Track Group, Inc. - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 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: 0-23153
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
Number)
|
1215 W. Lakeview Court, Romeoville, Il. 60446
(Address of principal executive offices) (Zip
Code)
(877) 260-2010
(Registrant’s telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer [ ]
|
Accelerated
filer [
]
|
|
Non-accelerated filer [
]
(Do not check if a smaller reporting company)
|
Smaller reporting company [X]
|
|
|
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 Exchange Act). Yes [ ]
No [X]
The number of shares outstanding of the registrant’s common
stock as of August 1, 2017 was 10,480,984.
Track Group, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2017
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
TRACK GROUP, INC. AND SUBSIDIARIES
|
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June 30,
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September 30,
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Assets
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2017
|
2016
|
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Current assets:
|
(Unaudited)
|
|
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Cash
|
$1,893,966
|
$1,769,921
|
|
Accounts
receivable, net of allowance for doubtful accounts of $3,166,215
and $2,335,508, respectively
|
5,847,987
|
6,894,095
|
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Note
receivable, current
|
234,733
|
334,733
|
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Prepaid
expenses and other
|
567,933
|
816,708
|
|
Inventory,
net of reserves of $26,934 and $98,150, respectively
|
210,574
|
521,851
|
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Total
current assets
|
8,755,193
|
10,337,308
|
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Property
and equipment, net of accumulated depreciation of $1,674,800 and
$1,421,389, respectively
|
936,637
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1,226,461
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Monitoring
equipment, net of accumulated amortization of $4,279,008 and
$3,438,074, respectively
|
3,758,926
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4,358,117
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Intangible
assets, net of accumulated amortization of $9,454,908 and
$8,233,659, respectively
|
25,064,504
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25,540,650
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Goodwill
|
8,195,103
|
7,955,876
|
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Other
assets
|
3,099,301
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2,900,911
|
|
Total
assets
|
$49,809,664
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$52,319,323
|
|
|
|
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Liabilities and Stockholders’ Equity
|
|
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Current liabilities:
|
|
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Accounts
payable
|
$2,676,087
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$2,771,101
|
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Accrued
liabilities
|
6,220,197
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3,976,192
|
|
Current
portion of long-term debt, net of discount of $0 and $222,973,
respectively
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62,463
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3,245,732
|
|
Total
current liabilities
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8,958,747
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9,993,025
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Stock
payable - related party
|
-
|
3,289,879
|
|
Long-term
debt, net of current portion and discount of $241,554 and $185,811,
respectively
|
33,645,419
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30,345,803
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Total
liabilities
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42,604,166
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43,628,707
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Stockholders’ equity:
|
|
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Common
stock, $0.0001 par value: 30,000,000 shares authorized;
10,480,984 outstanding at June 30, 2017 and 10,333,516 at September
30, 2016
|
1,048
|
1,034
|
|
Additional
paid-in capital
|
300,607,005
|
298,876,399
|
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Accumulated
deficit
|
(292,794,210)
|
(289,341,503)
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Accumulated
other comprehensive income (loss)
|
(608,345)
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(845,314)
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Total
equity
|
7,205,498
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8,690,616
|
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Total
liabilities and stockholders’ equity
|
$49,809,664
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$52,319,323
|
The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
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June 30,
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June 30,
|
June 30,
|
June 30,
|
|
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2017
|
2016
|
2017
|
2016
|
|
Revenues:
|
|
|
|
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|
Monitoring
services
|
$7,157,424
|
$6,598,128
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$21,577,313
|
$18,947,752
|
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Other
|
193,930
|
156,283
|
665,574
|
716,302
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Total
revenues
|
7,351,354
|
6,754,411
|
22,242,887
|
19,664,054
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Cost of revenues:
|
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|
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Monitoring,
products & other related services
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2,734,920
|
2,462,281
|
8,936,501
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7,060,036
|
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Depreciation
& amortization included in cost of revenues
|
672,562
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488,655
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1,633,629
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1,498,407
|
|
Impairment
of monitoring equipment and parts
|
210,000
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60,000
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344,787
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180,000
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Total
cost of revenue
|
3,617,482
|
3,010,936
|
10,914,917
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8,738,443
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Gross profit
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3,733,872
|
3,743,475
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11,327,970
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10,925,611
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Operating expenses:
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General & administrative
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3,611,903
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3,263,951
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9,142,113
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9,240,935
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(Gain) loss on sale
of assets
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(2,500)
|
-
|
763,531
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-
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Restructuring
costs
|
(1,265)
|
-
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569,135
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-
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Selling & marketing
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572,334
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407,829
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1,786,312
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1,684,130
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Research & development
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292,938
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610,398
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1,460,354
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1,741,285
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Depreciation & amortization
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535,892
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621,311
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1,744,276
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2,055,915
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Total operating expenses
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5,009,302
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4,903,489
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15,465,721
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14,722,265
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Loss from operations
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(1,275,430)
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(1,160,014)
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(4,137,751)
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(3,796,654)
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Other income (expense):
|
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Interest
expense, net
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(672,369)
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(683,482)
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(2,116,805)
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(2,009,399)
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Currency
exchange rate gain (loss)
|
181,966
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18,438
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75,859
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(66,119)
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Gain
on settlement of milestone payments
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3,000,000
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-
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3,213,940
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-
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Other
income, net
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4,934
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41,112
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13,701
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40,393
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Income (loss) before income taxes
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1,239,101
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(1,783,946)
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(2,951,056)
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(5,831,779)
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Income
tax expense
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492,552
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-
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501,651
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-
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Net income (loss) attributable to common shareholders
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746,549
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(1,783,946)
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(3,452,707)
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(5,831,779)
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Foreign
currency translation adjustments
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746,156
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(280,319)
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236,969
|
689,936
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Comprehensive income (loss)
|
$1,492,705
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$(2,064,265)
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$(3,215,738)
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$(5,141,843)
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Basic
and diluted income (loss) per common share
|
$0.07
|
$(0.17)
|
$(0.33)
|
$(0.57)
|
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Weighted
average common shares outstanding, basic and diluted
|
10,486,665
|
10,302,136
|
10,384,566
|
10,277,973
|
The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
(Unaudited)
|
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Nine Months Ended
|
|
|
|
June 30,
|
|
|
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2017
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(3,452,707)
|
$(5,831,779)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
3,377,905
|
3,554,322
|
|
Impairment
of monitoring equipment and parts
|
344,787
|
180,000
|
|
Loss
on disposal of monitoring equipment included in cost of
sales
|
-
|
67,097
|
|
Bad
debt expense
|
903,081
|
844,968
|
|
Amortization
of debt discount
|
167,230
|
167,230
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Common
stock issued for services
|
-
|
60,001
|
|
Stock
based compensation
|
114,352
|
539,275
|
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Vesting
and re-pricing of stock options
|
790,314
|
437,197
|
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Loss
on sale of assets
|
763,531
|
27,419
|
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Gain
on settlement of milestone payments
|
(3,213,940)
|
-
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
243,597
|
(1,430,852)
|
|
Notes
receivable
|
-
|
(28,299)
|
|
Inventories
|
57,700
|
161,159
|
|
Prepaid
expenses and other
|
(190,958)
|
581,451
|
|
Accounts
payable
|
106,547
|
145,774
|
|
Accrued
expenses
|
2,926,074
|
2,489,900
|
|
Net
cash provided by operating activities
|
2,937,513
|
1,964,863
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(35,919)
|
(58,271)
|
|
Capitalized
software
|
(1,933,390)
|
(1,518,800)
|
|
Purchase
of monitoring equipment and parts
|
(1,305,070)
|
(2,315,140)
|
|
Proceeds
from sale of assets
|
512,500
|
-
|
|
Net
cash used in investing activities
|
(2,761,879)
|
(3,892,211)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Principal
payments on notes payable
|
(50,773)
|
(1,003,976)
|
|
Net
cash used in financing activities
|
(50,773)
|
(1,003,976)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(816)
|
36,131
|
|
|
|
|
|
Net increase (decrease) in cash
|
124,045
|
(2,895,193)
|
|
Cash, beginning of period
|
1,769,921
|
4,903,045
|
|
Cash, end of period
|
$1,893,966
|
$2,007,852
|
|
|
|
|
|
|
2017
|
2016
|
|
Cash
paid for interest
|
$18,504
|
$50,614
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Non-cash
transfer of inventory to monitoring equipment
|
309,710
|
133,135
|
The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial information
of Track Group, Inc. and subsidiaries (collectively, the
“Company” or “Track Group”) has been prepared in accordance with the
Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission
(“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information
contains all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the Company’s
financial position as of June 30, 2017, and results of its
operations for the three and nine months ended June 30,
2017. These financial statements should be read in conjunction
with the annual consolidated financial statements and notes thereto
that are included in the Company’s Annual Report on Form 10-K
for the year ended September 30, 2016. The results of
operations for the three and nine months ended June 30, 2017 may
not be indicative of the results for the fiscal year ending
September 30, 2017.
Reclassifications – Certain
reclassifications of amounts previously reported have been made to
the accompanying financial statements to maintain consistency
between periods presented. The reclassifications had no impact on
net income (loss) or shareholders’
equity.
(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the
accounts of Track Group and its subsidiaries. All significant
inter-company transactions have been eliminated in
consolidation. Certain prior year
amounts on the consolidated statement of operations have
been reclassified to conform to the current period
presentation. These reclassifications have no impact on the
previously reported results.
(3) RECENTLY ISSUED ACCOUNTING STANDARDS
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which
are adopted by the Company as of the specified effective date.
Unless otherwise discussed, the Company believes that the impact of
recently issued standards that are not yet effective will not have
a material impact on its financial position or results of
operations upon adoption.
In May 2017, the FASB issued Accounting Standards Update
(“ASU”)
2017-09, Compensation - Stock Compensation: Scope of Modification
Accounting, which provides guidance about which changes to the
terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award. The update
is effective for annual periods beginning after December 15, 2017.
The update is to be adopted prospectively to an award modified on
or after the adoption date. Early adoption is permitted.
Management does not anticipate
that this adoption will have a significant impact on its
consolidated financial position, results of operations, or cash
flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles –
Goodwill and Other: Simplifying the Test for Goodwill
Impairment. The new guidance simplifies the subsequent
measurement of goodwill by removing the second step of the two-step
impairment test. The amendment requires an entity to perform its
annual or interim goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. An entity still
has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is
necessary. The new guidance will be effective for annual periods or
any interim goodwill impairment tests in fiscal years beginning
after December 15, 2019. The amendment should be applied on a
prospective basis. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after
January 1, 2017. Management
does not anticipate that this adoption will have a significant
impact on its consolidated financial position, results of
operations, or cash flows.
In May 2016, the FASB issued ASU 2016-12. The amendments in this
update affect the guidance in Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements for the
amendments in this Update are the same as the effective date and
transition requirements for Topic 606 (and any other Topic amended
by Update 2014-09). Accounting Standards Update 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of the
Effective Date, defers the effective date of Update 2014-09 by one
year. Management is currently evaluating the impact that this
amendment will have on its consolidated financial
statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and
Licensing. This update was intended to clarify two aspects of Topic
606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for
those areas. The effective date for ASU 2016-10 is the same as
Topic 606, which begins for annual reporting periods beginning
after December 15, 2017. Management is currently evaluating the
impact of the pending adoption of ASU 2016-10 on the
Company’s consolidated financial statements.
In March 2016, FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). This update was intended
to improve the operability and understandability of the
implementation guidance on principal versus agent considerations.
The amendments in this update have the same effective date as ASC
606 as discussed above. Management is currently evaluating the
impact of the pending adoption of ASU 2016-08 on the
Company’s consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this update change the
accounting for certain stock-based compensation transactions,
including the income tax consequences and cash flow classification
for applicable transactions. The amendments in this update are
effective for annual periods beginning after December 31, 2016 and
interim periods within those annual periods. Management does
not anticipate that this adoption will have a significant impact on
its consolidated financial position, results of operations, or cash
flows.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 841).
For lessees, the amendments in this update require that for all
leases not considered to be short term, a company recognize both a
lease liability and right-of-use asset on its balance sheet,
representing the obligation to make payments and the right to use
or control the use of a specified asset for the lease term. The
amendments in this update are effective for annual periods
beginning after December 15, 2018 and interim periods within those
annual periods. Management does not anticipate that this
adoption will have a significant impact on its consolidated
financial position, results of operations, or cash
flows.
(4) IMMATERIAL ERROR CORRECTIONS
This Quarterly Report on Form 10-Q of the Company for the period
ended June 30, 2017, includes the revision of the Company's
previously filed consolidated income statements for the three
months and nine months ended June 30, 2016.
Management concluded that the general and administrative section of
the Condensed Consolidated Income Statement contained an error and
that for comparative purposes in 2017 filings, these figures should
be revised but that the adjustments are not material
modifications. Accordingly, the Company has determined that
prior financial statements should be corrected, even though such
revisions are immaterial. Furthermore, the Company has
determined that correcting prior year financial statements for
immaterial changes would not require previously filed reports to be
amended.
Under general and administrative expense, we have
reclassified costs related to repairs and maintenance of monitoring
devices and certain other costs, including installation,
communications and transportation costs that were previously
recorded in general and administrative expense to cost of revenues,
selling and marketing, and research and development. Net income (loss) and shareholders’ equity
were not affected by the reclassification. The effect of these
revisions on the Company's results of operations for the three and
nine months ended June 30, 2016 previously reported are as
follows:
|
|
Three
months ended
June
30,
2016
Previously
Reported
|
Net
Change
|
Three
months ended
June
30,
2016
(Revised)
|
|
Cost of
revenues:
|
|
|
|
|
Monitoring,
products & other related services
|
$2,008,721
|
$453,560
|
$2,462,281
|
|
|
|
|
|
|
Total operating
expense
|
|
|
|
|
General and
administrative expenses
|
3,612,957
|
(349,006)
|
3,263,951
|
|
Selling &
marketing
|
470,829
|
(63,000)
|
407,829
|
|
Research &
development
|
651,952
|
(41,554)
|
610,398
|
|
|
Nine
months ended
June
30,
2016
Previously
Reported
|
Net
Change
|
Nine
months ended
June
30,
2016
(Revised)
|
|
Cost of
revenues:
|
|
|
|
|
Monitoring,
products & other related services
|
$5,781,617
|
$1,278,419
|
$7,060,036
|
|
|
|
|
|
|
Total operating
expense
|
|
|
|
|
General and
administrative expenses
|
10,448,942
|
(1,208,007)
|
9,240,935
|
|
Selling &
marketing
|
1,684,130
|
-
|
1,684,130
|
|
Research &
development
|
1,811,697
|
(70,412)
|
1,741,285
|
(5) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate that the book value of
an asset may not be recoverable and in the case of goodwill, at
least annually. The Company evaluates whether events and
circumstances have occurred which indicate possible impairment as
of each balance sheet date. If the carrying amount of an asset
exceeds its fair value, an impairment charge is recognized for the
amount by which the carrying amount exceeds the estimated fair
value of the asset. Impairment of long-lived assets is
assessed at the lowest levels for which there is an identifiable
fair value that is independent of other groups of assets. The
Company recorded $210,000 and $60,000 of impairment expenses
related to monitoring equipment for the three months ended June 30,
2017 and 2016, respectively. Additionally, the Company recorded
$344,787 and $180,000 of impairment expenses related to monitoring
equipment for the nine months ended June 30, 2017 and 2016,
respectively.
(6) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the
acquisition method of accounting as indicated in ASC 805, Business
Combinations, which requires the acquiring entity in a business
combination to recognize the fair value of all assets acquired,
liabilities assumed, and any non-controlling interest in the
acquiree; and establishes the acquisition date as the fair value
measurement point. Accordingly, the Company recognizes assets
acquired and liabilities assumed in business combinations,
including contingent assets and liabilities and non-controlling
interest in the acquiree, based on fair value estimates as of the
date of acquisition. In accordance with ASC 805, the Company
recognizes and measures goodwill as of the acquisition date, as the
excess of the fair value of the consideration paid over the fair
value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a
business combination is incomplete by the end of the reporting
period in which the combination occurs, but during the allowed
measurement period not to exceed one year from the acquisition
date, the Company retrospectively adjusts the provisional amounts
recognized at the acquisition date, by means of adjusting the
amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company has agreed to pay additional
amounts to sellers contingent upon achievement by the acquired
businesses of certain future goals which may include revenue
milestones, new customer accounts, and earnings targets. The
Company records contingent consideration based on its estimated
fair value as of the date of the acquisition. The Company evaluates
and adjusts the value of contingent consideration, if necessary, at
each reporting period based on the progress toward and likely
achievement of certain targets on which issuance of the contingent
consideration is based. Any differences between the
acquisition-date fair value and the changes in fair value of the
contingent consideration subsequent to the acquisition date are
recognized in current period earnings until the arrangement is
settled. If there is uncertainty surrounding the value of
contingent consideration, then the Company’s policy is to
wait until the end of the measurement period before making an
adjustment.
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive income (loss) includes net income (loss) as currently
reported under U.S. GAAP and other comprehensive income (loss).
Other comprehensive income (loss) considers the effects of
additional economic events, such as foreign currency translation
adjustments, that are not required to be recorded in determining
net income (loss), but rather are reported as a separate component
of stockholders’ equity. The Chilean Peso, New Israeli Shekel
and the Canadian Dollar are used as functional currencies of the
following operating subsidiaries: (i) Track Group Chile SpA; (ii)
Track Group International Ltd.; and (iii) Track Group Analytics
Limited, respectively. The balance sheets of all subsidiaries have
been converted into United States Dollars (USD) at the prevailing
exchange rate at June 30, 2017.
(8) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share
(“Basic
EPS”) is computed by
dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the
period.
Diluted net income (loss) per common share
(“Diluted EPS”) is computed by dividing net income (loss)
attributable to common shareholders by the sum of the
weighted-average number of common shares outstanding and the
weighted-average dilutive common share equivalents
outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an
anti-dilutive effect.
Common share equivalents consist of shares issuable upon the
exercise of common stock options and warrants. As of June 30,
2017 and 2016, there were 479,310 and 450,991 outstanding common
share equivalents, respectively, that were not included in the
computation of Diluted EPS for the three and nine months ended June
30, 2017 and 2016, respectively as their effect would be
anti-dilutive. The common stock equivalents outstanding as of June
30, 2017 and 2016 consisted of the following:
|
|
June 30,
|
June 30,
|
|
|
2017
|
2016
|
|
Exercise
of outstanding common stock options and warrants
|
479,310
|
450,991
|
|
Total
common stock equivalents
|
479,310
|
450,991
|
At June 30, 2017, all stock option and warrant exercise prices are
above the market price of $2.18 and thus have not been included in
the basic earnings per share calculation.
(9) ACQUISITION
On November 26, 2014, the Company entered into a Share Purchase
Agreement to purchase from the shareholders of Track Group
Analytics Limited, formerly G2 Research Limited
(“TGA”), all issued and outstanding shares of TGA
for an aggregate purchase price of up to CAD$4,600,000 (the
“TGA Acquisition”),
of which CAD$2,000,000 was paid in cash to the TGA shareholders on
the Closing Date with the remainder of the purchase price to be
paid as follows: (i) CAD$600,000 to the former TGA shareholders in
shares of common stock of which one-half of the shares were issued
on the one-year anniversary of the closing and the balance was
issued on the two-year anniversary of the closing; and (ii) up to
CAD$2,000,000 to the former TGA shareholders in shares of common
stock over a two-year period beginning as of the closing,
subject to the achievement of certain milestones set forth in the
purchase agreement. The final milestone payment of 10,602 shares of
common stock was paid on January 31, 2017. In total, the Company
has paid approximately USD $956,000 of milestone payments through
stock issuances related to the TGA Acquisition.
The fair value of patents, developed technology, customer
contracts/relationship, tradename and trademarks were capitalized
as of the acquisition date and are amortized using a straight-line
method to depreciation and amortization expense over their
estimated useful lives.
On
March 12, 2014, the Company entered into a Share Purchase Agreement
(the “GPS
GlobalSPA”) to purchase from Eli Sabag, an individual
resident of the State of Israel, all of the issued and outstanding
shares of GPS Global Tracking and Surveillance System Ltd., a
company formed under the laws of and operating in the State of
Israel (“GPS
Global”). The GPS Global SPA contained customary
representations and warranties and covenants, including provisions
for indemnification, subject to the limitations described in the
agreement. Subsequent to the closing, the Mr. Sabag and certain key
employees of GPS Global entered into employment agreements and
continue to operate GPS Global. The GPS Global SPA also granted Mr.
Sabag the right for a three-year period following the closing to
nominate one director to serve on the Company’s board and on
GPS Global’s board of directors. The closing of the
transaction, which occurred on April 1, 2014, was subject to
customary closing conditions. Subsequently, the Company
changed the name of GPS Global to Track Group International Ltd. As
part of the transaction, there was a potential payment of common
stock valued at $3,000,000 which was subject to achieving certain
milestones before April 1, 2017. On
March 30, 2017, the Company informed the seller that neither the
Company nor the seller sold or leased the required number of GPS
tracking devices, under a revenue generating contract, as defined
in the Share Purchase Agreement and no contingent shares had been
earned. See Note 21.
(10) DISPOSITION
On
March 8, 2017, the Company sold certain non-core assets for
$510,000, net, after a payment to a third party for a royalty
repurchase. The Company retained other assets acquired at the time
of the original acquisition of these non-core assets, consisting of
customers generating material revenue, as well as employees
considered critical to the maintenance, development and growth of
the Company’s business and operations. The Company incurred a
loss of $766,031 on the sale, which consists of a sale price of
$860,000, less a third-party royalty buyout payment of $350,000,
$410,105 of equipment, net of accumulated depreciation, and
$865,926 of intangible assets, net of accumulated
amortization.
(11) PREPAID AND OTHER EXPENSES
The carrying amounts reported in the balance sheets for prepaid
expenses and other current assets approximate their fair market
value based on the short-term maturity of these instruments. As of
June 30, 2017, and September 30, 2016, the outstanding balance of
prepaid and other expenses was $567,933 and $816,708,
respectively. The $567,933 as of June 30, 2017 is comprised
largely of prepayments toward inventory purchases, vendor deposits
and other prepaid supplier expenses. The decrease in prepaid and
other expenses at June 30, 2017 was primarily due to lower prepaid
inventory purchases and lower prepaid software
maintenance.
(12) INVENTORY
Inventory is valued at the lower of the cost or market. Cost
is determined using the first-in, first-out
(“FIFO”) method. Market is determined based
on the estimated net realizable value, which generally is the
item’s selling price. Inventory is periodically reviewed
in order to identify obsolete, damaged or impaired
items.
Inventory consists of finished goods that are to be shipped to
customers and parts used for minor repairs of
ReliAlertTM,
Shadow, and other tracking devices. Completed and shipped
ReliAlertTM
and other tracking devices are
reflected in Monitoring Equipment. As of June 30, 2017 and
September 30, 2016, respectively, inventory consisted of the
following:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Finished
goods inventory
|
$237,508
|
$620,001
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(98,150)
|
|
Total
inventory, net of reserves
|
$210,574
|
$521,851
|
(13) PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at June 30,
2017 and September 30, 2016, respectively:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Equipment
and software
|
$1,019,664
|
$1,028,173
|
|
Automobiles
|
68,295
|
87,313
|
|
Leasehold
improvements
|
1,261,344
|
1,279,500
|
|
Furniture
and fixtures
|
262,134
|
252,864
|
|
Total
property and equipment before accumulated depreciation
|
2,611,437
|
2,647,850
|
|
Accumulated
depreciation
|
(1,674,800)
|
(1,421,389)
|
|
Property
and equipment, net of accumulated depreciation
|
$936,637
|
$1,226,461
|
Property and equipment depreciation expense for the three months
ended June 30, 2017 and 2016 was $70,760 and $93,474,
respectively. Depreciation expense for property and
equipment for the nine months ended June 30, 2017 and 2016 was
$248,348 and $482,464, respectively.
(14) MONITORING EQUIPMENT
The following table summarizes monitoring equipment at June 30,
2017 and September 30, 2016, respectively:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Monitoring
equipment
|
$8,037,934
|
$7,796,191
|
|
Less:
accumulated amortization
|
(4,279,008)
|
(3,438,074)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$3,758,926
|
$4,358,117
|
|
|
|
|
The Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is amortized using the straight-line method over an
estimated useful life of one to five years.
Depreciation of monitoring equipment for the three months ended
June 30, 2017 and 2016 was $560,062 and $376,154, respectively.
These expenses were recognized in cost of revenues.
Depreciation of monitoring equipment for the nine months ended June
30, 2017 and 2016 was $1,296,129 and $1,160,907, respectively.
These expenses were recognized in cost of revenues. As part of the
sale of assets described in Note 10, the Company disposed of
$771,568 of monitoring equipment and $361,463 of related
accumulated amortization in the nine months ended June 30,
2017.
(15) INTANGIBLE ASSETS
The following table summarizes intangible assets at June 30, 2017
and September 30, 2016, respectively:
|
|
June 30,
2017
|
September 30,
2016
|
|
Other
intangible assets:
|
|
|
|
Patent
& royalty agreements
|
21,170,565
|
21,170,565
|
|
Technology
|
10,379,196
|
9,651,074
|
|
Customer
relationships
|
2,558,747
|
2,555,086
|
|
Trade
name
|
332,703
|
319,383
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
34,519,412
|
33,774,309
|
|
Accumulated
amortization
|
(9,454,908)
|
(8,233,659)
|
|
Intangible
assets, net of accumulated amortization
|
$25,064,504
|
$25,540,650
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through June 2017. The assets
have useful lives ranging from three to twenty years. Amortization
expense for the three months ended June 30, 2017 and 2016 was
$577,632 and $640,339, respectively. Amortization for the nine
months ended June 30, 2017 and 2016 was $1,833,428 and $1,910,950,
respectively. The Company disposed of $1,600,000 of intangible
assets and $734,074 of accumulated amortization related to the sale
of assets during the three and nine months ended June 30, 2017. See
Note 10.
(16) GOODWILL
The following table summarizes the activity of goodwill at June 30,
2017 and September 30, 2016, respectively:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Balance
- beginning of period
|
$7,955,876
|
$7,782,903
|
|
Effect
of foreign currency translation on goodwill
|
239,227
|
172,973
|
|
Balance
- end of period
|
$8,195,103
|
$7,955,876
|
Goodwill is recognized in connection with acquisition transactions
in accordance with ASC 805. The Company performs an impairment test
for goodwill annually or more frequently if indicators of potential
impairment exist. No impairment of goodwill had been recognized
through June 30, 2017.
(17) OTHER ASSETS
As of June 30, 2017, and September 30, 2016, the outstanding
balance of other assets was $3,099,301 and $2,900,911,
respectively. Other assets are comprised largely of a cash
collateralized performance bond for an international
customer. The Company anticipates this restricted cash will be
unrestricted and available to the Company upon completion of its
relationship with the customer, unless mutually agreed
otherwise.
(18) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of June 30, 2017
and September 30, 2016:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Accrued
payroll, taxes and employee benefits
|
$1,026,825
|
$1,424,812
|
|
Accrued
consulting
|
127,070
|
123,114
|
|
Accrued
taxes - foreign and domestic
|
525,668
|
311,614
|
|
Accrued
board of directors fees
|
-
|
96,000
|
|
Accrued
other expenses
|
406,489
|
160,078
|
|
Accrued
cellular costs
|
177,522
|
84
|
|
Accrued
outside services
|
44,000
|
13,768
|
|
Accrued
restructuring costs
|
63,480
|
-
|
|
Accrued
warranty and manufacturing costs
|
145,000
|
103,441
|
|
Accrued
interest
|
3,704,143
|
1,743,281
|
|
Total
accrued liabilities
|
$6,220,197
|
$3,976,192
|
(19) RESTRUCTURING
In the
first quarter of fiscal year 2017, the Company approved a plan to
restructure its business (the “Restructuring Plan”) to
streamline operations by consolidating its headquarters from Salt
Lake City, Utah into its existing Chicagoland office. The
Restructuring Plan, which is expected to be completed in fiscal
2017, also included outsourcing its monitoring center that allowed
the Company to reduce its headcount significantly, lower future
expenses and improve its ability to align workforce costs with
customer demands. During the first nine months of fiscal 2017, the
Company recognized expenses for the Restructuring Plan of $569,135,
including $435,643 of severance expense and $133,492 of lease and
moving costs, all of which will be paid in fiscal
2017.
Total
fiscal year 2017 restructuring
charges and their utilization are summarized as
follows:
|
|
Employee
-related
|
Other
costs
|
Total
|
|
Liability at
September 30, 2016
|
$-
|
$-
|
$-
|
|
Accrued
expenses
|
435,643
|
133,492
|
$569,135
|
|
Payments
|
(421,104)
|
(84,551)
|
(505,655)
|
|
Liability at June
30, 2017
|
$14,539
|
$48,941
|
$63,480
|
(20)
DEBT OBLIGATIONS
On September 25, 2015, the Company entered into a Loan Agreement
(the “Loan
Agreement”) with one of
the Company’s related parties, Sapinda Asia Limited
(“Sapinda”) to provide the Company with a $5.0
million line of credit that accrues interest at a rate of 3% per
annum for undrawn funds, and 8% per annum for borrowed funds.
Pursuant to the terms and conditions of the Loan Agreement,
available funds may be drawn down at the Company’s request at
any time until the Loan Agreement matures on September 30, 2017
(the “Maturity
Date”), when all borrowed
funds, plus all accrued but unpaid interest will become due and
payable. The Company, however, may elect to satisfy any outstanding
obligations under the Loan Agreement prior to the Maturity Date
without penalties or fees. The Company did not draw on this line of
credit nor did it pay any interest during the nine months ended
June 30, 2017. The undrawn balance of this line of credit at June
30, 2017 was $1,600,356.
On March 13, 2017, the Company and Sapinda entered into Amendment
Number One to the Loan Agreement. Amendment Number One extends the
maturity date of all loans made pursuant to the Loan Agreement to
September 30, 2020. In addition, Amendment Number One eliminates
the requirement that the Company pay Sapinda 3% for any undrawn
funds under the Loan Agreement (the "3%
Interest"), and that the 3%
Interest due Sapinda for all undrawn funds under the Loan Agreement
through March 13, 2017 ("Execution
Date") are forgiven. In
addition, all penalties assessed against Sapinda for failure to
provide funds under the Loan Agreement through the Execution Date
("Lender
Penalties") are forgiven. The
forgiveness by both parties has no effect on the Consolidated
Statement of Operations for the nine months ended June 30, 2017.
Lender Penalties shall begin to accrue again provided Sapinda had
not funded the amount of $1.5 million on or before March 31, 2017.
In breach of Amendment Number One to the Loan Agreement, Sapinda
failed to fund the $1.5 million by March 31, 2017. The Company
formally notified Sapinda of the breach by letter dated April 4,
2017. The Company is again accruing the failure to fund penalties
under Section 6.3 of the Loan Agreement, as amended. Further
advances under the Loan Agreement are not currently expected to be
forthcoming, and therefore no assurances can be given that the
Company will obtain additional funds to which it is entitled under
the Loan Agreement, or that the penalties accruing will ever be
paid.
On May 1, 2016, the Company entered into an unsecured Loan
Agreement with Conrent Invest S.A., acting with respect to its
Compartment Safety III (the “Conrent Loan
Agreement”). Under
the Conrent Loan Agreement, the Company can borrow $5.0
million for working capital, repayment of debt, and operating
purposes. When funded, the unsecured loan will bear interest
at a rate of 8% per annum, payable in arrears semi-annually, with
all principal and accrued unpaid interest due on July 31,
2018. In addition, the Company anticipates paying the lender
an arrangement fee of $112,500 when it receives proceeds from this
loan. As of June 30, 2017, the Company had not received the funds
under the Conrent Loan Agreement and no assurances can be given
that the Company will otherwise be successful in obtaining funds to
which it is entitled under the Conrent Loan
Agreement.
Debt obligations as of June 30, 2017 and September 30, 2016,
respectively, are comprised of the following:
|
|
June
30,
2017
|
September 30,
2016
|
|
Unsecured facility agreement with an entity
whereby, as of June 30, 2015, the Company may borrow up to $30.4
million bearing interest at a rate of 8% per annum, payable in
arrears semi-annually, with all principal and accrued and unpaid
interest due on July 31, 2018. A $1.2 million origination fee was
paid and recorded as a debt discount and will be amortized as
interest expense over the term of the loan. As of June 30, 2017,
the remaining debt discount was $241,554. The Company did
not pay interest on this loan during
the three and nine months ended June 30, 2017.
|
$30,158,446
|
$29,991,216
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5.0 million at 8%
interest per annum on borrowed funds maturing on September 30,
2020.
|
3,399,644
|
3,399,644
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the G2 acquisition.
|
134,240
|
182,002
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
15,552
|
18,673
|
|
|
|
|
|
Total
debt obligations
|
33,707,882
|
33,591,535
|
|
Less
current portion
|
(62,463)
|
(3,245,732)
|
|
Long-term
debt, net of current portion
|
$33,645,419
|
$30,345,803
|
The following table summarizes the Company’s future
maturities of debt obligations, net of the amortization of debt
discounts as of June 30, 2017:
|
Fiscal Year
|
Total
|
|
2017
|
$62,463
|
|
2018
|
30,442,250
|
|
2019
|
42,137
|
|
2020
|
3,402,586
|
|
2021
& thereafter
|
-
|
|
Debt
discount
|
(241,554)
|
|
Total
|
$33,707,882
|
(21) RELATED-PARTY TRANSACTIONS
Related-Party Loan Agreement
On September 25, 2015, the Company entered into the Loan Agreement
with Sapinda, a related party, to provide the Company with a $5.0
million line of credit that accrues interest at a rate of 3% per
annum for undrawn funds, and 8% per annum for borrowed funds.
Pursuant to the terms and conditions of the Loan Agreement,
available funds may be drawn down at the Company’s request at
any time until the Maturity Date, when all borrowed funds, plus all
accrued but unpaid interest will become due and payable. The
Company, however, may elect to satisfy any outstanding obligations
under the Loan Agreement prior to the Maturity Date without
penalties or fees. The Company did not draw on this line of credit
nor did it pay any interest during the nine months ended June 30,
2017. The undrawn balance of this line of credit at June 30, 2017
was $1,600,356.
On March 13, 2017, the Company and Sapinda entered into Amendment
Number One to the Loan Agreement. Amendment Number One extends the
maturity date of all loans made pursuant to the Loan Agreement to
September 30, 2020. In addition, Amendment Number One eliminates
the requirement that the Company pay Sapinda the
3% Interest, and that the
3% Interest due Sapinda for all undrawn funds under the Loan
Agreement through the Execution Date are forgiven. In addition,
Lender Penalties under the Loan Agreement through the Execution
Date are forgiven. Lender Penalties shall begin to accrue again
provided Sapinda has not funded the amount of $1.5 million on or
before March 31, 2017. In breach of Amendment Number One to the
Loan Agreement, Sapinda failed to fund the $1.5 million by March
31, 2017. The Company formally notified Sapinda of the breach by
letter dated April 4, 2017. The Company is again accruing the
failure to fund penalties, amounting to $91,000 at June 30, 2017,
under Section 6.3 of the Loan Agreement, as amended.
Further
advances under the Loan Agreement are not currently expected to be
forthcoming, and therefore no assurances can be given that the
Company will obtain additional funds to which it is entitled under
the Loan Agreement, or that the penalties accruing will ever be
paid.
Stock Payable – Related Party
Changes in the stock payable liability are shown
below:
|
|
June 30,
|
September 30,
|
|
|
2017
|
2016
|
|
Beginning
balance
|
$3,289,879
|
$3,501,410
|
|
Payment of shares for achieving performance
milestones
|
(75,939)
|
(211,531)
|
|
Adjustment to Track
Group Analytics stock payable
|
(213,940)
|
-
|
|
Adjustment
to GPS Global stock payable
|
(3,000,000)
|
-
|
|
Ending
balance
|
$-
|
$3,289,879
|
Shares of common stock valued at up to $3,000,000, in the balance
shown above, could have been earned by the former owner of GPS
Global Tracking and Surveillance System, Ltd., now
a wholly-owned subsidiary of the Company, subject to
achieving certain milestones under the Share Purchase Agreement
dated April 1, 2014. The measurement period of the milestones ended
April 1, 2017. On March 30, 2017, the Company informed the seller
that neither the Company nor the seller sold or leased the required
number of GPS tracking devices, under a revenue generating
contract, as defined in the Share Purchase Agreement and no
contingent shares had been earned. The Company reversed the
$3,000,000 contingent liability in the three months ended June 30,
2017 in “Other Income, net” in the Condensed
Consolidated Statement of Operations.
In connection with the acquisition of TGA (See Note 9), the Company
recognized a liability for stock payable to the former owners of
the entity acquired. In conjunction with the respective purchase
agreements, shares of the Company’s common stock are payable
based on the achievement of certain milestones on or before
November 26, 2016. The final milestone payment of 10,602 shares of
common stock related to the TGA acquisition was paid in the second
fiscal quarter of 2017.
Each of the foregoing related-party transactions was reviewed and
approved by disinterested and independent members of the Company's
Board of Directors.
(22) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of
common stock, $0.0001 par value per share. During the nine months
ended June 30, 2017, the Company issued 94,840 shares of common
stock to Board of Director members for their services in fourth
fiscal quarter of 2016 and the first three quarters of fiscal 2017.
In addition, the Company issued 10,602 shares for achievement of
certain milestones (see Note 9) and 30,323 shares to
employees.
The Company is authorized to issue up to 20,000,000 shares of
preferred stock, $0.0001 par value per share. The Company's Board
of Directors has the authority to amend the Company's Articles of
Incorporation, without further shareholder approval, to designate
and determine, in whole or in part, the preferences, limitations
and relative rights of the preferred stock before any issuance of
the preferred stock, and to create one or more series of preferred
stock. As of June 30, 2017, there were no shares of preferred stock
outstanding.
In
February 2014, the Company offered certain employees a retention
plan which vested evenly over a three-year term. In February 2017,
the Company made its final long-term incentive plan payment to
certain employees of 11,703 shares of common stock and due to the
decrease in the value of common stock and employees no longer with
the Company, recorded a $751,045 reduction of general and
administrative expenses for the nine-month period ended June 30,
2017.
(23) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholders on March 21, 2011, the
shareholders approved the 2012 Equity Compensation Plan (the
“2012
Plan”). The 2012
Plan provides for the grant of incentive stock options and
nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units, other stock-based awards and performance-based awards to
employees and certain non-employees who provide services to the
Company in lieu of cash. A total of 90,000 shares were initially
authorized for issuance pursuant to awards granted under the 2012
Plan. At the 2015 annual meeting of shareholders held on May 19,
2015, our stockholders approved a 713,262 share increase to the
total number of shares authorized under the 2012
Plan. As of June 30,
2017, 38,292 shares of common stock were available for future
grants under the 2012 Plan.
All Options
and Warrants
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
During the nine months ended June 30, 2017 and 2016, the Company
granted 137,268 and 229,528 options and warrants to purchase shares
of common stock under the 2012 Plan. At the Company’s May 11,
2017 Board of Directors meeting, the Board of Directors approved a
resolution extending the expiration date of 573,663 warrants of
five current board members and three members of management that
were granted during the fiscal year 2011 and fiscal years 2013
through 2017. These extensions were between one and five years, did
not affect the exercise price of the grants and resulted in
incremental stock-based compensation of $801,584, of which $790,314
was expensed in the three months ended June 30, 2017. All future
grants of warrants and options will have an expiration period of
five years. The warrants for Board members vest immediately and
warrants issued to employees vest annually over either a two or
three year period after the grant date. Excluding the
incremental stock-based compensation mentioned above, the Company
recorded expense of $154,679 and $160,260 for the nine months ended June 30, 2017 and 2016,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
The option and warrant grants for nine months ended June 30, 2017
were valued using the Black-Scholes model with the following
weighted-average assumptions:
|
|
Nine Months Ended
June 30
|
|
|
|
2017
|
2016
|
|
Expected
stock price volatility
|
121%
|
96%
|
|
Risk-free
interest rate
|
1.89%
|
0.98%
|
|
Expected
life of options/warrants
|
5
years
|
2 Years
|
The expected life of stock options (warrants) represents the period
of time that the stock options or warrants are expected to be
outstanding based on the simplified method allowed under GAAP. The
expected volatility is based on the historical price volatility of
the Company’s common stock. The risk-free interest rate
represents the U.S. Treasury bill rate for the expected life of the
related stock options (warrants). The dividend yield represents the
Company’s anticipated cash dividends over the expected life
of the stock options (warrants).
A summary of stock option activity for the nine months ended June
30, 2017 is presented below:
|
|
Shares Under Option
|
Weighted Average
Exercise
Price
|
Weighted Average
Remaining
Contractual
Life
|
Aggregate Intrinsic
Value
|
|
Outstanding
as of September 30, 2016
|
504,991
|
$10.78
|
1.15 years
|
$182,095
|
|
Granted
|
137,268
|
$3.93
|
|
|
|
Expired/Cancelled
|
(52,949)
|
$(16.16)
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Outstanding
as of June 30, 2017
|
589,310
|
8.71
|
5.14 years
|
$-
|
|
Exercisable
as of June 30, 2017
|
479,310
|
9.84
|
5.26 years
|
$-
|
The intrinsic value of options outstanding and exercisable is based
on the Company’s share price of $2.18 at June 30,
2017.
(24) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary. Interest and penalties related to income tax
liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
For the nine months ended June 30, 2017 and 2016, the Company
incurred a net loss for income tax purposes of $3,452,707 and
$5,831,779, respectively. The amount and ultimate realization
of the benefits from the net operating losses is dependent, in
part, upon the tax laws in effect, the Company's future earnings,
and other future events, the effects of which cannot be
determined. The Company has established a valuation allowance
for all deferred income tax assets not offset by deferred income
tax liabilities due to the uncertainty of their
realization. Accordingly, there is no benefit for income taxes
in the accompanying statements of operations.
In
computing income tax, we recognize an income tax provision in tax
jurisdictions in which we have pre-tax income for the period and
are expecting to generate pre-tax book income during the fiscal
year.
(25) COMMITMENTS AND CONTINGENCIES
Legal Matters
We are, from time to time, involved in various legal proceedings
incidental to the conduct of our business. Historically, the
outcome of all such legal proceedings has not, in the aggregate,
had a material adverse effect on our business, financial condition,
results of operations or liquidity. Other than as set forth below,
there are no additional pending or threatened legal proceedings at
this time.
Lazar Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar
Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in
the 11th Circuit Court in and for Miami-Dade County, Florida
alleging breach of contract with regard to certain Stock Redemption
Agreements. On May 2, 2016, the Court resolved this case in favor
of the Company by granting the Company's motion for Summary
Judgment. The Plaintiffs filed a Notice of Appeal on June 1, 2016
challenging the Court’s ruling on the motion for Summary
Judgment. The Company filed a Response Brief on June 22, 2017.
Plaintiff’s Reply Brief is due August 16, 2017.
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
13, 2017. The Appeal was docketed on July 26, 2017, the
Company’s brief will be filed August 15th. 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. Defendant’s initial
Counter Claims were dismissed, however the Court granted the
Defendant leave to amend. The Amended Counter Claims were filed on
June 23, 2017. Track Group filed a Motion to Dismiss on July 21,
2017. 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 had
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.
The initial arbitration proceeding took place on June 22, 2017.
Depositions will be taken by August 10, 2017. The hearing is
scheduled for September 14 and 15, 2017. 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
filed in District Court of the Third Judicial District in Salt Lake
County, Utah alleging breach of contract, among other causes of
action, related to Mr. Merrill’s termination of employment.
Mr. Merrill is seeking not less than $590,577 plus interest,
attorney fees and costs. Mr. Merrill’s employment with the
Company was terminated effective September 27, 2016. Track Group
filed an Answer with Counter Claims on December 21, 2016. At this
time we are in the initial discovery phase. 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. While the
Company became a part of this suit recently, the case has been
ongoing since the fall of 2016. The court entered a scheduling
order placing a deadline on discovery of December 19, 2017 and on
dispositive motions for January 17, 2018. We will defend the case
vigorously and believe the probability of incurring a material loss
to be remote.
SecureAlert, Inc v. Federal Government of Mexico (Department of the
Interior). On
March 24, 2017, SecureAlert Inc. filed a complaint before the
Federal Administrative Tribunal, 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, we filed an appeal against the decision
of the Federal Administrative Tribunal. The Company will elaborate
our Appeal Brief by August 9, after which time we will await a
ruling.
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
$1,000,000 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 should take place in November. The Company expects the court
to make a decision within three months of the actual hearing
date.
Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et
al. On June 9, 2017 Plaintiff, Pablo Gonzalez-Cruz, filed a
Complaint in the Court of First Instance, San Juan Superior Court,
Commonwealth of Puerto Rico against Track Group, and associated
parties, alleging that his daughter died as a direct and immediate
result of the gross negligence and guilty indifferent actions and
omissions of all the defendants. Plaintiff is requesting damages of
no less than $2.0 million. The Company’s Answer and
Appearance are due by August 14, 2017.
(26) SUBSEQUENT EVENTS
In accordance with the Subsequent Events Topic of the FASB ASC 855,
we have evaluated subsequent events, through the filing date and
noted no subsequent events that are reasonably likely to impact the
financial statements.
__________________________________________________________________________________________
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This Report contains information that constitutes
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934 (“Exchange
Act”). Generally, the statements contained in this
Quarterly Report on Form 10-Q that are not purely historical can be
considered to be “forward-looking
statements.” These statements represent our
expectations, hopes, beliefs, anticipations, commitments,
intentions, and strategies regarding the future. They may be
identified by the use of words or phrases such as
“believes,” “expects,”
“intends,” “anticipates,”
“should,” “plans,” “estimates,”
“projects,” “potential,” and
“will,” among others. Forward-looking statements
include, but are not limited to, statements contained in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations regarding our financial performance,
revenue, and expense levels in the future and the sufficiency of
our existing assets to fund future operations and capital spending
needs. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. These risks and uncertainties include, but are
not limited to, those described in “Risk Factors” in
our most recent Annual Report on Form 10-K, and those described
from time to time in our reports filed with the SEC.
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form
10-K, for the fiscal year ended September 30, 2016, and Current
Reports on Form 8-K that have been filed with the SEC through the
date of this Report. Except as otherwise indicated, as used in this
Report, the terms “the Company,” “Track Group,” “we,” “our,” “us,” refer to Track Group, Inc., a Delaware
corporation.
General
Our
core business is based on the manufacture and leasing of patented
tracking and monitoring solutions to federal, state and local law
enforcement agencies, both in the U.S and abroad, for the
electronic monitoring of offenders and offering unique data
analytics services on a platform-as-a-service (PaaS) business
model. Currently, the Company deploys offender based
management services that combine patented GPS tracking
technologies, fulltime 24/7/365 global monitoring capabilities,
case management, and proprietary data analytics. We offer
customizable tracking solutions that leverage real-time tracking
data, best-practices monitoring, and analytics capabilities to
create complete, end-to-end tracking solutions.
Our devices consist principally of the
ReliAlertTM
product line, which is supplemented by
the Shadow product line. These devices are generally leased on
a daily rate basis and may be combined with our monitoring center
services, proprietary software and data analytics subscription to
provide an end-to-end PaaS.
ReliAlertTM
and
Shadow. Our tracking
devices utilize patented technology and are securely attached
around an offender’s ankle with a tamper resistant strap that
cannot be adjusted or removed without detection, unless by a
supervising officer, and which is activated through services
provided by our monitoring centers. The
ReliAlertTM
and Shadow units are intelligent
devices with integrated computer circuitry, utilizing both GPS and
RF, and constructed from case-hardened plastics designed to
promptly notify the intervention centers of any attempt made to
breach applicable protocols, or to remove or otherwise tamper with
the device or optical strap housing. The
ReliAlertTM
platform also incorporates voice
communication technology that provides officers with 24/7/365 voice
communication with the offenders. Both devices are FCC, CE and
PTCRB certified and protected by numerous patents and
trademarks.
Monitoring Center
Services. Our
monitoring center facilities provide live 24/7/365 monitoring of
all alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, we staff our centers with highly-trained,
bi-lingual individuals. These operators act as an extension of
agency resources receiving alarms, communicating and intervening
with offenders regarding violations, and interacting with
supervision staff, all pursuant to agency-established
protocols. The facilities have redundant power source, battery
back-up and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in the U.S. and Chile. In
addition the Company has assisted in the establishment of
monitoring centers for customers and local partners in other global
locations. During the second fiscal quarter of 2017, the Company
completed its transition of one of its monitoring centers to an
independent vendor, whom we monitor closely. See Note 19 to the
Condensed Consolidated Financial Statements.
Data Analytics
Services. Our
TrackerPAL software, TrackerPAL Mobile, combined with our Data
Analytic analysis tools, provide an integrated platform allowing
case managers and law enforcement officers’ quick access
views of a an offenders travel behavior, mapping, and provide
inference on patterns. Our advanced data analytics service
offers a highly complex predictive reporting mechanism that
combines modern statistical methods, developed using computer
science and used by intelligence agencies that separate noteworthy
events from normal events, rank offender cases according to their
need for supervision, and relate decision-relevant metrics to
benchmarks in real-time.
Strategy
Our
global growth strategy is to continue to expand service offerings
on a subscription basis that empower professionals in security, law
enforcement, corrections and rehabilitation organizations worldwide
with a single-sourced, real-time, end-to-end offender management
solution that integrates reliable intervention technologies to
support re-socialization, monitoring, and predictive analytics for
offenders. In selective circumstances, we will also assist agencies
by operating offender pay programs. To accomplish these objectives,
we have and will continue to innovate and grow our portfolio of
proprietary and non-proprietary real-time monitoring and
intervention products and services. These include GPS, RF, drug and
alcohol testing for offenders, domestic violence applications and
predictive analytics. Given the flexibility of our platform,
our device technology, tracking, monitoring, and analytical
capabilities, we believe that our solutions may apply to other
industry verticals that require tracking, monitoring and predictive
analytics such as those entities responsible for pre-trial
participants or individuals on bail.
Critical Accounting Policies
From
time to time, management reviews and evaluates certain accounting
policies that are considered to be significant in determining our
results of operations and financial position.
A description of the Company’s critical accounting policies
that affect the preparation of the Company’s financial
statements is set forth in the Company’s Annual Report on
Form 10-K for the year ended September 30, 2016. Such policies were
unchanged during the nine months ended June 30, 2017.
The
preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. By their
nature, these judgments are subject to an inherent degree of
uncertainty. We assess the reasonableness of our estimates,
including those related to bad debts, inventories, estimated useful
lives, intangible assets, warranty obligations, product liability,
revenue, legal matters and income taxes. We base our estimates on
historical experience as well as available current information on a
regular basis. Management uses this information to form the
basis for making judgments about the carrying value of assets and
liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
Results of Operations
Three Months Ended June 30, 2017, Compared to Three Months Ended
June 30, 2016
Revenue
For the three months ended June 30, 2017, the
Company recognized revenue from operations of $7,351,354 compared
to $6,754,411 for the three
months ended June 30, 2016, an increase of $596,943 or 9%. The
increase in revenue 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 three months ended June 30, 2017 increased to
$193,930 from $156,283 in the same period in 2016 largely due to
higher sales of consumable items. We will continue to focus on
recurring subscription based opportunities and not equipment
sales.
Cost of Revenue
During the three months ended June 30, 2017, cost
of revenue totaled $3,617,482 compared to cost of revenue during
the three months ended June 30, 2016 of $3,010,936, an increase of
$606,546 or 20%. The increase in cost of
revenue was largely the result of increases in total monitoring and
analytics activity, which drove up outside monitoring costs by $613,537,
communication costs by $152,797, amortization of devices by
$183,907 and impairment of devices of $150,000 and other
incremental revenue related costs, partially offset by lower
monitoring center personnel costs of $417,650.
The
Company is examining ways to lower device manufacturing costs and
increase automation of our software system to offset other
increases in cost of revenue. During the second fiscal quarter of
2017, the Company completed the outsourcing of one of our
monitoring centers to an independent vendor to lower monitoring
costs and improve our ability to align workforce costs with
customer demands.
Depreciation and amortization included in cost of
revenue for the three months ended June 30, 2017 and 2016 totaled
$672,562 and $488,655,
respectively. These costs represent depreciation of
monitoring devices as well as
the amortization of certain royalty agreements. The Company
accelerated depreciation of certain devices in the third quarter of
2017 of $161,406. Devices are depreciated over a
one to five-year useful life. Royalty agreements are being
amortized over a ten year useful life. The Company believes these
lives are appropriate due to rapid changes in electronic monitoring
technology and the corresponding potential for obsolescence.
Management periodically assesses estimates for useful lives of
assets for appropriateness.
Impairment cost for equipment and parts for the three months ended
June 30, 2017 and 2016 were $210,000 and $60,000 for the three
months ended June 30, 2017 and 2016, respectively. These costs
relate to disposal of obsolete inventory, monitoring equipment and
parts as we continue to make significant enhancements to our
various devices and monitoring platform.
Gross Profit and Margin
During the three months ended June 30, 2017, gross
profit totaled $3,733,872, resulting in a gross margin of 51%
compared to $3,743,475 or a
gross margin of 55% during the three months ended June 30,
2016. Absolute gross profit is
approximately flat compared with the three months ended June 30,
2016. The decrease in gross margin percentage is due to the
increase in impairment of devices and accelerated depreciation of
certain devices recognized in the three months ended June 30, 2017,
compared to the same period ended June 30,
2016.
General and Administrative Expense
During the three months ended June 30, 2017,
general and administrative expense totaled $3,611,903 compared to
$3,263,951 for the three months
ended June 30, 2016. The increase of $347,952 or 11% in
general and administrative costs resulted largely from an increase
in stock-based compensation expense of $685,033 primarily due to a
modification of warrants, higher fees and licenses of $277,064,
partially offset by lower bad debt expense of $143,355, lower
business taxes of $181,103, lower recruiting and training expense
of $98,465, lower contract labor of $83,593, lower consulting fees
of $60,456 and lower travel expense of $42,412.
Gain (loss) on Sale of Assets
During
the three months ended June 30, 2017, we had a gain on the sale of
equipment of $2,500.
Restructuring Costs
During the three months ended June 30, 2017, we
recorded a $1,265 reduction of costs related to the relocation of
our headquarters from Salt Lake City, Utah to our existing
Chicagoland office bringing our total expense to $569,135.
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 19 to the Condensed Consolidated Financial
Statements.
Selling and Marketing Expense
During the three months ended June 30, 2017,
selling and marketing expense increased to $572,334 compared to
$407,829 for the three months
ended June 30, 2016. The $164,505, or approximately 40% increase is
largely a result of additional outside services and payroll and
benefits.
Research and Development Expense
During the three months ended June 30, 2017,
research and development expense totaled $292,938 compared to
$610,398 for the three months
ended June 30, 2016, a decrease of $317,460 or approximately 52%.
The $317,460, or approximately 52% decrease largely resulted from
lower outside professional services of $251,800 and lower payroll
and benefits of $35,943. The Company is significantly
enhancing its technology platform to improve the efficiency of its
software, firmware, user interface, and automation. As a result of
these improvements, $905,022 was capitalized as developed
technology during the three months ended June 30, 2017 and
$419,890 was capitalized in the
three months ended June 30, 2016. A portion of these expenses would
have been recognized as research and development expense, absent
the significant enhancements to the technology.
Depreciation and Amortization Expense
During the three months ended June 30, 2017,
depreciation and amortization expense totaled $535,892 compared to
$621,311 for the three months
ended June 30, 2016. The $85,419, or approximately 14% decrease was
largely the result of certain property and equipment assets
becoming fully depreciated.
Other Income and Expense
For the three months ended June 30, 2017, net
interest expense was $672,369 compared to $683,482
for the three months ended June 30,
2016, a decrease of $11,113 or approximately 2%.
The
decrease in net interest expense
resulted primarily from a penalty due from the
lender under the loan agreement, partially offset by a higher
balance due under the Sapinda loan agreement. See Note 20 to the
Condensed Consolidated Financial Statements.
Net Income (Loss) Attributable to Common Shareholders
The Company had net income of $746,549
for the three months ended June 30,
2017, compared to a net loss of $1,783,946 for the three months ended June 30, 2016, an
increase of $2,530,495. This increase in net
income is largely due a gain on settlement of milestone payments,
offset by an increase in income tax expense.
Nine Months Ended June 30, 2017, Compared to Nine Months Ended June
30, 2016
Revenue
For the
nine months ended June 30, 2017, the Company recognized revenues
from operations of $22,242,887, compared to $19,664,054 for the
nine months ended June 30, 2016, an increase of $2,578,833 or
13%. Of these revenues, $21,577,313 and $18,947,752,
respectively, were from monitoring services, an increase of
$2,629,561 or 14%. The increase
in revenue 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 nine months ended June 30, 2017 decreased to
$665,574 from $716,302 in the same period in 2016 largely due to
lower sales of consumable items. We are continuing to focus on
recurring subscription based opportunities and not equipment
sales.
Cost of Revenue
During
the nine months ended June 30, 2017, cost of revenues totaled
$10,914,917 compared to cost of revenues during the nine months
ended June 30, 2016 of $8,738,443, an increase of $2,176,474 or
25%. The increase in cost of
revenue was largely the result of increases in total monitoring and
analytics activity, which drove up outside monitoring costs by $1,368,957,
communication costs by $614,453, repair and maintenance costs by
$371,280, depreciation and amortization by $135,222, impairment
expense of $164,787 and other incremental revenue related costs,
partially offset by lower monitoring center personnel costs of
$619,502.
Depreciation and
amortization included in cost of revenue for the nine months ended
June 30, 2017 and 2016 totaled $1,633,629 and $1,498,407,
respectively. This $135,222 or 9% increase in costs represents an
acceleration of certain monitoring devices, partially offset by a
drop in the depreciation of TrackerPALTM, ReliAlertTM
and other monitoring
devices as well as the amortization of certain royalty
agreements. Devices are depreciated
over a one to five-year useful life. Royalty agreements are being
amortized over a ten year useful life. The Company believes these
lives are appropriate due to rapid changes in electronic monitoring
technology and the corresponding potential for obsolescence.
Management periodically assesses estimates for useful lives of
assets for appropriateness.
Impairment cost for equipment and parts
for the nine months ended June 30, 2017 and 2016 were $344,787 and
$180,000, respectively. These costs relate to
disposal of obsolete inventory, monitoring equipment and parts as
we continue to make significant enhancements to our various devices
and monitoring platform.
Gross Profit and Margin
During
the nine months ended June 30, 2017, gross profit totaled
$11,327,970, or 51% of net revenues compared to $10,925,611, or 56%
of net revenues during the nine months ended June 30,
2016. The increase in
absolute gross profit of $402,359 or 4% is due to higher overall
revenues. The decrease in gross margin is due to the increase in
certain aspects of cost of revenue, including monitoring activity
and communication costs.
General and Administrative Expense
During
the nine months ended June 30, 2017, general and administrative
expense totaled $9,142,113 compared to $9,240,935 for the nine
months ended June 30, 2016. The
decrease of $98,822 or approximately 1% in general and
administrative costs resulted largely from decreases in legal and
professional fees of $440,518, lower contract labor of $251,456,
lower taxes of $185,314 and lower travel expense of $113,927,
partially offset by higher stock-based compensation of $625,600,
higher fees and licenses of $289,060.
Loss on Sale of Assets
During
the nine months ended June 30, 2017, we incurred a loss on the sale
of non-core assets of $763,531. The loss consists of cash received
of $860,000, less a third-party royalty buyout payment of $350,000,
$410,105 of equipment, net of accumulated depreciation, and
$865,926 of intangible assets, net of accumulated amortization and
a gain on the sale of equipment. See Note 10 to the Condensed
Consolidated Financial Statements.
Restructuring Costs
During the nine months ended June 30, 2017, we
recorded $569,135 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 19 to the Condensed Consolidated Financial
Statements.
Selling and Marketing Expense
During
the nine months ended June 30, 2017, selling and marketing expense
totaled $1,786,312 compared to $1,684,130 for the nine months ended
June 30, 2016. The $102,182, or 6%
increase resulted largely from higher outside
services.
Research and Development Expense
During
the nine months ended June 30, 2017, research and development
expense totaled $1,460,354 compared to research and development
expense for the nine months ended June 30, 2016 totaling
$1,741,285, a decrease of $280,931 or 16%. The $280,931 decrease resulted largely from lower
research and development costs, as well as lower outside services.
The Company is significantly enhancing its technology platform to
improve the efficiency of its software, firmware, user interface,
and automation. As a result of these improvements, $1,933,390 was
capitalized as developed technology during the nine months
ended June 30, 2017 and
$1,581,169 was capitalized during the nine months ended June
30, 2016. A portion of these expenses
would have been recognized as research and development expense,
absent the significant enhancements to the
technology.
Depreciation and Amortization Expense
During
the nine months ended June 30, 2017, depreciation and amortization
expense totaled $1,744,276 compared to $2,055,915 for the nine
months ended June 30, 2016. The
$311,639, or approximately 15% decrease was largely the result of
certain property and equipment assets becoming fully
depreciated.
Other Income and Expense
For the nine months ended June 30,
2017, net interest expense was $2,116,805 compared to $2,009,399
for the nine months ended June 30, 2016. The increase in net
interest expense resulted primarily from an increase in the average
loan balance due to Sapinda. See Note 20 to the Condensed
Consolidated Financial Statements.
Net Loss Attributable to Common Shareholders
The
Company had a net loss from continuing operations for the nine
months ended June 30, 2017 totaling $3,452,707 compared to a net
loss of $5,831,779 for the nine months ended June 30,
2016. This decrease in net
loss is largely due to a gain on settlement of milestone payments,
higher gross profit, a decrease in certain operating expenses,
partially offset by an increase in income tax expense,
restructuring costs and loss on sale of assets.
Liquidity and Capital Resources
During prior fiscal
years, to finance the business, the Company has supplemented cash
flows with borrowings under a credit facility, a revolving line of
credit from one of its shareholders, receipt of certain
disgorgement funds, and from the sale and issuance of debt
securities. No such borrowings or sales of equity securities
occurred during the three or nine months ended June 30,
2017.
As of June 30, 2017, the Company had unrestricted
cash of $1,893,966 and working capital deficit of $203,554,
compared to unrestricted cash of $1,769,921 and working
capital of $344,283 as of September 30, 2016. The Company had a net loss of $3,452,707 for the
nine months ended June 30, 2017, which included certain non-cash
items, such as depreciation and amortization, stock-based
compensation, bad debt expense, loss on sale of assets and gain on
settlement of milestone payments. In addition, accounts receivable
was $243,597 lower and accrued expenses increased by $2,926,074, of
which $1,960,862 represents interest payable, for the nine months
ended June 30, 2017.
The
Company provided $2,937,513 of cash from operating activities
during the nine months ended June 30, 2017, compared to $1,964,863
in the nine months ended June 30, 2016, representing an increase of
$972,650 or 50%.
The Company used cash of $2,761,879 for investing
activities during the nine months ended June 30, 2017, compared to
$3,892,211 of cash used in investing activities in the nine months
ended June 30, 2016. Cash used for investing
activities was spent on significant enhancements to the
Company’s next generation software platform and for purchases
of monitoring and other equipment to meet demand during the nine
months ended June 30, 2017. In addition, the Company received
$512,500 from the sale of certain assets.
The
Company used $50,773 of cash for financing activities during the
nine months ended June 30, 2017, compared to $1,003,976 in cash
used in the nine months ended June 30, 2016.
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 the
Company approximately $227,947 for pre-bankruptcy monitoring
services at June 30, 2017, of which the Company has recorded an
allowance for doubtful accounts of $99,690. Since April 3, 2017, we
received payments of approximately $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.
The Company's Restructuring Plan approved in the quarter ended
December 31, 2016 is intended to reduce certain expenses, and
reduce the Company's dependence on external sources of financing.
While the Restructuring Plan is intended to result in a reduction
in operating losses and cash used in operations, the Company
currently remains dependent on external sources of financing to
continue operations. As a result, management intends to pursue
certain options to reduce its dependence on external sources of
capital, which may include refinancing certain debt, extending debt
maturities, converting certain debt to equity, selling certain
non-core assets, further reducing operating costs and/or raising
additional capital, although no assurances can be given that
management will be successful in consummating any of the foregoing.
See Note 21 to the Condensed Consolidated Financial
Statements.
As of
June 30, 2017, excluding interest, $3.4 million and $30.4 million
were owed to Sapinda and Conrent under the Sapinda Loan Agreement
and Conrent Loan Agreement (together, the “Loan Agreements”),
respectively. While management is currently exploring options
to restructure the debt owed under the Loan Agreements, which may
include exchanging debt for equity, no assurances can be given that
management will be successful. Together with available cash and
cash flow from operations, and assuming the Company is able to
re-structure existing debt or exchange certain debt for equity,
management believes that the Company may have adequate working
capital to provide for its working capital requirements through the
remainder of its fiscal year ending September 30, 2017, although no
assurances can be given.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
The
Company footprint extends to several countries outside the United
States, and we intend to continue to examine international
opportunities. As a result, our revenues and results of
operations are affected by fluctuations in currency exchange rates,
interest rates, transfer pricing changes, taxes and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
Foreign Currency Risks
We had $8,110,003 and $7,610,492
in revenue from sources outside the
United States for the nine months ended June 30, 2017 and 2016,
respectively. Although we typically transact the sale of
monitoring equipment and services in U.S. Dollars, we do receive
payments in an equivalent value of foreign currencies which
resulted in foreign exchange gain of $75,859 and an exchange loss
of $66,119 during the nine
months ended June 30, 2017 and 2016, respectively. For the three
months ended June 30, 2017, the Company recorded a foreign currency
translation adjustment of $746,156 largely related to the weakening
of the U.S. dollar versus the Canadian dollar and the New Israeli
Shekel. Changes in foreign 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
did not use foreign currency exchange contracts or derivative
financial instruments for trading 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 hedging instruments in order to minimize
the effects of foreign currency exchange on our
business.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to
ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), (i) is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules
and forms and (ii) is accumulated and communicated to our
management, including the Chief Executive Officer and Chief
Financial Officer (our principal financial and accounting officer),
to allow timely decisions regarding required disclosure. Our
management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures, as such term is defined under
Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange
Act. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of June 30,
2017.
Changes in Internal Controls
We
maintain a system of internal control over financial reporting that
is designed to provide reasonable assurance that our books and
records accurately reflect our transactions and that our
established policies and procedures are followed. There was no
change in our internal control over financial reporting during our
quarter ended June 30, 2017 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER
INFORMATION
We are, from time to time, involved in various legal proceedings
incidental to the conduct of our business. Historically, the
outcome of all such legal proceedings has not, in the aggregate,
had a material adverse effect on our business, financial condition,
results of operations or liquidity. Other than as set forth below,
there are no additional pending or threatened legal proceedings at
this time.
Lazar Leybovich et
al v. SecureAlert, Inc. On March 29, 2012, Lazar
Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in
the 11th Circuit Court in and for Miami-Dade County, Florida
alleging breach of contract with regard to certain Stock Redemption
Agreements. On May 2, 2016, the Court resolved this case in favor
of the Company by granting the Company's motion for Summary
Judgment. The Plaintiffs filed a Notice of Appeal on June 1, 2016
challenging the Court’s ruling on the motion for Summary
Judgment. The Company filed a Response Brief on June 22, 2017.
Plaintiff’s Reply Brief is due August 16, 2017.
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 13, 2017.
The Appeal was docketed on July 26, 2017, the Company’s brief
will be filed August 15th. 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. Defendant’s initial Counter Claims were dismissed,
however the Court granted the Defendant leave to amend. The Amended
Counter Claims were filed on June 23, 2017. Track Group filed a
Motion to Dismiss on July 21, 2017. 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 had 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. The initial arbitration proceeding took
place on June 22, 2017. Depositions will be taken by August 10,
2017. The hearing is scheduled for September 14 and 15, 2017. 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 filed in District Court of the
Third Judicial District in Salt Lake County, Utah alleging breach
of contract, among other causes of action, related to Mr.
Merrill’s termination of employment. Mr. Merrill is seeking
not less than $590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated
effective September 27, 2016. Track Group filed an Answer with
Counter Claims on December 21, 2016. At this time we are in the
initial discovery phase. 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. While the Company became a part of this suit
recently, the case has been ongoing since the fall of 2016. The
court entered a scheduling order placing a deadline on discovery of
December 19, 2017 and on dispositive motions for January 17, 2018.
We will defend the case vigorously and believe the probability of
incurring a material loss to be remote.
SecureAlert, Inc
v. Federal Government of Mexico (Department of the
Interior). On
March 24, 2017, SecureAlert Inc. filed a complaint before the
Federal Administrative Tribunal, 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, we filed an appeal against the decision
of the Federal Administrative Tribunal. The Company will elaborate
our Appeal Brief by August 9, after which time we will await a
ruling.
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 $1,000,000 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 should take place
in November. The Company expects the court to make a decision
within three months of the actual hearing date.
Pablo
Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al. On
June 9, 2017 Plaintiff, Pablo Gonzalez-Cruz, filed a Complaint in
the Court of First Instance, San Juan Superior Court, Commonwealth
of Puerto Rico against Track Group, and associated parties,
alleging that his daughter died as a direct and immediate result of
the gross negligence and guilty indifferent actions and omissions
of all the defendants. Plaintiff is requesting damages of no less
than $2.0 million. The Company’s Answer and Appearance are
due by August 14, 2017.
Item
1A. Risk Factors
We
have identified the following risk factor in addition to the risk
factors previously disclosed in Part I, Item 1A, "Risk Factors" in
our Annual Report on Form 10-K for the year ended September 30,
2016:
We are dependent upon certain customers, contracts with two of
which expire prior to the end of December 31, 2017. If we lose any
of these customers, or our contracts with such customers are not
renewed, our results from operations and business condition may be
materially and adversely affected.
While
we typically enter into long-term contracts for monitoring
services, contracts with two of our customers that together account
for 41% of total sales during the nine months ended June 30, 2017,
and 42% during the three months ended June 30, 2017, expire prior
to December 31, 2017. While we have responded to requests for
proposals to renew such contracts, no assurances can be given that
such contracts will renewed. The loss of any of these
customers may have a material adverse effect on our business,
including our results from operations and financial
condition.
We rely on significant suppliers and other third parties for key
products, cellular access and monitoring services. If
we do not renew these agreements when they expire, or if these
suppliers or other third parties otherwise fail to comply with
their contractual obligations, our results of operations or
financial condition could be adversely affected.
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, as well as
for our offender monitoring services provided to all of our U.S.
and certain of our international customers. If any of these
significant suppliers were to cease providing products or services
to us, or if the service levels fall below levels required by our
customers, 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 or otherwise
addressing the deficiency in service levels would not materially
and adversely affect our business and financial
condition.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon
Senior Securities.
None.
Not
applicable.
Item 5. Other
Information
None.
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(a)
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Exhibits Required by Item 601 of Regulation S-K
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Exhibit Number
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Title of Document
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Certification of Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
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Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
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Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) (filed herewith).
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101.INS
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XBRL INSTANCE DOCUMENT
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101.SCH
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XBRL TAXONOMY EXTENSION SCHEMA
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101.CAL
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XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
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101.DEF
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XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
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101.LAB
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XBRL TAXONOMY EXTENSION LABEL LINKBASE
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101.PRE
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XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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Track Group, Inc.
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Date: August 10, 2017
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By:
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/s/ Guy
Dubois
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Guy Dubois
Principal Executive Officer
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Date: August 10, 2017
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By:
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/s/ Peter K.
Poli
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Peter K. Poli, Chief Financial Officer
(Principal Accounting Officer)
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-30-