,116	28%
Customer B	$3,743,508	13%	$2,013,929	7%
Customer C	$2,326,318	8%	$1,573,959	6%

 

No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2017 or 2016. (See Note 16 to the Consolidated Financial Statements).

 

 

 

Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2017 and 2016, respectively, are shown in the table below: 

 

	2017	%	2016	%
Customer A	$1,657,316	30%	$2,476,168	36%
Customer B	$641,973	12%	$899,428	13%
Customer C	$394,253	7%	$548,867	8%

 

Dependence on Major Suppliers

 

We purchase cellular services from several major suppliers. The cost to us for these services during the fiscal years ended September 30, 2017 and 2016 was $2,178,895 and $1,581,219, respectively. The 38% increase in cellular service expense in 2017 compared to 2016 resulted from increased costs associated with higher revenue and resulting cost of sales and the consolidation of smaller suppliers into national suppliers, partially offset by lower pricing on contracts negotiated in fiscal 2017.

 

During the years ended September 30, 2017 and 2016, we also purchased a significant portion of our inventory and monitoring equipment from certain suppliers. The cost during the fiscal years ended September 30, 2017 and 2016 of these purchases was $1,838,779 and $1,488,515, respectively. The 24% increase was due to the shut-down of the 2G cellular network resulting from the one-time replacement of these 2G units and higher demand due to growth for products purchased from these suppliers.

 

Intellectual Property

 

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

 

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

 

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

 

Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. The Company owns 10 trademarks that are registered with the United States Patent and Trademark Office, plus one trademark registered in Mexico and one in Canada. In addition, we have the Track Group trademark and design registered in various countries around the world.

 

 

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

 

The following table summarizes our trademark registrations:

 

Trademark		Application  Number		Registration Number		Status/  Next Action
Mobile911 Siren with 2-Way Voice Communication & Design®		76/013,886		2,595,328		Registered
TrackerPAL®		78/843,035		3,345,878		Registered
Mobile911®		78/851,384		3,212,937		Registered
TrackerPAL®		CA 1,315,487		749,417		Registered
TrackerPAL®		MX 805,365		960954		Registered
ReliAlert™		85/238,049		4200738		Registered
HomeAware™		85/238,064		4111064		Registered
SecureCuff™		85/238,058		4271621		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

 

 *Track Group™ and Design is also a registered trademark in the following countries: Europe, Switzerland, Mexico, Canada and Chile.

 

Patents. We have 16 patents issued in the United States. At foreign patent offices, we have seven patents issued and six patents pending. 

 

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

 

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

 

 

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 - 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 - 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

 

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

 

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

 

Government Regulation

Our operations are subject to various federal, state, local and international laws and regulations. We are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would require curtailment of our operations because of such laws and regulations.

 

Seasonality

 

Given the consistency in recurring domestic monitoring revenues by customers throughout 2017, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic device deployment opportunities typically slow down in the months of July and August. We believe this is due to the unavailability of judicial and corrections officials who observe a traditional vacation season during this period.

 

Employees

 

As of December 8, 2017, we had 154 full-time employees and two part-time employees. None of the employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and management believes that relations with employees are good.

 

 

Additional Available Information

 

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

 

All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

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 occur, our business, results of operations or financial condition could be materially harmed, the trading price of our Common Stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.

 

Risks Related to Our Business, Operations and Industry 

 

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

 

As of September 30, 2017, we had $33,751,248 of indebtedness outstanding, of which approximately $30,270,531 becomes due and payable within the next 12 months. Our significant indebtedness could adversely affect our ability to raise additional capital to fund our operations, make interest payments as they come due, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under our outstanding debt instruments. As a result, we will have to raise additional capital or restructure such indebtedness during the next 12 months, and no assurances can be given that we may be successful in that regard. See Note 16 to the Consolidated Financial Statements.

 

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

 

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

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. While we are currently negotiating to restructure our indebtedness, no assurances can be given that we will be successful, and we cannot assure you that we will maintain a level of cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

During fiscal year 2017, three of our customers in aggregate accounted for 50% of total sales. All of their contracts expire within the next fiscal year. Failure to renew these contracts, resulting in the loss of any of these customers, may have a material adverse effect on our business (See Note 2 and Note 16 to the Consolidated Financial Statements).

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

We conduct business internationally with a variety of sovereign governments.

 

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

 

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

 

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

 

 Risks Related to Acquisitions

 

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

 

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

 

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

 

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

 

 

●	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. We do not utilize hedging techniques to minimize our exposure. As a result, an investment in our Common Stock may expose shareholders to fluctuations in exchange rates.

 

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

 

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

 

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

 

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

 

Risks Related to Our Common Stock

 

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

 

As of September 30, 2017, the Company's transfer agent records indicate that Sapinda Asia Limited and Mr. Lars Windhorst (collectively “Sapinda Asia”) are the Company's largest shareholders with more than 50% of the outstanding voting securities of the Company. As a result, Sapinda Asia will control the outcome of any shareholders’ meeting, including having the power to determine the composition of our board of directors and control the outcome of the voting on any significant corporate transactions or other matters submitted to our shareholders for approval. The interests of Sapinda Asia may not be aligned with or be in the best interests of other shareholders. This concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to other shareholders. In the near future, based on Schedule 13D filings made with the Securities and Exchange Commission in July and September of 2017, management believes that ETS Limited (“ETS”), a Cayman Islands entity, will become the owner of a substantial majority of Sapinda Asia's shares in the Company such that ETS will become the Company's largest shareholder with 46.5% of the Company's total outstanding shares. As a result, ETS will have substantial influence over the outcome of shareholder meetings in the future and the interests of ETS may not be aligned with or be in the best interests of other shareholders.

 

 

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

 

Our Certificate of Incorporation authorizes us to issue up to 20,000,000 shares of preferred stock, par value $0.0001. The Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of preferred stock. The Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the Common Stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or Common Stock. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the Common Stock and reduce the likelihood that common shareholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of preferred stock may also adversely affect an acquisition or change in control of the Company. As of September 30, 2017, there were no outstanding shares of preferred stock issued.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Item 2.       Properties

 

Our headquarters is approximately 5,600 square feet of commercial office space located at 200 E. 5th Avenue Suite 100, Naperville, Illinois. The lease for this office space began on September 1, 2017 and expires on August 31, 2022. Lease payments are approximately $10,900 per month.

 

We lease commercial office space in Indianapolis, Indiana of approximately 2,000 square feet. This lease began on August 1, 2016 and shall terminate on July 31, 2018. Lease payments are approximately $3,600 per month. In addition, we lease a second location with approximately 2,000 square feet in Indianapolis, Indiana. This lease was executed on January 1, 2014 and expires on December 31, 2018. Monthly lease payments for this facility are approximately $3,300.

 

Track Group Analytics, Inc. operations are approximately 4,200 square feet of office space in Bedford, Nova Scotia, Canada. The lease for this office space began on July 1, 2015 and expires on June 30, 2020. Monthly lease payments are approximately $5,700.

 

SecureAlert Chile operations are approximately 3,500 square feet of commercial office space located in Santiago, Chile. The lease for this office space began on December 31, 2016 and expires on December 31, 2019. Lease payments are approximately $6,500 per month.

 

We lease commercial office space in Sandy, Utah of approximately 1,500 square feet. The lease for this office space began on September 1, 2017 and expires on August 31, 2018. Lease payments are $1,500 per month.

 

Item 3.       Legal Proceedings

 

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

 

Lazar Leybovich et al. v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. On May 2, 2016, the Court resolved this case in favor of the Company by granting the Company's motion for Summary Judgment. The Plaintiffs filed a Notice of Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. An oral argument has been set for December 2017. We intend to defend the case vigorously.

 

Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et al. On December 3, 2015, Candace Boggs et al. filed a complaint in the State Court of Dougherty County, Georgia, alleging breach of contract and negligence in monitoring of certain offenders in Dougherty County, Georgia, as well as a request for punitive damages in an amount sufficient to deter similar conduct in the future. Plaintiffs withdrew their complaint in February 2016, but refiled the complaint on October 12, 2016. The Company’s motion for Summary Judgment was denied on February 27, 2017 and a Notice of Appeal was filed by The Company’s counsel on April 15, 2017. An oral argument has been scheduled for December 2017. We believe the allegations are inaccurate and are defending the case vigorously. We believe the probability of incurring a material loss to be remote.

 

 

Track Group, Inc. v. I.C.S. of the Bahamas Co. Ltd. On May 18, 2016, the Company filed a complaint in the District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, under the terms of a loan agreement and promissory note between the Company and I.C.S. of the Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid principal and interest on the Promissory Note are in the amount of $230,000.00, plus per annum interest. The Defendant’s initial Counterclaims were dismissed, however the Court granted the Defendant leave to amend. The Amended Counter Claims were filed on June 23, 2017. The Company’s Motion to Dismiss the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period is completed, the Company will proceed with a Motion for Summary Judgment. We believe we will be successful in this action for amounts owed under the loan agreement and promissory note; however, the Company may encounter problems enforcing a favorable judgment in the foreign jurisdiction where ICS resides.

 

Track Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016, the Company filed a Notice of Arbitration with the International Centre for Dispute Resolution, alleging breach of contract by I.C.S. of the Bahamas Co. Ltd. (“ICS”). Under the terms of the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) between the Company and ICS any dispute must be resolved by binding arbitration. The Company asserts that ICS has failed to pay the Company fees owed to it under the C&M Agreement. The amount owed to the Company is upwards of $1 million. Depositions were completed in August of 2017. The arbitration hearing is tentatively scheduled for January 31, 2018. The Company is confident it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration award in the foreign jurisdiction where ICS resides.

 

John Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment. Mr. Merrill is seeking not less than $590,577 plus interest, attorney fees and costs. Mr. Merrill’s employment with the Company was terminated effective September 27, 2016. The Company filed an Answer with Counter Claims on December 21, 2016. The Company plans to file its motion for Summary Judgment by the end of the year. We intend to defend the case vigorously and believe the allegations and claims are without merit.

 

Michael Anthony Johnson v. Community Corrections of Marion County and Track Group, Inc. On February 28, 2017, the Company was notified that Mr. Johnson, the Plaintiff, had filed a pro se complaint in the United States District Court for the Southern District of Indiana, asserting violations of his rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company’s Answer was filed April 27, 2017, and we are currently responding to the Defendant’s discovery. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.

 

SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, the Company filed a complaint before the Federal Administrative Tribunal, against the failure by Defendants to pay claimant amounts agreed to, and due under, the Pluri Annual Contract for the Rendering of Monitoring Services of Internees, through Electric Bracelets, in the Islas Marias Penitentiary Complex dated July 15, 2011, entered into by the Organo Administrativo Desconcentrado Prevencion y Readaptacion Social of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, under the consideration that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decision of the Federal Administrative Tribunal. Counsel estimates the Tribunal should have a ruling on or before June 30, 2018. If the Company’s appeal is successful, the case will be sent back to the Federal Administrative Tribunal for a resolution on the merits of the case.

 

 

 

Inversiones Tecnologicas SpA v. Track Group Chile SpA. On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position) filed a complaint before the Civil Court of Santiago, in order to collect $1.0 million of fees for alleged services rendered with occasion of the public tender for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim, under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal will be scheduled for February 2018. The Company expects the court to make a decision within three months of the hearing date.

 

Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al. On June 9, 2017 Plaintiff, Pablo Gonzalez-Cruz, and relatives of the Plaintiff, filed a Complaint in the Court of First Instance, San Juan Superior Court, Common Wealth of Puerto Rico against the Company, and associated parties alleging the death of his daughter was as a direct and immediate result of the gross negligence and guilty indifferent actions and omissions of all the defendants. Plaintiff is requesting damages at no less than $2.0 million. The Company’s Answer and Appearance were filed August 13, 2017.

 

 

PART II

 

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

 

Market Information

 

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

 

Fiscal Year Ended September 30, 2017	High	Low
First Quarter ended December 31, 2016	$7.30	$3.35
Second Quarter ended March 31, 2017	$5.25	$3.36
Third Quarter ended June 30, 2017	$3.36	$2.16
Fourth Quarter ended September 30, 2017	$2.34	$1.40

 

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

 

Holders

 

As of November 20, 2017, we had 409 holders of record of our Common Stock and 10,480,984 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 600,842 shares of Common Stock.

 

Dividends

 

Since incorporation, we have not declared any cash dividends on our Common Stock. We do not anticipate declaring cash dividends on our Common Stock for the foreseeable future. 

 

Dilution

 

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

 

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

 

 

Transfer Agent and Registrar

 

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

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The 2012 Stock Incentive Plan

 

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

 

Under the 2012 Plan, up to 803,262 options or shares of Common Stock may be awarded. As of the date of this report, 276,959 shares of Common Stock and options for the purchase of 488,011 shares of Common Stock have been awarded under the 2012 Plan.

 

The following table includes information as of September 30, 2017 for our equity compensation plans:

 

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	488,011	$8.51	526,303
Equity compensation plans not approved by security holders	-	-	-
Total	488,011	$8.51	526,303

 

Recent Sales of Unregistered Securities

 

No securities were issued without registration under the Securities Act during the fiscal year ended September 30, 2017, nor were any securities issued subsequent to September 30, 2017.

 

 

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

 

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

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand Track Group, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to fiscal year 2017 refers to the year ended September 30, 2017. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2017 and 2016 and the accompanying notes thereto contained in this report. This introduction summarizes MD&A, which includes the following sections:

 

 

 

 

 

 

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

 

Overview

 

Our core business is based on the manufacture and leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (PaaS) business model. Currently, we deploy offender based management services that combine patented GPS tracking technologies, fulltime 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. We offer customizable tracking solutions that leverage real-time tracking data, best practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.

 

 

 

 

 

Results of Operations

 

Continuing Operations - Fiscal Year 2017 Compared to Fiscal Year 2016

 

Net Revenue

 

During the fiscal year ended September 30, 2017, we had net revenues of $29,727,018 compared to net revenues of $27,193,807 for the fiscal year ended September 30, 2016, an increase of $2,533,211, or approximately 9%. Of these revenues, $28,887,460 and $26,343,783 were from monitoring and other related services during the 2017 and 2016 period, respectively, an increase of $2,543,677 or 10%. Growth in revenue during the year ended September 30, 2017 was principally the result of (i) increases in total growth of our North American monitoring operations driven by clients in Indiana and Virginia, and (ii) growth of offender monitoring in Chile. 

 

Other revenue for the year ended September 30, 2017 decreased to $839,558 from $850,024 in the same period in 2016 largely due to lower sales of consumable items and a continued focus on recurring subscription based sales as opposed to product sales.

 

Cost of Revenue

 

During the year ended September 30, 2017, cost of revenue totaled $14,125,699 compared to cost of revenue during the year ended September 30, 2016 of $12,416,923, an increase of $1,708,776. This increase is largely due to increases in total monitoring and other related services revenue recognized both domestically and internationally. Increases in cost of revenue include but are not limited to monitoring costs, communication costs, lost device expense and other incremental revenue related costs.

 

Although management expects the cost of revenue to continue to increase in subsequent periods, the Company expects the cost of revenue as a percentage of total revenue to decrease in the foreseeable future due to economies of scale of purchasing, lower device costs, reduced communication costs and efficiencies of our proprietary software.

 

Depreciation and amortization included in cost of revenue for the fiscal years ended September 30, 2017 and 2016, totaled $2,128,668 and $2,009,437, respectively. These costs represent an acceleration of certain monitoring devices, the depreciation of TrackerPAL™, ReliAlert™ and other monitoring devices as well as the amortization of certain royalty agreements. We believe this life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales.

 

Impairment cost for equipment and parts for the fiscal years ended September 30, 2017 and 2016 were $0 and $80,000, respectively. These costs relate to disposal of obsolete inventory, monitoring equipment and parts for enhancements to our various devices and monitoring platform. 

 

Gross Profit and Margin

 

During the fiscal year ended September 30, 2017, gross profit totaled $15,601,319, resulting in a 52% gross margin, compared to $14,776,884, or a 54% gross margin during the fiscal year ended September 30, 2016, an increase of $824,435. The increase in absolute gross profit is due to higher overall revenue. The decrease in gross margin is largely due to higher costs of monitoring associated with duplicative costs during the transition from a company owned monitoring center to an outsourced vendor, as well as certain communication and lost devices expenses. We anticipate that gross profit as a percentage of total revenue may improve in subsequent periods as initiatives currently in development are realized and deployed.

 

Loss on Sale of Assets

 

During the year ended September 30, 2017, we sold certain non-core assets for net cash of $512,500 and incurred a loss on the sale of $763,531. See Note 5 to the Condensed Consolidated Financial Statements.

 

 

Restructuring Costs

 

During the year ended September 30, 2017, we recorded $558,833 of costs related to the relocation of our headquarters from Salt Lake City, Utah to our existing Chicagoland office. These costs include the transfer of our own monitoring center activities to a highly-specialized third party, severance pay related to a reduction of approximately 65 monitoring center employees, as well as other support employees and moving costs. See Note 8 to the Condensed Consolidated Financial Statements.

 

Impairment of Intangible Assets

 

In connection with our annual impairment test performed by an independent valuation firm, a non-cash impairment charge of $506,413 was recorded during the year ended September 30, 2017 related to a legacy non-core facet of the business.

 

General and Administrative Expense

 

During the fiscal year ended September 30, 2017, our general and administrative expense totaled $12,216,041, compared to $13,038,760 for the fiscal year ended September 30, 2016. The decrease of $822,719 or 6% in general and administrative cost resulted largely from a decrease in bad debt expense, lower business taxes, lower consulting and contract labor costs, lower training costs and lower travel expense, partially offset by increases in wages and benefits, repairs and maintenance, settlements, legal and professional fees and Board of Director fees.

 

Selling and Marketing Expense

 

For the fiscal year ended September 30, 2017, our selling and marketing expense was $2,311,725 compared to $2,270,733 for the year ended September 30, 2016. The $40,992, or 2%, increase was principally the result of higher outside services.

 

Research and Development Expense

 

During the fiscal year ended September 30, 2017, we incurred research and development expense of $1,784,867 compared to those costs recognized during fiscal year 2016 totaling $2,415,924. The decrease resulted largely from lower research and development costs, as well as payroll and wages and lower outside services. In addition, we are significantly enhancing our technology platform to improve the efficiency of our software, firmware, user interface, and automation. As a result of these improvements, $2,416,804 was capitalized as developed technology during the year ended September 30, 2017. A portion of these expenses would have been recognized as research and development expense, absent the software enhancements.

 

Depreciation and Amortization Expense

 

We maintain a significant portion of our tangible and intangible assets that are amortized or depreciated. During the fiscal year ended September 30, 2017, depreciation and amortization included in operating expense totaled $2,332,217, compared to $2,709,918 for the fiscal year ended September 30, 2016. This decrease of $377,701 or 14% was largely the result of lower amortization due to the sale of non-core assets and certain property and equipment assets becoming fully depreciated. 

 

Other Income and Expense

 

During the fiscal year ended September 30, 2017, other income (expense) was income of $648,133 compared to expense of $2,837,170 during fiscal 2016, an improvement of $3,485,303. The improvement in other income (expense) is due to a gain on settlement of milestone payments of $3,213,940 and positive currency exchange rate movements of $374,733. See Note 7 to the Condensed Consolidated Financial Statements.

 

 

Net Loss

 

We had a net loss for the fiscal year ended September 30, 2017 totaling $4,725,826 or ($0.45) loss per common share, compared to a net loss of $8,495,621 or ($0.83) per common share for the fiscal year ended September 30, 2016. This decrease in net loss is largely due to a gain on settlement of milestone payments of $3,213,940, higher gross profit of $824,435, and lower general and administrative expense of $822,719, lower research and development costs of $631,057 and lower depreciation expense of $377,701. These amounts were offset by income tax expense of $501,651, restructuring costs of $558,833, a loss on sale of assets of $763,531 and impairment of intangible assets of $506,413.

 

Financial Position, Liquidity and Capital Resources

 

Historically, we have been unable to finance our business solely from cash flows from operating activities. During the year ended September 30, 2017 and prior years, we supplemented cash flows to finance the business from borrowings under a credit facility, a revolving line of credit from one of our shareholders, receipt of certain disgorgement funds, and from the sale and issuance of debt securities. As of September 30, 2017, excluding interest, $3.4 million was owed to Sapinda (the “Sapinda Loan Agreement”) and $30.4 million was owed to Conrent (the “Conrent Loan Agreement”). No such borrowings or sales of equity securities occurred during the year ended September 30, 2017.

 

Net Cash Flows from Operating Activities.

 

During the fiscal year ended September 30, 2017, we incurred a net loss of $4,725,826 and we had cash flows from operating activities of $4,147,786, compared to a net loss from continuing operations of $8,495,621 and cash flows from operating activities of $907,563 for fiscal year 2016. The increase of cash from operations in 2017 compared to 2016 was largely the result of a decrease in accounts receivable and improved operating results. 

 

Net Cash Flows from Investing Activities.

 

The Company used $3,827,832 of cash for investing activities during the fiscal year ended September 30, 2017, compared to $5,057,183 of cash used during fiscal year 2016. Cash used for investing activities was used for significant enhancements of our software platform and used for purchases of monitoring and other equipment to meet demand during the twelve months ended September 30, 2017.

 

Net Cash Flows from Financing Activities.

 

The Company used $67,775 of cash for financing activities during the fiscal year ended September 30, 2017, compared to $978,168 of cash provided by financing activities during fiscal year 2016. During the fiscal year ended September 30, 2017, we made principal payments of $67,775 on notes payable. During the fiscal year ended September 30, 2016, we made principal payments of $1,021,832 on notes payable and we received cash proceeds totaling $2,000,000 from the issuance of notes payable.

 

Liquidity, Working Capital and Management’s Plan

 

As of September 30, 2017, we had unrestricted cash of $2,027,321, compared to unrestricted cash of $1,769,921 as of September 30, 2016. As of September 30, 2017, we had a working capital deficit of $30,874,107, compared to a working capital surplus of $344,283 as of September 30, 2016. This decrease in working capital is principally due to an increase in short-term debt of $27,024,799 which matures July 31, 2018, and a decrease in cash due to additional capitalized software of $2,416,804, and purchases of monitoring equipment of $1,838,779. See Notes 9 and 16 to the Consolidated Financial Statements.

 

On March 13, 2017, the Company successfully extended the Sapinda Loan Agreement from September 30, 2017 to September 30, 2020. In addition, management is currently exploring options to restructure the debt owed under the Conrent Loan Agreement, which may include exchanging debt for equity.

 

Although no assurances can be given, in the event that management is able to successfully restructure the debt owed under the Conrent Loan Agreement, management believes it will have adequate cash flow from operations to provide for our working capital requirements through the remainder of the fiscal year ended September 30, 2018. Our belief is conditioned on management’s ability to exchange such debt owed to Conrent into equity securities of the Company. However, in the event we are unable to successfully restructure the debt under the Loan Agreement, our available cash resources together with cash flow from operations will be inadequate to provide for the payment of the debt owed under the Conrent Loan Agreement and to satisfy our working capital requirements.

 

 

On April 3, 2017, Puerto Rico filed for the equivalent of bankruptcy in U.S. Federal court. The Company has a contractual relationship with an arm of the Puerto Rico government that currently owes us approximately $75,674 for pre-bankruptcy monitoring services, of which we have recorded an allowance for doubtful accounts of $60,539. Since April 3, 2017, we received payments of approximately $143,000, $240,000, $73,000 and $9,000 related to pre-bankruptcy amounts from Puerto Rico. While it is too early to determine how creditors, including the Company, will be treated in the bankruptcy, we may be required to write down additional amounts due to the bankruptcy proceeding.

 

Inflation

 

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

 

Off-Balance Sheet Financial Arrangements

 

The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company, except as described below.

 

	Payments due in less than 1 year	Payments due in 1 – 3 years	Payments due in 3 – 5 years	Total
Operating leases	$333,506	$492,481	$80,860	$906,847

 

As of September 30, 2017, the Company’s total future minimum lease payments under noncancelable operating leases were $906,847. The Company’s facility leases typically have original terms not exceeding 5 years and generally contain multi-year renewal options.

 

Critical Accounting Policies

 

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

 

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

 

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

 

Reclassification

 

Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net loss or shareholders’ equity.

 

 

Inventory Reserves

 

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

 

●	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 or Shadow devices), customers may, but are not required to, enter into one of our monitoring service contracts. We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.

 

 

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

 

Multiple Element Arrangements

 

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

 

Other Matters

 

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

 

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

 

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

 

Impairment of Long-lived Assets

 

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

 

Allowance for Doubtful Accounts

 

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

 

Recent Accounting Pronouncements 

 

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

 

 

Accounting for Stock-Based Compensation

 

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

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

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

 

We had $10,279,602 and $10,708,679 in revenue from sources outside the United States for the fiscal years ended September 30, 2017 and 2016, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange gain of $223,475 and foreign exchange loss $151,258 in fiscal years 2017 and 2016, respectively. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.

 

Item 8.       Financial Statements and Supplementary Data

 

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

 

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

 

None.

 

Item 9A.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of September 30, 2017. 

 

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

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

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued in May 2013 and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2017.

 

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

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fourth fiscal quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B.    Other Information

 

None.

  

 

PART III

 

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 28, 2018.

 

ITEM 11.    EXECUTIVE COMPENSATION

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 28, 2018.

 

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 28, 2018.

 

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 28, 2018.

 

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 28, 2018.

 

 

 

 

PART IV

 

Item 15.    Exhibits and Financial Statement Schedules

 

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

 

1. Financial Statements

 

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).
10.10	Employment Agreement by and between Track Group, Inc. and Derek Cassell dated, December 1, 2016 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
10.11	Services Agreement, dated December 7, 2016 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
10.12	Amendment to Employment Agreement by and between Track Group Inc. and Derek Cassell, dated February 13, 2017 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
10.13	Amendment No. 1 to 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 March 20, 2017).
10.14	Debt Exchange Agreement between Track Group, Inc. and Conrent Invest S.A., dated October 9, 2017 (incorporated by reference to our Current Report on Form 8-K, filed on October 13, 2017).
14.1	Code of Ethics (filed herewith).
21	Subsidiaries of the Registrant (filed herewith).
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 19, 2017

 

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

 

Signature		Title		Date
/s/ Guy Dubois		Director,		December 19, 2017
Guy Dubois		(Principal Executive Officer)
/s/ David S. Boone		Director		December 19, 2017
David S. Boone
/s/ Dirk K. van Daele		Director		December 19, 2017
Dirk K. van Daele
/s/ Karen Macleod		Director		December 19, 2017
Karen Macleod
/s/ Eric Rosenblum		Director		December 19, 2017
Eric Rosenblum
/s/ Ray Johnson		Director		December 19, 2017
Ray Johnson

 

 

 

Index to Consolidated Financial Statements

 

		Page
Report of Eide Bailly LLP		F-2
Consolidated Balance Sheets as of September 30, 2017 and 2016		F-3
Consolidated Statements of Comprehensive Loss for the fiscal years ended September 30, 2017 and 2016		F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 2017 and 2016		F-5
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2017 and 2016		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, 2017 and 2016 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Track Group, Inc. as of September 30, 2017 and 2016 and the consolidated results of its operations, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ Eide Bailly LLP

 

Salt Lake City, Utah

December 19, 2017

 

 

 

 

TRACK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017 AND 2016

 

Assets	2017	2016
Current assets:
Cash	$2,027,321	$1,769,921
Accounts receivable, net of allowance for doubtful accounts of $3,268,095 and $2,335,508, respectively	5,438,564	6,894,095
Note receivable, current portion	234,733	334,733
Prepaid expenses and other	854,122	816,708
Inventory, net of reserves of $26,934 and $98,150, respectively	261,810	521,851
Total current assets	8,816,550	10,337,308
Property and equipment, net of accumulated depreciation of $1,778,634 and $1,421,389, respectively	903,100	1,226,461
Monitoring equipment, net of accumulated amortization of $4,906,925 and $3,438,074, respectively	3,493,012	4,358,117
Intangible assets, net of accumulated amortization of $9,839,032 and $8,233,659, respectively	24,718,655	25,540,650
Goodwill	8,226,714	7,955,876
Other assets	2,989,101	2,900,911
Total assets	$49,147,132	$52,319,323
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	2,769,835	2,771,101
Accrued liabilities	6,650,291	3,976,192
Current portion of long-term debt, net of discount of $185,811 and $222,973, respectively	30,270,531	3,245,732
Total current liabilities	39,690,657	9,993,025
Stock payable - related party	-	3,289,879
Long-term debt, net of current portion and discount of $0 and $185,811, respectively	3,480,717	30,345,803
Total liabilities	43,171,374	43,628,707
Stockholders’ equity:
Common stock, $0.0001 par value: 30,000,000 shares authorized; 10,480,984 and 10,333,516 shares outstanding, respectively	1,048	1,034
Additional paid-in capital	300,717,861	298,876,399
Accumulated deficit	(294,067,329)	(289,341,503)
Accumulated other comprehensive loss	(675,822)	(845,314)
Total equity	5,975,758	8,690,616
Total liabilities and stockholders’ equity	$49,147,132	$52,319,323

 

The accompanying notes are an integral part of the financial statements.

 

 

TRACK GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2016

 

	2017	2016
Revenues:
Monitoring services	$28,887,460	$26,343,783
Other	839,558	850,024
Total revenues	29,727,018	27,193,807
Cost of revenues:
Monitoring, products and other related services	11,997,031	10,327,486
Depreciation and amortization included in cost of revenues	2,128,668	2,009,437
Impairment of monitoring equipment and parts	-	80,000
Total cost of revenue	14,125,699	12,416,923
Gross profit	15,601,319	14,776,884
Operating expenses:
General & administrative	12,216,041	13,038,760
Loss on sale of assets	763,531	-
Restructuring costs	558,833	-
Impairment of intangible assets	506,413	-
Selling & marketing	2,311,725	2,270,733
Research & development	1,784,867	2,415,924
Depreciation & amortization	2,332,217	2,709,918
Total operating expense	20,473,627	20,435,335
Loss from operations	(4,872,308)	(5,658,451)
Other income (expense):
Interest income	20,086	114,235
Interest expense	(2,820,924)	(2,829,003)
Currency exchange rate gain (loss)	223,475	(151,258)
Gain on settlement of milestone payments	3,213,940	-
Other income/expense, net	11,556	28,856
Total other income (expense)	648,133	(2,837,170)
Net loss before income taxes	(4,224,175)	(8,495,621)
Income tax expense	501,651	-
Net loss attributable to common shareholders	(4,725,826)	(8,495,621)
Foreign currency translation adjustments	169,492	1,532,751
Comprehensive loss	$(4,556,334)	$(6,962,870)
Net loss per common share, basic and diluted	$(0.45)	$(0.83)
Weighted average common shares outstanding, basic and diluted	10,408,870	10,285,947

 

  The accompanying notes are an integral part of the financial statements.

 

 

TRACK GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2017

 

	Shares	Amount	Capital	Deficit	Comprehensive Loss	Total
Balance as of October 1, 2016	10,333,516	$1,034	$298,876,399	$(289,341,503)	$(845,314)	$8,690,616
Modification of warrants	-	-	790,313	-	-	790,313
Issuance of Common Stock for:
Recognition of milestone achievement services	10,602	1	75,937	-	-	75,938
Common shares issued upon vesting of restricted stock	42,026	4	167,281	-	-	167,285
Stock for Board of Director fees	94,840	9	464,991	-	-	465,000
Issuance of Common Stock warrants for Board of Director fees	-	-	75,000	-	-	75,000
Amortization of equity-based compensation granted to employees	-	-	267,940	-	-	267,940
Foreign currency translation adjustments	-	-	-	-	169,492	169,492
Net loss	-	-	-	(4,725,826)	-	(4,725,826)
Balance as of September 30, 2017	10,480,984	$1,048	300,717,861	(294,067,329)	(675,822)	5,975,758