Track Group, Inc. - Annual Report: 2018 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2018
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ____________
to ___________
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Commission file number:
000-23153
TRACK GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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87-0543981
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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200 E.
5th Avenue Suite 100
Naperville, Illinois 60563
(Address of principal executive offices, Zip Code)
(877) 260-2010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par
value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [
]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated
filer [
]
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Non-accelerated filer [
]
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Smaller reporting company [X]
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Emerging growth company [ ]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [
]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes
[ ] No [X]
The aggregate market value of the registrant’s Common Stock
held by non-affiliates of the registrant computed by reference to
the closing price on March 31, 2018 was $3.1 million. As of
December 17, 2018, there were 11,401,650 shares of Common Stock
issued and outstanding.
Documents Incorporated by
Reference
The registrant incorporates information required by Part III (Items
10, 11, 12, 13, and 14) of this report by reference to portions of
the registrant’s definitive proxy statement with respect to
its 2019 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after the close
of the fiscal year ended September 30, 2018, pursuant to Regulation
14A.
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Track Group, Inc.
FORM 10-K
For the Fiscal Year Ended September 30, 2018
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual
Report”) contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), relating to our
operations, results of operations, and other matters that are based
on our current expectations, estimates, assumptions, and
projections. Words such as “may,”
“will,” “should,” “likely,”
“anticipates,” “expects,”
“intends,” “plans,” “projects,”
“believes,” “estimates,” and similar
expressions are used to identify these forward-looking
statements. These statements are not guarantees of future
performance and involve risks, uncertainties, and assumptions that
are difficult to predict. Forward-looking statements are based
upon assumptions as to future events that might not prove to be
accurate. Actual outcomes and results could differ materially
from what is expressed or forecast in these forward-looking
statements. Risks, uncertainties, and other factors that might
cause such differences, some of which could be material, include,
but are not limited to the factors discussed under the section of
this Annual Report entitled “Risk
Factors.”
Track Group, Inc., a Delaware corporation since 2016 and previously
incorporated in 1995 as a Utah corporation, has its principal place
of business at 200 E. 5th Avenue Suite 100, Naperville, Illinois 60563. Our
telephone number is (877) 260-2010. We maintain a corporate website
at www.trackgrp.com. Our common stock, par value $0.0001 per
share (“Common
Stock”), is currently
listed for quotation on the OTCQX Premier Marketplace
(“OTCQX”) under the symbol
“TRCK.” Unless specified otherwise, as used in
this Annual Report, “we,” “us,”
“our,” “Track Group” or the
“Company” refer to Track Group, Inc. and its
subsidiaries.
Company Background
The Company designs, manufactures, and markets location tracking
devices and develops and sells a variety of related software,
services, accessories, networking solutions, and monitoring
applications. Our products and services include a full-range of
one-piece GPS tracking devices, a device-agnostic operating system,
a portfolio of software applications including smartphone, alcohol
and predictive analytics, and a variety of accessory, service and
support offerings. Our products and services are currently
available worldwide and are sold through our direct sales force, as
well as through value-added resellers. The Company sells to
government customers on federal, state and local levels in the U.S.
and to members of the Ministry of Justice (MOJ) internationally.
Track Group’s device-agnostic platform and expanded portfolio
of integrated and complimentary monitoring-related services help
reduce risk and make the administration of justice better, faster,
and less expensive for taxpayers. As of September 30, 2018, the
Company’s products and platform were used to monitor over
34,000 individuals globally.
Business Strategy
We are committed to helping our customers improve offender
rehabilitation and re-socialization outcomes through our innovative
hardware, software, and services. We treat our business as a
service business. Although we still manufacture patented tracking
technology, we see the physical goods as only a small part of the
integrated offender monitoring solutions we provide. Accordingly,
rather than receiving a payment just for a piece of manufactured
equipment, the Company receives a recurring stream of revenue for
ongoing device agnostic subscription contracts. As part of our
strategy, we continue to expand our device-agnostic platform
to not only collect, but also store,
analyze, assess and correlate location data for both accountability
and auditing reasons, as well as to use for predictive analytics
and assessment of effective and emerging techniques in criminal
behavior and rehabilitation. We
believe a high-quality customer experience with knowledgeable
salespersons who can convey the value of our products and services
greatly enhances our ability to attract and retain customers.
Therefore, our strategy also includes building and expanding our
own direct sales force and our third-party distribution network to
effectively reach more customers and provide them with a
world-class sales and post-sales support experience. In addition,
we are developing related-service offerings to address adjacent
market opportunities in both the public and private sectors. We
believe continual investment in research and development
(“R&D”), including smartphone applications and
other monitoring services is critical to the development and sale
of innovative technologies and integrated solutions today and in
the future.
Recent Developments
Contract with the Gendarmeria de Chile
On
January 25, 2018, the Company entered into a Monitoring Services
Agreement (the “Gendarmeria
Agreement”) with Gendarmeria de Chile, the Republic of
Chile’s uniform prison service (“Gendarmeria”), for services the
Company began offering to Gendarmeria on October 18, 2017 for a
period of 365 days. As of October 18, 2018, the Gendarmeria
Agreement was automatically extended for periods of 30-days and the
Company anticipates that this option will be exercised by
Gendarmeria for the foreseeable future. Most recently, Gendarmeria
asked the Company’s Chilean subsidiary to extend the maturity
of the performance bond associated with the Gendarmeria
Agreement to July 18, 2019. Furthermore, Gendarmeria will
not make a decision with respect to the Request for Proposal
process until all of the judicial proceedings are complete;
however, management believes that as the
incumbent provider with several years of experience managing a
successful program for the Chilean government, the Company is best
positioned to prevail in such a process.
Conrent Facility Agreement
On July 19, 2018 the Company and Conrent Invest S.A.
(“Conrent”),
acting on behalf of its compartment, Safety 2, amended the facility
agreement originally entered into by and between the parties on
December 30, 2013 (the “Amended
Facility Agreement”), which Amended
Facility Agreement alters certain provisions of the Company’s
existing $30.4 million unsecured debt facility. Effective July 19,
2018, the Amended Facility
Agreement (i) extended the Maturity Date to the earlier of either
April 1, 2019 or the date upon which the Outstanding Principal
Amount, as defined therein, is repaid by the Company, and (ii)
provided that in the event of a Change of Control, as defined
therein, Conrent shall immediately cancel the facility and declare
the Outstanding Principal Amount, together with unpaid interest,
immediately due and payable. On November 14, 2018, the
Company requested that Conrent extend the maturity of the Amended
Facility Agreement from April 1, 2019 to April 1, 2020. On December
3, 2018, Conrent agreed to convene meetings of the investors who
purchased the securities from Conrent to finance the debt (the
“Noteholders”)
and subsequently issued a notice of a meeting of Noteholders for
each series of Notes, which meetings will be held on January 16,
2019. Based on
discussions between the Company and Conrent to date, the Company
anticipates that the Noteholders will agree to extend the maturity
of the Amended Facility Agreement before its maturity on April 1,
2019, however no assurance can be given.
Products and Services
Devices
ReliAlert™XC 3
ReliAlert™XC3 is our flagship GPS device that sets the
standard for reliability and performance in the offender monitoring
industry. Advanced features enable agencies to more effectively
track offender movements and communicate directly with offenders in
real-time, through a patented, on-board two/three-way voice
communication technology. This device includes an enhanced GPS
antenna and GPS module for higher sensitivity GPS, enhanced voice
audio quality, increased battery performance of 50+ hours, 3G
cellular capabilities, improved tamper sensory, and durability
enhancements.
Shadow™
Driven by customer demand to improve the performance and
affordability of offender tracking devices, Shadow™ is the
smallest and lightest device of its kind with a sleek, modern
design featuring an enhanced mobile charging capability that makes
it easier to use. The device is 3G compliant and fully supported by
all global mobility providers.
Operating System Software
TrackerPAL™
TrackerPAL™ is a secure, cloud-based monitoring system
that gives customers the
ability to not only collect, but also store, analyze, assess and
correlate offender data for both accountability and auditing
reasons, as well as to use with predictive analytics applications
and assess criminal behavior and rehabilitation opportunities. The
Company is working on a successor software platform,
IntelliTrackTM
that will be introduced to customers
in a controlled manner throughout the upcoming fiscal
year.
Application Software
TrackerPAL™ Mobile
A mobile application of the TrackerPAL™ software is available
for Android and iOS devices. The Company is also developing a
similar application for IntelliTrackTM.
Data Analytics
Our data analytics services help facilitate the discovery and
communication of meaningful patterns in diverse location and
behavioral data that helps agencies reduce risks and improve
decision making. Our analytics applications use various
combinations of statistical analysis procedures, data and text
mining, and predictive modeling to proactively analyze information
on community-released offenders to discover hidden relationships
and patterns in their behaviors and to predict future
outcomes.
Real-Time Alcohol Monitoring
BACtrack is the world’s first smartphone-based remote alcohol
monitoring system. The award-winning BACtrack Mobile integrates a
smartphone app and police-grade breathalyzer branded for the
Company to bring blood-alcohol content (“BAC”) wirelessly to a mobile device. We can
quickly and easily estimate an enrollee’s BAC and track the
results over time. The smartphone monitoring application allows
supervisors to send scheduled or random notifications to enrollees
to take BAC tests, providing photo/location-verified and time
stamped results. It also includes an onboard calendar, reminding an
enrollee of court dates, testing dates, medications to take,
mandatory events to attend, and other matters.
Victim and Survivor Support
Our Domestic Violence Smartphone Application creates a mobile
geo-zone around a survivor of domestic abuse and communicates with
the offender’s tracking device – providing an
early-warning notification to the survivor if he or she is in
proximity of the offender or group of offenders.
InTouch
InTouch
is a smartphone monitoring and supervision application specifically
designed for the criminal justice market to compliment traditional
Electronic Monitoring Solutions; offering a
“step-up”/“step-down” option from location
monitoring bracelets for community supervised
populations.
Accessories
SecureCuff™
The SecureCuff™ is a patented, optional accessory available
exclusively for ReliAlert™XC3 and is the only uncuttable
strap in the industry specifically made for high-risk offenders.
SecureCuff™ has encased, hardened steel bands that provide
extreme cut-resistance and includes the same fiber-optic technology
as the standard strap for tampering notification.
RF Beacon™
The RF Beacon™ is a completely self-contained, short-range
transmitting station that provides a Radio Frequency (RF) signal
communicating with assigned offender GPS devices to increase the
ability to maintain critical offender location information and
provide agencies with an effective way to more accurately
“tether” an offender to a specific
location.
Product Support and Services
Monitoring Centers
Our monitoring centers provide live 24/7/365 monitoring of all
alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, are staffed with highly trained, bi-lingual
individuals. These operators act as an extension of agency
resources receiving alarms, communicating and intervening with
offenders regarding violations, and interacting with supervision
staff, all pursuant to agency-established protocols. The
facilities have redundant power source, battery backup and triple
redundancy in voice, data, and IP. We have assisted in the
establishment of monitoring centers for customers and local
partners in the United States, Chile and other global
locations.
Customer Care
We offer a range of support options for our customers. These
include assistance that is built into software products, printed
and electronic product manuals, online support including
comprehensive product information, as well as technical
assistance.
Research and Development Program
During the fiscal year ended September 30, 2018, we incurred
research and development expense of $862,142, compared to
$1,784,867 recognized during fiscal year 2017. The $922,725
decrease in research and development cost reflects lower wages and
benefits of $585,641 and lower outside service and consulting
expense of $326,118 as the Company is completing its new technology
platform, which will be introduced to customers in the upcoming
fiscal year. 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,
$1,083,745 was capitalized as developed technology during the year
ended September 30, 2018. A portion of this expense would have been
recognized as research and development expense, absent the
significant enhancements to the technology. This represented a decrease of
$1,333,059 compared to the $2,416,804 capitalized as developed
technology during the year ended September 30,
2017.
Competition
The markets for our products and services are highly competitive
and we are confronted by aggressive competition in all areas of our
business. These markets are characterized by frequent product
introductions and technological advances. Our competitors selling
tracking devices have aggressively cut prices and lowered their
product margins to gain or maintain market share. Our financial
condition and operating results could be adversely affected by
these and other industry-wide downward pressures on gross margins.
Principal competitive factors important to us include price,
product features, relative price/performance, product quality and
reliability, design innovation, a strong software ecosystem,
service and support, and corporate reputation.
Our specific competitors vary from market to market and we compete
against other international, national and regional companies, some
of whom use local partners that have more knowledge of the local
markets and the government decision making process. Some of our
competitors are owned by large public companies and may have access
to more resources than we do, while others are backed by private
equity firms with large funds, or in some cases, work as part of a
consortium with extensive international experience. We expect
competition in these markets to intensify as competitors attempt to
imitate some of the features of our products and applications
within their own products or, alternatively, collaborate with
third-party providers to offer solutions that are more competitive
than those they currently offer.
Competitive Strengths
Relationships with High-Quality Government Customers. We
have developed strong relationships with federal, state and county
customers within the United States and with Ministries of Justice
internationally and managed to bring in new, sizable customers in
the past year.
Industry Leading Analytics Software. Remains a leader with
fully functioning, revenue generating analytics software on the
market today, specifically designed for the offender monitoring
market. Several state
departments of corrections, county probation agencies and
Sheriff’s offices have utilized this solution for multiple
years.
Device Agnostic Software Platform. Our software platform is
device agnostic and currently accommodates offender monitoring of
new products that we introduce, integrates with case management
software utilized by sheriff, probation and pre-trial departments,
and adds devices manufactured by competitors.
Smartphone Monitoring Pioneers in Criminal Justice.
Today’s prison system incarcerates too many individuals who
pose little threat to public safety, at far too great a cost. They
serve their sentences in overcrowded, outdated institutions that
expose them to hardened criminals. Upon release, their
opportunities and lives have changed forever. Now, low-risk
offender populations can serve their sentences virtually, holding
jobs and taking care of family members, yet still feeling the
weight of their punishment while seeing a clear path to avoiding
trouble in the future. Further, taxpayers gain a clear cost
advantage. To date, we have developed apps targeting alcohol
monitoring, domestic violence and our core monitoring
platform.
Experienced Senior Management Team. Our top executives have
extensive experience in both the offender monitoring marketplace
and their specific fields of expertise, whether that be sales,
customer care and/or technology. We also benefit from a diverse and
experienced Board of Directors.
Recurring Revenue. Our revenue is generated in large part by
long-term customer contracts based on the size of the offender
monitoring program throughout each month, which creates a
predictable, recurring revenue stream.
Extensive Product Suite. We have a large variety of
products that appeal to a broad range of government customers and
greatly enhance our ability to attract and retain clients. These
products include different GPS devices, alcohol monitoring devices
and applications, and new smartphone applications including those
that address adjacent market opportunities in both the public and
private sectors and analytics software.
National Footprint with International Presence. We operate in approximately 42
states as well as select international locations, including Chile
and Mexico. Our presence both within the United States and abroad
better positions us to compete for new and expiring government
contracts.
Sources and Availability of Raw Materials
We use various suppliers and contract manufacturers to supply parts
and components for the manufacture and support of our product
lines. Although our intention is to establish at least two sources
of supply for materials whenever possible, for certain components
we have sole or limited source supply arrangements. We may not be
able to procure these components from alternative sources at
acceptable prices and quality within a reasonable time, or at all;
therefore, the risk of loss or interruption of such arrangements
could impact our ability to deliver certain products on a timely
basis.
Dependence on Major Customers
We had sales to entities, two of which represent more than 10% of
our gross revenue, as follows for the years ended September 30,
2018 and 2017, respectively:
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2018
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%
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2017
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%
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Customer
A
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$9,201,502
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30%
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$8,747,338
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29%
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Customer
B
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$3,772,540
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12%
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$3,743,508
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13%
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Customer
C
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$2,468,472
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8%
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$2,326,318
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8%
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No other customer represented more than 10% of our total revenue
for the fiscal years ended September 30, 2018 or
2017.
Concentration of credit risk associated with our total and
outstanding accounts receivable as of September 30, 2018 and 2017,
respectively, are shown in the table below:
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2018
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%
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2017
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%
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Customer
A
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$1,689,976
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29%
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$1,657,316
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30%
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Customer
B
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$594,626
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10%
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$641,973
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12%
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Customer
C
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$428,560
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7%
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$394,253
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7%
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Dependence on Major Suppliers
We purchase cellular services from several major suppliers. The
cost to us for these services during the fiscal years ended
September 30, 2018 and 2017 was $2,075,671 and $2,178,895,
respectively. The 5% decrease in cellular service expense in 2018
compared to 2017 resulted from lower pricing on contracts
negotiated in fiscal 2018, partially offset by increased costs
associated with higher revenue.
During the years ended September 30, 2018 and 2017, we also
purchased a significant portion of our inventory and monitoring
equipment from certain suppliers. The cost of these purchases
during the fiscal years ended September 30, 2018 and 2017 was
$1,305,586 and $1,838,779, respectively. The 29% decrease was due
to the shut-down of numerous 2G cellular networks in 2017, which
required the one-time replacement of these 2G units and decreased
cost of units purchased in 2018.
Intellectual Property
We currently hold rights to patents and copyrights relating to
certain aspects of our hardware devices, accessories, software and
services. We have registered or applied for trademarks and service
marks in the U.S. and a number of foreign countries. Although we
believe the ownership of such patents, copyrights, trademarks and
service marks is an important factor in our business and that our
success does depend in part on the ownership thereof, we rely
primarily on the innovative skills, technical competence and
marketing abilities of our personnel.
We file patent applications as needed to protect
innovations arising from our research, development and design, and
are currently pursuing numerous patent applications around the
world. Over time, we have accumulated a large portfolio of
issued patents around the world. We hold copyrights relating
to certain aspects of our products and services. No single patent
or copyright is solely responsible for protecting our products. We
believe that the duration of our patents is adequate relative to
the expected lives of our products.
Many of our products are designed to include intellectual property
obtained from third parties. It may be necessary in the future to
seek or renew licenses relating to various aspects of our products,
processes and services. Although we have generally been able to
obtain such licenses on commercially reasonable terms in the past,
there is no guarantee that such licenses can be obtained in the
future on reasonable terms, or at all. Because of technological
changes in the industries in which we compete, current extensive
patent coverage and the rapid rate of issuance of new patents, it
is possible that certain components of our products, processes and
services may unknowingly infringe existing patents or intellectual
property rights of others. From time to time, we have been notified
that we may be infringing certain patents or other intellectual
property rights of third parties.
Trademarks. We have
developed and use trademarks in our business, particularly relating
to our corporate and product names. We own ten trademarks that
are registered with the United States Patent and Trademark Office,
plus one trademark registered in Mexico and one in Canada. In
addition, we have the Track Group trademark and design registered
in various countries around the world.
We will file additional applications for the registration of our
trademarks in foreign jurisdictions as our business expands under
current and planned distribution arrangements. Protection of
registered trademarks in some jurisdictions may not be as extensive
as the protection provided by registration in the United
States.
The following table summarizes our trademark
registrations:
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Trademark
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Application
Number
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Registration
Number
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|
Status/
Next
Action
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|
Mobile911 Siren with 2-Way Voice Communication &
Design®
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76/013,886
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2,595,328
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Registered
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TrackerPAL®
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78/843,035
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3,345,878
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Registered
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Mobile911®
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78/851,384
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3,212,937
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Registered
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TrackerPAL®
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CA 1,315,487
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|
749,417
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Registered
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TrackerPAL®
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MX 805,365
|
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960954
|
|
Registered
|
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ReliAlert™
|
|
85/238,049
|
|
4200738
|
|
Registered
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|
SecureCuff™
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|
85/238,058
|
|
4271621
|
|
Registered
|
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SecureAlert™
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86/031,550
|
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4623370
|
|
Registered
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TrackGroup™
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86/301716
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4701636
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Registered
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Track Group™ and Design
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86/469103
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4793747
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Registered
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Track Group™ and Design*
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MP 1257077
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1257077
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Registered
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V-TRCK®
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87/151142
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5330916
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Registered
|
*Track Group™ and Design is also a registered trademark
in the following countries: Europe, Switzerland, Mexico, Canada and
Chile. HomeAware™ and TRUEDETECT™ are registered
trademarks owned by the Company; however, they are no longer in
use.
Patents. We have 12 patents issued in the United
States. At foreign patent offices, we have eight patents
issued and four patents pending.
The following tables summarize information regarding our patents
and patent applications. There are no assurances given that
the pending applications will be granted or that they will, if
granted, contain all of the claims currently included in the
applications.
|
US Patents
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|
Application
Serial No.
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Date Filed
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Patent No.
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Issue Date
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Remote Tracking and Communication Device
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11/202427
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10-Aug-05
|
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7330122
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12-Feb-08
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Remote Tracking and Communications Device
|
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12/028088
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|
8-Feb-08
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7804412
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|
28-Sep-10
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|
Remote Tracking and Communications Device
|
|
12/875,988
|
|
3-Sep-10
|
|
8031077
|
|
4-Oct-11
|
|
Alarm and Alarm Management System for Remote Tracking
Devices
|
|
11/486992
|
|
14-Jul-06
|
|
7737841
|
|
15-Jun-10
|
|
Alarm and Alarm Management System for Remote Tracking
Devices
|
|
12/792,572
|
|
2-Jun-10
|
|
8013736
|
|
6-Sep-11
|
|
A Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
|
|
11/486989
|
|
14-Jul-06
|
|
8797210
|
|
5-Aug-14
|
|
A Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
|
|
14/323,831
|
|
3-Jul-14
|
|
9491289
|
|
8-Nov-16
|
|
A Remote Tracking System with a Dedicated Monitoring
Center
|
|
11/486976
|
|
14-Jul-06
|
|
7936262
|
|
3-May-11
|
|
Remote Tracking System and Device With Variable Sampling and
Sending Capabilities Based on Environmental Factors
|
|
11/486991
|
|
14-Jul-06
|
|
7545318
|
|
9-Jun-09
|
|
Tracking Device Incorporating Enhanced Security Mounting
Strap
|
|
12/818,453
|
|
18-Jun-10
|
|
8,514,070
|
|
20-Aug-13
|
|
Tracking Device Incorporating Cuff with Cut Resistant
Materials
|
|
14/307,260
|
|
17-Jun-14
|
|
9129504
|
|
8-Sep-15
|
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device
|
|
12/399151
|
|
6-Mar-09
|
|
8232876
|
|
31-Jul-12
|
|
International Patents
|
|
Application
Serial No.
|
|
Date Filed
|
|
Patent No.
|
|
Issue Date
|
|
Remote Tracking and Communication Device - Brazil
|
|
PI0614742.9
|
|
4-Aug-06
|
|
|
|
Pending
|
|
Remote Tracking and Communication Device - Canada
|
|
2617923
|
|
4-Aug-06
|
|
2617923
|
|
7-Jun-16
|
|
Remote Tracking and Communication Device - Mexico
|
|
MX/a/2008/001932
|
|
4-Aug-06
|
|
278405
|
|
24-Aug-10
|
|
Secure Strap Mounting System for an Offender Tracking Device -
EPO
|
|
10009091.9
|
|
9-Jan-10
|
|
|
|
Pending
|
|
Secure Strap Mounting System for an Offender Tracking Device -
Brazil
|
|
PI11001593
|
|
28-Feb-11
|
|
|
|
Pending
|
|
Secure Strap Mounting System for an Offender Tracking Device -
Mexico
|
|
MX/a/2011/002283
|
|
28-Feb-11
|
|
319057
|
|
4-Apr-14
|
|
Secure
Strap Mounting System For an Offender Tracking Device -
Canada
|
|
2732654
|
|
25-Oct-13
|
|
2732654
|
|
1-May-18
|
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Brazil
|
|
PI0909172-6
|
|
1-Sep-10
|
|
|
|
Pending
|
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Canada
|
|
2717866
|
|
3-Sep-10
|
|
2717866
|
|
17-May-16
|
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - EPO
|
|
09 716 860.3
|
|
6-Oct-10
|
|
2260482
|
|
9-Jan-13
|
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - United Kingdom
|
|
Refer to EP Patent # 2260482
|
||||||
|
A System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Mexico
|
|
MX/a/2010/009680
|
|
2-Sep-10
|
|
306920
|
|
22-Jan-13
|
Trade Secrets. We
own certain intellectual property, including trade secrets, which
we seek to protect, in part, through confidentiality agreements
with employees and other parties. Even where these agreements
exist, there can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or
independently developed by competitors.
We intend to protect our legal rights concerning intellectual
property by all appropriate legal action. Consequently, we may
become involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing
proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical
personnel.
Government Regulation
Our operations are subject to various federal, state, local and
international laws and regulations.
In October 2018, through an internal review of our export
compliance, it came to our attention that some of our products may
not have been properly classified in the past, and that our export
of certain products, software and technology may be subject to
export licensing requirements of which we were not previously
aware. As a result of these findings, we have hired independent
counsel to assist in, among other things, an investigation with
respect to our past export practices and analyzing our
classification of products, software and technology. In addition,
on October 16, 2018, we voluntarily self-disclosed the information
above to the Bureau of Industry and Security
(“BIS”), and we have taken steps to obtain
licenses for the export of certain of our products, software and
technology to certain countries. Should the BIS determine that we
did violate applicable export regulations, the BIS may, in its
discretion, impose certain fines on us for such violations, which
may have a material adverse effect on our business, financial
condition and results of operations. It is currently unknown
whether we may face any penalties.
Other than our potential violations of licensing requirements
related to our exports, as disclosed above, we are not involved in
any pending or, to our knowledge, threatened governmental
proceedings, which would require curtailment of our operations
because of such laws and regulations.
Seasonality
Given the consistency in recurring domestic monitoring revenue by
customers throughout fiscal 2018, we detected no apparent
seasonality in our business. However, as in previous years,
incremental domestic device deployment opportunities typically slow
down in the months of July and August. We believe this is due to
the unavailability of judicial and corrections officials who
observe a traditional vacation season during this
period.
Employees
As of December 3, 2018, we had 159 full-time employees and 1
part-time employee. None of the employees are represented by a
labor union or subject to a collective bargaining
agreement. We have never experienced a work stoppage and
management believes that relations with employees are
good.
Additional Available Information
We make available, free of charge, at our corporate website
(www.trackgrp.com) copies of our annual reports filed with the
United States Securities and Exchange Commission
(“SEC”) on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements,
and all amendments to these reports, as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act. We also provide copies of our Forms 8-K, 10-K,
10-Q, and proxy statements at no charge to investors upon
request.
All reports filed by us with the SEC are available free of charge
via EDGAR through the SEC website at www.sec.gov. In addition, the
public may read and copy materials we have filed with the SEC at
the SEC’s Public Reference Room located at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
Our business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this Annual Report, including our financial statements and related
notes, before you decide to invest in our Common Stock. If any of
the following risks or uncertainties actually occur, our business,
results of operations or financial condition could be materially
harmed, the trading price of our Common Stock could decline and you
could lose all or part of your investment. The risks and
uncertainties described below are those that we currently believe
may materially affect us; however, they may not be the only ones
that we face. Additional risks and uncertainties of which we are
unaware or currently deem immaterial may also become important
factors that may harm our business. Except as required by law, we
undertake no obligations to update any risk factors.
Risks Related to Our Business, Operations and
Industry
We face risks related to our substantial indebtedness, including
risk related to the repayment of our short-term
indebtedness.
As of September 30, 2018, we had $33,866,785 of indebtedness
outstanding, of which approximately $30,437,810 becomes due and
payable within the next 12 months, including $30,400,000 which
matures on April 1, 2019. Our significant indebtedness could
adversely affect our ability to raise additional capital to fund
our operations, make interest payments as they come due, limit our
ability to react to changes in the economy or our industry, and
prevent us from meeting our obligations under our outstanding debt
instruments. As a result, we will have to raise additional
capital or restructure such indebtedness during the next six
months, and no assurances can be given that we may be successful in
that regard. See “Recent Developments” and Note 15
to the Consolidated Financial Statements.
Our high degree of leverage could have adverse consequences to
us, including:
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making it more difficult for us to make payments on our
debt;
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increasing our vulnerability to general economic and industry
conditions;
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requiring a substantial portion of cash flow from operations to be
dedicated to the payment of principal and interest on our debt,
thereby reducing our ability to use our cash flow to fund our
operations, capital expenditures, and future business
opportunities;
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restricting us from making strategic acquisitions or causing us to
make non-strategic divestitures;
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limiting our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions, and general corporate or other
purposes; and
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limiting our ability to adjust to changing market conditions and
placing us at a competitive disadvantage compared to our
competitors who may be less highly leveraged.
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We will not be able to generate sufficient cash to service all of
our indebtedness, and may be forced to take other actions to
satisfy our obligations under our indebtedness, which may not be
successful.
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial condition and operating
performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business and other
factors beyond our control. While we are currently negotiating
to extend the maturity of our indebtedness, no assurances can be
given that we will be successful, and we cannot assure you that we
will maintain a level of cash flows sufficient to permit us to pay
the principal, premium, if any, and interest on our
indebtedness.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, sell assets, seek additional
capital, or restructure or refinance our indebtedness.
These alternative measures may not be successful and may not permit
us to meet our scheduled debt service obligations. In the absence
of such operating results and resources, we could face substantial
liquidity difficulties and might be required to dispose of material
assets or operations to meet our debt service and other
obligations. We may not be able to consummate those
dispositions or the proceeds that we realize from them may not be
adequate to meet the debt service obligations then
due.
There is no certainty that the market will continue to accept or
expand the use of our products and services.
Our targeted markets may be slow to, or may never, expand the use
of our products or services. Governmental organizations may
not use our products unless they determine, based on experience,
advertising or other factors, that our products are a preferable
alternative to other available methods of tracking or
incarceration. In addition, decisions to adopt new tracking
devices can be influenced by government administrators, regulatory
factors, and other factors largely outside of our control. No
assurance can be given that key decision-makers will continue to
accept or expand the use of our products, and if they do not, it
could have a material adverse effect on our business, financial
condition and results of operations.
Budgetary issues faced by government agencies could adversely
impact our future revenue.
Our revenue is primarily derived from contracts with state, local
and county government agencies in the United States and governments
of Caribbean and Latin American nations. Many of these
government agencies are experiencing budget deficits and may
continue to do so. As a result, we may experience delays in
payment on customer invoices, the amount spent by our current
clients on equipment and services that we supply may be reduced or
grow at rates slower than anticipated, and it may be more difficult
to attract additional government clients. In light of the
recent hurricanes, and the destruction sustained by many Caribbean
countries, this is of increasing risk. Furthermore, the industry
has experienced a general decline in average daily lease rates for
GPS tracking devices. As a result of these factors, our
ability to maintain or increase our revenue may be negatively
affected.
We rely on significant suppliers for key products and cellular
access. If we do not renew these agreements when they
expire, we may not continue to have access to these
suppliers’ products or services at favorable prices or in
volumes as we have in the past, which could adversely affect our
results of operations or financial condition.
We have entered into agreements with several national providers for
cellular services. We also currently rely on a single source for
the large majority of the manufacturing of our devices. If any
of these significant suppliers were to cease providing products or
services to us, we would be required to seek alternative sources.
No assurances can be given that alternate sources could be located
or that the delay or additional expense associated with locating
alternative sources for these products or services would not
materially and adversely affect our business and financial
condition.
Our research, development, marketing and export activities are
subject to government regulations. The cost of compliance or the
failure to comply with these regulations could adversely affect our
business, results of operations and financial
condition.
In October 2018, through an internal review of our export
compliance, it came to our attention that some of our products may
not have been properly classified in the past, and that our export
of certain products, software and technology may be subject to
export licensing requirements of which we were not previously
aware. As a result of these findings, we have hired independent
counsel to assist in, among other things, an investigation with
respect to our past export practices and analyzing our
classification of products, software and technology. In addition,
on October 16, 2018, we voluntarily self-disclosed our potential
former violation of the applicable export licensing requirements to
the Bureau of Industry and Security (“BIS”), and we have taken steps to obtain
licenses for the export of certain of our products, software and
technology to certain countries. Should the BIS determine that we
violated applicable export regulations, the BIS may, in its
discretion, impose certain fines on us for such violations, which
may have a material adverse effect on our business, financial
condition and results of operations. It is currently unknown
whether we may face any penalties.
In addition, there can be no assurance that changes in the legal or
regulatory framework or other subsequent developments will not
result in limitation, suspension or revocation of regulatory
approvals granted to us. Any such events, were they to occur, could
have a material adverse effect on our business, financial condition
and results of operations. We are required to comply with
regulations for manufacturing and export practices, which mandate
procedures for extensive control and documentation of product
design, control and validation of the manufacturing process and
overall product quality. If we, our management or our third-party
manufacturers fail to comply with applicable regulations regarding
these manufacturing practices, we could be subject to a number of
sanctions, including fines, injunctions, civil penalties, delays,
suspensions or withdrawals of market approval, seizures or recalls
of product, operating restrictions and, in some cases, criminal
prosecutions.
We face intense competition, including competition from entities
that are more established and may have greater financial resources
than we do, which may make it difficult for us to establish and
maintain a viable market presence.
Our current and expected markets are rapidly
changing. Although we believe our technology has advantages
over competing systems, there can be no assurance that those
advantages are significant. Many of our competitors have
products or techniques approved or in development and operate
large, well-funded research and development programs in the
field. Moreover, competitors may be in the process of
developing technology that could be developed more quickly or
ultimately be more effective than our products. There can be
no assurance that our competitors will not develop more effective
or more affordable products, or achieve earlier patent protection
or product commercialization.
We are dependent upon certain customers, the loss of which may
adversely affect our results of operations and business
condition.
During fiscal year 2018, three of our customers accounted for an
aggregate of 51% of total sales. One of these contracts is
currently being extended on a month to month basis and one of these
contracts expires within the next fiscal year. Failure to renew
these contracts, resulting in the loss of any of these
customers, may have a material adverse effect on our business (See
Note 2 to the Consolidated Financial Statements).
Our business plan is subject to the risks of technological
uncertainty, which may result in our products failing to be
competitive or readily accepted by our target markets.
There can be no assurance that our research and development efforts
will be successful. In addition, the technology that we
integrate or that we may expect to integrate with our product and
service offerings is rapidly changing and developing. We face
risks associated with the possibility that our technology may not
function as intended and the possible obsolescence of our
technology and the risks of delay in the further development of our
own technologies. Cellular coverage is not uniform throughout our
current and targeted markets. GPS technology depends upon
“line-of-sight” access to satellite signals used to
locate the user, which, under some circumstances, may limit the
effectiveness of GPS tracking.
We face risks of litigation and regulatory investigation and
actions in connection with our operations.
Lawsuits, including regulatory actions, may seek recovery of large,
indeterminate amounts or otherwise limit our operations, and their
existence and magnitude may remain unknown for substantial periods
of time. Relevant authorities in the markets in which we
operate may investigate us in the future. These investigations may
result in significant penalties in multiple jurisdictions, and we
may become involved in disputes with private parties seeking
compensation for damages resulting from the relevant violations.
Such legal liability or regulatory action could have a material
adverse effect on our business, results of operations, financial
condition, cash flows, reputation and credibility. In
addition, our business activities are subject to various
governmental regulations in countries where we operate, which
include investment approvals, export regulations, tariffs,
antitrust, anti-bribery, intellectual property, consumer and
business taxation, foreign trade, exchange controls, and
environmental and recycling requirements. These regulations limit,
and other new or amended regulations may further limit, our
business activities or increase operating costs. In addition, the
enforcement of such regulations, including the imposition of fines
or surcharges for violation of such regulations, may adversely
affect our results of operations, financial condition, cash flows,
reputation and credibility.
Our products are subject to the risks and uncertainties associated
with the protection of intellectual property and related
proprietary rights.
We believe that our success depends in part on our ability to
obtain and enforce patents, maintain trade secrets and operate
without infringing on the proprietary rights of others, both in the
United States and in other countries. Our inability to obtain
or to maintain patents on our key products could adversely affect
our business. We currently own 20 patents issued and have filed and
may file additional patent applications in the United States and in
key foreign jurisdictions relating to our technologies,
improvements to those technologies, and for specific products we
may develop. There can be no assurance that patents will issue
on any of these applications or that, if issued, any patents will
not be challenged, invalidated or circumvented. The
enforcement of patent rights can be uncertain and involves complex
legal and factual questions. The scope and enforceability of
patent claims are not systematically predictable with absolute
accuracy. The strength of our own patent rights depends, in
part, upon the breadth and scope of protection provided by the
patent and the validity of our patents, if any.
Our success will also depend, in part, on our ability to avoid
infringing the patent rights of others. We must also avoid any
material breach of technology licenses we may enter into with
respect to our new products and services. Existing patent and
license rights may require us to alter the designs of our products
or processes, obtain licenses or cease certain activities. If
patents have been issued to others that contain competitive or
conflicting claims and such claims are ultimately determined to be
valid and superior to our own, we may be required to obtain
licenses to those patents or to develop or obtain alternative
technology. If any licenses are required, there can be no
assurance given that we will be able to obtain any necessary
licenses on commercially favorable terms, if at all. Any
breach of an existing license or failure to obtain a license to any
technology that may be necessary in order to commercialize our
products may have a material adverse impact on our business,
results of operations and financial condition.
We also rely on trade secrets laws to protect portions of our
technology for which patent protection has not yet been pursued or
is not believed to be appropriate or obtainable. These laws
may protect us against the unlawful or unpermitted disclosure of
any information of a confidential and proprietary nature, including
but not limited to our know-how, trade secrets, methods of
operation, names and information relating to vendors or suppliers,
and customer names and addresses. We seek to protect this
un-patentable and unpatented proprietary technology and processes,
in addition to other confidential and proprietary information in
part, by entering into confidentiality agreements with employees,
collaborative partners, consultants, and certain
contractors. There can be no assurance that these agreements
will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and other confidential and
proprietary information will not otherwise become known or be
independently discovered or reverse-engineered by
competitors.
We conduct business internationally with a variety of sovereign
governments.
Our business is subject to a variety of regulations and political
interests that could affect the timing of payment for services and
the duration of our contracts. We face the risk of systems
interruptions and capacity constraints, possibly resulting in
adverse publicity, revenue loss and erosion of customer trust. The
satisfactory performance, reliability and availability of our
network infrastructure are critical to our reputation and our
ability to attract and retain customers and to maintain adequate
customer service levels. In addition, because our customers in
these foreign jurisdictions are sovereign governments or
governmental departments or agencies, it may be difficult for us to
enforce our agreements with them in the event of a breach of those
agreements, including, but not limited to, the failure to pay for
services rendered or to complete projects that we have
commenced.
We may experience temporary service interruptions for a variety of
reasons, including telecommunications or power failures, fire,
water damage, vandalism, computer bugs or viruses, malicious
cyber-attacks or hardware failures.
Any service interruption that results in the unavailability of our
system or reduces its capacity could result in real or perceived
public safety issues that may affect customer confidence in our
services. Historically, we have experienced temporary
interruptions of telecommunications or power outages, which were
promptly mitigated, although Hurricane Maria in 2017 presented even
greater challenges in Puerto Rico, including into the 2018 fiscal
year. Such instances may result in loss of customer accounts
or similar problems if they occur again in the future. Given
rapidly changing technologies, we are not certain that we will be
able to adapt the use of our services to permit, upgrade, and
expand our systems or to integrate smoothly with new
technologies. Network and information systems and other
technologies are critical to our business activities. Network
and information systems-related events, including those caused by
us, our service providers or by third parties, such as computer
hacking, cyber-attacks, computer viruses, or other destructive or
disruptive software, process breakdowns, denial of service attacks,
malicious social engineering or other malicious activities, or any
combination of the foregoing could result in a degradation or
disruption of our services. These types of events could result
in a loss of customers and large expenditures to repair or replace
the damaged properties, networks or information systems or to
protect them from similar events.
We currently have one independent director sitting on our Board of
Directors.
Our Board of Directors is currently comprised of three
members, two of which would not be considered independent
under the rules of the Nasdaq Capital Market and the
OTCMarkets. Additionally, we no longer maintain separate
audit, compensation or nominating and governance committees, the
duties of which are fulfilled by our entire Board of
Directors. The rules of the OTCMarkets require that
companies whose securities are listed for quotation on the OTCQX
have a board of directors comprised of at least two
independent directors. In the event we fail to appoint an
additional independent director on or before May 31,
2019, our Common Stock will no longer be
eligible for quotation on the OTCQX, resulting in the quotation of
our Common Stock on an alternative market, such as
the OTC Pink Marketplace. Such change may affect the
number and type of investors eligible to purchase our
Common Stock. As a result, the price of our Common Stock may
be adversely affected.
Risks Related to Acquisitions
The success of our business depends on achieving our strategic
objectives, including acquisitions, dispositions and
restructurings.
Our acquisitions, as well as potential restructuring actions, may
not achieve expected returns and other benefits as a result of
various factors, including integration and collaboration
challenges, such as personnel and technology. In addition, we may
not achieve anticipated cost savings from restructuring actions,
which could result in lower operating margins. If we decide to sell
assets or a business, we may encounter difficulty in finding buyers
or alternative exit strategies on acceptable terms in a timely
manner, which could delay the accomplishment of our strategic
objectives. After reaching an agreement with a buyer or seller for
the acquisition or disposition of a business, we are subject to
satisfaction of pre-closing conditions as well as to necessary
regulatory and governmental approvals on acceptable terms, which
may prevent us from completing the transaction.
We may not be able to grow successfully through our recent
acquisitions or through future acquisitions, we may not
successfully manage future growth, and we may not be able to
effectively integrate businesses that we may acquire.
We plan to continue to grow organically as well as through
strategic acquisitions of other businesses. In order to
complete acquisitions, we would expect to require additional debt
and/or equity financing, which may increase our interest expense,
leverage, and the number of shares of our Common Stock or other
securities outstanding. Businesses that we acquire may not
perform as expected. Future revenue, profits and cash flows of an
acquired business may not materialize due to the failure or
inability to capture expected synergies, increased competition,
regulatory issues, changes in market conditions, or other factors
beyond our control. In addition, we may not be successful in
integrating these acquisitions into our existing operations.
Competition for acquisition opportunities may escalate, increasing
our cost of making further acquisitions or causing us to refrain
from making additional acquisitions. Additional risks related
to acquisitions include, but are not limited to:
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the potential disruption of our existing business;
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entering new markets or industries in which we have limited prior
experience;
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difficulties integrating and retaining key management, sales,
research and development, production and other personnel or
diversion of management attention from ongoing business concerns to
integration matters;
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difficulties integrating or expanding information technology
systems and other business processes or administrative
infrastructures to accommodate the acquired
businesses;
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complexities associated with managing the combined businesses due
to multiple physical locations;
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risks associated with integrating financial reporting and internal
control systems; and
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whether any necessary additional debt or equity financing will be
available on terms acceptable to us, or at all, and the impact of
such financing on our operating performance and results of
operations.
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Risks Related to International Operations
We are exposed to fluctuations in currency exchange
rates.
Our financial results are reported in U.S. dollars, but operations
are conducted internationally. Currency exchange rates have, and
may continue to have, a significant impact on our operating
results. We do not utilize hedging techniques to minimize our
exposure. As a result, an investment in our Common Stock may expose
shareholders to fluctuations in exchange rates.
The dollar cost of our operations internationally could increase as
a result of increases or decreases in the rate of inflation or
devaluation of the local currency in relation to the dollar, which
may harm our results of operations.
The dollar cost of our international operations is expected to be
influenced by any increase in inflation that is not offset by the
devaluation of the local currency in relation to the dollar. As a
result, we are exposed to the risk that foreign currencies will
appreciate in relation to the dollar. We cannot predict whether the
foreign currencies will appreciate or depreciate against the dollar
in the future.
International political, economic and military instability may
impede our ability to execute our plan of
operations.
Political, economic and military conditions, both domestic and
abroad, may affect our business. We cannot predict whether or in
what manner these problems may occur. Acts of random terrorism
periodically occur, which could affect our operations or
personnel. Ongoing or revived hostilities or other factors
could harm our operations and could impede our ability to execute
our plan of operations. Natural disasters, such as the hurricanes
in the Caribbean in 2017, could render our affected customers
financially unable to continue making payments or using our
services. Moreover, in order to effectively compete in certain
foreign jurisdictions, it is frequently necessary or required to
establish joint ventures, strategic alliances or marketing
arrangements with local operators, partners or agents. Reliance on
local operators, partners or agents could expose us to the risk of
being unable to control the scope or quality of our overseas
services or products. In addition, our business insurance may
not cover losses that may occur as a result of events associated
with the security situation. Any losses or damages incurred by us
could have a material adverse effect on our business and financial
condition.
Risks Related to Our Common Stock
Certain individuals and groups own or control a significant number
of our outstanding shares.
Certain groups or persons, and in particular ETS Limited, who owned
approximately 42.7% of our issued and outstanding Common Stock as
of December 17, 2018, beneficially own a substantial number of
shares of our outstanding Common Stock or securities and debt
instruments. As a result, these persons have the ability,
acting as a group, to influence substantially our affairs and
business, including the election of our directors and, subject to
certain limitations, of fundamental corporate transactions. This
concentration of ownership may also have the effect of delaying or
preventing a change of control or making other transactions more
difficult or impossible without their support. In addition, these
equity holders may have an interest in pursuing acquisitions,
divestitures, financing or other transactions that, in their
judgment, could enhance their equity investments, even though such
transactions may involve significant risk to us or our other
shareholders. Additionally, they may make investments in
businesses that directly or indirectly compete with us, or may
pursue acquisition opportunities that may be complementary to our
business and, as a result, those acquisition opportunities may not
be available to us.
Our Board of Directors may authorize the issuance of preferred
stock and designate rights and preferences that will dilute the
ownership and voting interests of existing shareholders without
their approval.
Our Certificate of Incorporation authorizes us to issue up to
20,000,000 shares of preferred stock, par value $0.0001 per share,
of which 1,200,000 shares have been designated as Series A
Convertible Preferred Stock (“Series A
Preferred”). Our Board of
Directors is authorized to designate, and to determine the rights
and preferences of any series or class of preferred stock, and may
designate additional shares of preferred stock in the future. The
Board of Directors may, without shareholder approval, issue shares
of preferred stock with dividend, liquidation, conversion, voting
or other rights which are senior to our Common Stock or which could
adversely affect the voting power or other rights of the existing
holders of outstanding shares of preferred stock or Common Stock.
Additionally, the issuance of preferred stock may have the effect
of decreasing the market price of the Common Stock and reduce the
likelihood that common shareholders will receive dividend payments
and payments upon liquidation. The issuance of shares of preferred
stock may also adversely affect an acquisition or change in control
of the Company. As of December 17, 2018, there were no
outstanding shares of Series A Preferred issued and
outstanding.
Sales by certain of our shareholders of a substantial number of
shares of our Common Stock in the public market could adversely
affect the market price of our Common Stock.
A large number of outstanding shares of our Common Stock are held
by several of our principal shareholders. If any of these
principal shareholders were to decide to sell large amounts of
stock over a short period of time, such sales could cause the
market price of our Common Stock to decline.
A decline in the price of our Common Stock could affect our ability
to raise additional working capital and adversely impact our
operations and would severely dilute existing or future investors
if we were to raise funds at lower prices.
A prolonged decline in the price of our Common Stock could result
in a reduction of our ability to raise capital. Because our
operations have been financed in part through the sale of equity
securities, a decline in the price of our Common Stock could be
especially detrimental to our continued operations. Any reduction
in our ability to raise equity capital in the future would force us
to reallocate funds from other planned uses and would have a
significant negative effect on our business plans and operations,
including our ability to develop new products and continue our
current operations. If our stock price declines, there can be no
assurance that we can raise additional capital or generate funds
from operations sufficient to meet our obligations. We believe
the following factors could cause the market price of our Common
Stock to fluctuate widely:
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actual or anticipated variations in our interim or annual
results;
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announcements of new services, products, acquisitions or strategic
relationships within the industry;
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changes in accounting treatments or principles;
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changes in earnings estimates by securities analysts and in analyst
recommendations; and
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general political, economic, regulatory and market
conditions.
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Any failure to meet these expectations, even if minor, could
materially adversely affect the market price of our Common
Stock.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
shareholders.
Our Certificate of Incorporation authorizes the issuance of
30,000,000 shares of Common Stock. Our Board of Directors has the
authority to issue additional shares of Common Stock up to the
authorized capital stated in the Certificate of Incorporation. The
issuance of any such shares of Common Stock will result in a
reduction in value of our outstanding Common Stock. If we do issue
any such additional shares of Common Stock, such issuance also will
cause a reduction in the proportionate ownership and voting power
of all other shareholders. Further, any such issuance may result in
a change of control of the Company.
Trading of our Common Stock may be volatile and sporadic, which
could depress the market price of our Common Stock and make it
difficult for our shareholders to resell their
shares.
There is currently a limited market for our Common Stock and the
volume of our Common Stock traded on any day may vary significantly
from one day to the other. Our Common Stock is quoted on the OTCQX.
Trading in stock quoted on the OTCQX is often thin, volatile, and
characterized by wide fluctuations in trading prices, due to many
factors that may have little to do with the issuer’s
operations, results or business prospects. The availability of
buyers and sellers represented by this volatility could lead to a
market price for our Common Stock that is unrelated to operating
performance. Moreover, the OTCQX is not a stock exchange, and
trading of securities quoted on the OTCQX is often more volatile
than the trading of securities listed on a stock exchange like
NASDAQ or NYSE:MKT.
Our headquarters is approximately 5,600 square feet of commercial
office space located at 200 E. 5th Avenue Suite 100, Naperville, Illinois. The lease
for this office space began on September 1, 2017 and expires on
August 31, 2022. Lease payments are approximately $11,000 per
month.
We lease commercial office space in Indianapolis, Indiana of
approximately 5,751 square feet. This lease began on September 1,
2018 and shall terminate on August 31, 2022. Lease payments are
approximately $3,100 per month through December 31, 2018 and
increase to approximately $5,900 on January 1, 2019 as additional
space is occupied. In addition, we lease a second location with
approximately 2,000 square feet in Indianapolis, Indiana. This
lease was executed on January 1, 2014 and expires on December 31,
2018. Monthly lease payments for this facility are approximately
$3,300.
Track Group Analytics, Inc. operations are conducted in
approximately 4,200 square feet of office space in Bedford, Nova
Scotia, Canada. The lease for this office space began on July
1, 2015 and expires on June 30, 2020. Monthly lease payments are
approximately $5,700.
SecureAlert Chile operations are conducted in approximately 3,500
square feet of commercial office space located in Santiago, Chile.
The lease for this office space began on December 31, 2016 and
expires on December 31, 2019. Lease payments are approximately
$6,500 per month.
We lease commercial office space in Sandy, Utah of approximately
1,500 square feet. The lease for this office space began on
September 1, 2017 and expired on August 31, 2018. We are currently
leasing this property on a month to month basis. Lease payments are
$1,500 per month.
The Company is, from time to time, involved in various legal
proceedings incidental to the conduct of our business.
Historically, the outcome of all such legal proceedings has not, in
the aggregate, had a material adverse effect on our business,
financial condition, results of operations or liquidity. Other than
as set forth below, there are no additional pending or threatened
legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie
Leybovich and Ben Leybovich filed a complaint in the 11th Circuit
Court in and for Miami-Dade County, Florida alleging breach of
contract with regard to certain Stock Redemption Agreements. The
Plaintiffs are alleging $1,587,604 in combined damages. 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 an Appeal on June 1, 2016 challenging the
Court’s ruling on the motion for Summary Judgment. The
Appellate court ruled in favor of the Plaintiff, finding that
factual issue remains, reversing the Summary Judgment and remanding
the case back to trial. The Company’s motion for partial
Summary Judgment has been denied. A five day trial is tentatively
scheduled to take place in February 2019.
Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc.
et al. On December 3, 2015, Candace Boggs et al. filed a
complaint in the State Court of Dougherty County, Georgia, alleging
breach of contract and negligence in monitoring of certain
offenders in Dougherty County, Georgia, as well as a request for
punitive damages. Plaintiffs withdrew their complaint in February
2016, but refiled the complaint on October 12, 2016. The
Company’s motion for Summary Judgment was denied on February
27, 2017 and a Notice of Appeal was filed by the Company’s
counsel on April 15, 2017. In May the Court of Appeals reversed the
trial court decision and granted the Company’s Motion to
Dismiss the Plaintiff’s claims. Plaintiff has filed a
petition to have the case heard in the Georgia Supreme Court. On
June 27, 2018, Counsel filed a response to the petition and we are
currently waiting on a ruling from the court. We believe the claims
are inaccurate and are defending the case vigorously. We believe
the probability of incurring a material loss to be
remote.
Track Group, Inc. v. I.C.S. of the Bahamas Co.
Ltd. On May 18, 2016, the Company filed a complaint in
the District Court of the Third Judicial District in Salt Lake
County, Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid
principal and interest on the Promissory Note are in the amount of
$230,000, plus per annum interest. The Defendant’s initial
Counterclaims were dismissed; however, the Court granted the
Defendant leave to amend. The Amended Counter Claims were filed on
June 23, 2017 alleging $1,628,667 in damages. The Company’s
Motion to Dismiss the Amended Counterclaims was denied on September
19, 2017. The Company filed an Answer to the Amended Counterclaims
on October 3, 2017. Depositions have taken place for both parties.
The Company’s motion for Summary Judgment on ICS’s
Counterclaims was filed on August 13, 2018. Once the motion is
fully briefed a hearing will be scheduled. We believe we will be
successful in this action for amounts owed under the loan agreement
and promissory note; however, the Company may encounter problems
enforcing a favorable judgment in the foreign jurisdiction where
ICS resides.
Track Group Inc. v. I.C.S. of the Bahamas Co.
Ltd. On September 26, 2016, the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by ICS. Under the terms of
the Commercial and Monitoring Representative Agreement dated
November 30, 2010 (the “C&M
Agreement”) by and
between the Company and ICS, any dispute must be resolved by
binding arbitration. The Company asserts that ICS has failed to pay
the Company fees owed to it under the C&M Agreement. The amount
owed to the Company is approximately $1.0 million. Depositions were
completed in August of 2017. The arbitration hearing took place on
January 31, 2018. The arbitrator requested legal briefings after
the hearing which were submitted in March 2018. Final briefs were
submitted to the arbitrator on May 30, 2018. The arbitrator ruled
that ICS owes the Company $689,000. ICS submitted a Request for
Modification of the arbitration award on August 22, 2018 and the
arbitrator subsequently eliminated the earlier award of $689,000 to
the Company. The Company is currently pursuing legal means to
demonstrate that there is no such basis for the change by the
arbitrator.
John Merrill v. Track Group, Inc. and Guy
Dubois. On
November 30, 2016, the Company was served with a complaint filed by
John Merrill, the former Chief Financial Officer of the Company, in
District Court of the Third Judicial District in Salt Lake County,
Utah alleging breach of contract, among other causes of action,
related to Mr. Merrill’s termination of employment. Mr.
Merrill is seeking not less than $590,577 plus interest, attorney
fees and costs. Mr. Merrill’s employment with the Company was
terminated effective September 27, 2016. The Company filed an
Answer with Counter Claims on December 21, 2016. The Company filed
a motion for Summary Judgment on January 16, 2018. At a hearing on
April 25, 2018, the court dismissed the Plaintiff’s claims
related to an oral look-back agreement and a separation agreement.
The court has not ruled on Plaintiff’s claims related to his
employment agreement. A settlement amount could not be reached by
the parties. The matter will likely proceed to trial after expert
discovery is conducted. 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 alleged damages of at least $250,000. The Company’s
motion for Summary Judgment was granted on August 31,
2018.
SecureAlert, Inc. v. Federal Government of Mexico (Department of
the Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by Defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social of the then Public Security Department, and
presently, an agency of the National Security Commission of the
Department of the Interior, and SecureAlert, Inc., presently Track
Group, Inc. The Company’s claim amount is upwards of $6.0
million. On March 28, 2017, the Federal Administrative Tribunal
rejected our claim, based on its determination that this case
should be resolved by a Civil Court and not by the Federal
Administrative Tribunal. For that reason, on April 25, 2017, the
Company filed an appeal before the Collegiate Tribunals against the
decision of the Federal Administrative Tribunal. The Tribunal ruled
the claims should be resolved in the Civil Court. Following that
ruling the Supreme Court took action to resolve the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal.
Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et
al. On June 9, 2017, the
Plaintiff, Pablo Gonzalez-Cruz, and relatives of the Plaintiff,
filed a Complaint in the Court of First Instance, San Juan Superior
Court, Common Wealth of Puerto Rico against the Company, and
associated parties alleging the death of his daughter was a direct
and immediate result of the gross negligence. The Company’s
insurance carrier reached a settlement with the Plaintiff through
an agreement dated September 5, 2018.
Eli Sabag v. Track Group, Inc., Sapinda Asia Limited and Lars
Windhorst. On May 4, 2018, Eli Sabag filed a
complaint before the Marion Superior Court in Marion County Indiana
for damages and declaratory Judgment against the Company. The
complaint seeks to enforce an “earn-out” clause in a
Share Purchase Agreement (“SPA”) between the Company and
Sabag. Sabag alleges that the Company breached the SPA because
it failed to pay him his earn out after it sold and leased a
sufficient number of GPS devices to meet the earn-out
milestone. In the alternative, Sabag sued the Company for
breach of fiduciary duty and tortious interference, alleging that
the Company avoided selling sufficient GPS devices so as to not
trigger the issuance of Contingent Stock under the SPA. Finally,
Sabag alleges that the Company was unjustly enriched because it
failed to pay full value for his shares under the SPA. The
Company believes the allegations are unfounded and without merit,
and it will defend the case vigorously. Furthermore, according
to the SPA, any disputes are to be resolved through binding
arbitration and enforced in the State of Utah. The Company
filed a motion to dismiss the Complaint and Compel Arbitration on
September 5, 2018, and we are currently waiting on a ruling from
the Court.
Erick Cerda v. Track Group, Inc. On July 25, 2018, former
employee Erick Cerda (“Plaintiff”) filed a complaint in
the United States District Court for the Northern District of
Illinois, Case No. 18-CV-05075, against the Company alleging
violations of Title VII of the Civil Rights Act of 1964
(“Title VII”)
and the Age Discrimination in Employment Act (“ADEA”). Plaintiff seeks
injunctive relief and monetary damages in an unspecific
amount. On October 5, 2018, the Company filed its answer and
affirmative defenses to Plaintiff’s First Amended Complaint
denying Plaintiff’s allegations in their entirety. The
Company believes that Plaintiff’s allegations are unfounded
and without merit.
PART II
Item 5.
Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our Common Stock is traded on the OTCQX under the symbol
“TRCK.” The following table sets forth the range
of high and low sales prices of our Common Stock as reported on the
OTCQX for the periods indicated.
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Fiscal Year Ended September 30,
2018
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High
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Low
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First Quarter ended December 31,
2017
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$1.47
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$1.05
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Second
Quarter ended March 31, 2018
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$1.22
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$1.01
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Third
Quarter ended June 30, 2018
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$1.13
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$0.99
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Fourth
Quarter ended September 30, 2018
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$1.02
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$0.90
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Fiscal Year Ended September 30,
2017
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High
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Low
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First Quarter ended December 31,
2016
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$7.30
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$3.35
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Second
Quarter ended March 31, 2017
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$5.25
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$3.36
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Third
Quarter ended June 30, 2017
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$3.36
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$2.16
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Fourth
Quarter ended September 30, 2017
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$2.34
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$1.40
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Holders
As of December 17, 2018, we had 185 holders of record of our Common
Stock and 11,401,650 shares of Common Stock outstanding. We also
have granted options and warrants for the purchase of
685,259 shares
of Common Stock.
Dividends
Since incorporation, we have not declared any cash dividends on our
Common Stock. We do not anticipate declaring cash dividends on
our Common Stock for the foreseeable future.
Dilution
The Board of Directors determines when, under what conditions and
at what prices to issue shares of Company stock. In addition,
a significant number of shares of Common Stock are reserved for
issuance upon exercise of outstanding options and
warrants.
The issuance of any shares of Common Stock for any reason will
result in dilution of the equity and voting interests of existing
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is American
Stock Transfer & Trust Company, which is located at 6201 15th
Avenue, Brooklyn, New York, 11219.
Securities Authorized for Issuance under Equity Compensation
Plans
The 2012 Stock Incentive Plan
The Company’s 2012 Equity Compensation Plan, as amended (the
“2012
Plan”), was first
approved by our Board of Directors and shareholders at the Annual
Meeting of Shareholders held on December 21, 2011, and amended
following our Annual Meeting of Shareholders on May 19,
2015. We believe that incentives and stock-based awards focus
and align employees on the objective of creating shareholder value
and promoting the success of the Company, and that incentive
compensation plans like the 2012 Plan are an important attraction,
retention and motivation tool for participants in the
plan.
Under the 2012 Plan, up to 803,262 shares of Common Stock or
options to purchase Common Stock may be awarded. As of the
date of this report, 258,408 shares of Common Stock and options for
the purchase of 517,636 shares of Common Stock have been awarded
under the 2012 Plan.
The following table includes information as of September 30, 2018
for our equity compensation plans:
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Plan category
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Number of securities to be issued upon exercise of outstanding
options, warrants and rights
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Weighted-average
exercise price
of outstanding options, warrants
and rights
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Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a)
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(a)
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Equity
compensation plans approved by security holders
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616,655
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$1.61
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27,218
|
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Equity
compensation approved by Board of Directors outside of 2012
Plan
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68,604
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1.15
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-
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Total
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685,259
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$1.56
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27,218
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Recent Sales of Unregistered Securities
No securities were issued without registration under the Securities
Act during the fiscal year ended September 30, 2018, nor were any
securities issued subsequent to September 30, 2018, that were not
reported in our Quarterly Reports on Form 10-Q and in our Current
Reports on Form 8-K filed with the Securities and Exchange
Commission.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements within the meaning of Section 21E of the Exchange
Act and Section 27A of the Securities Act. All statements
contained in this Annual Report on Form 10-K (“Annual
Report”) other than statements of historical fact are
forward-looking statements. When used in this report or elsewhere
by management from time to time, the words “believe,”
“anticipate,” “intend,” “plan,”
“estimate,” “expect,” “may,”
“will,” “should,” “seeks” and
similar expressions are forward-looking statements. Such
forward-looking statements are based on current expectations, but
the absence of these words does not necessarily mean that a
statement is not forward-looking. Forward-looking statements are
not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of
various factors. For a more detailed discussion of such
forward-looking statements and the potential risks and
uncertainties that may impact upon their accuracy, see Item 1A
entitled “Risk Factors” in Part I of this Annual Report
and the “Overview” and “Liquidity and Capital
Resources” sections of this Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” These forward-looking statements reflect our
view only as of the date of this report. Except as required by law,
we undertake no obligations to update any forward-looking
statements. Accordingly, you should also carefully consider the
factors set forth in other reports or documents that we file from
time to time with the SEC.
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(“MD&A”) is intended to help the reader better
understand Track Group, our operations and our present business
environment. Our fiscal year ends on September 30 of each
year. Reference to fiscal year 2018 refers to the year ended
September 30, 2018. This MD&A is provided as a supplement
to, and should be read in conjunction with, our consolidated
financial statements for the fiscal years ended September 30, 2018
and 2017 and the accompanying notes thereto contained in this
Annual Report. This introduction summarizes MD&A, which
includes the following sections:
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Overview – a general description of our business and the
markets in which we operate; our objectives; our areas of focus;
and challenges and risks of our business.
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Results of Operations – an analysis of our consolidated
results of operations for the last two fiscal years presented in
our consolidated financial statements.
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Liquidity and Capital Resources – an analysis of cash flows;
off-balance sheet arrangements and aggregate contractual
obligations; and the impact of inflation and changing
prices.
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Off-Balance Sheet Arrangements
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Critical Accounting Policies – a discussion of accounting
policies that require critical judgments and
estimates.
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We intend for this discussion to provide the reader with
information that will assist in understanding our financial
statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting
principles affect our financial statements.
Overview
Our core business is based on the leasing of patented tracking and
monitoring solutions to federal, state and local law enforcement
agencies, both in the U.S and abroad, for the electronic monitoring
of offenders and offering unique data analytics services on a
platform-as-a-service (PaaS) business model. Currently, we
deploy offender based management services that combine patented GPS
tracking technologies, fulltime 24/7/365 global monitoring
capabilities, case management, and proprietary data analytics. We
offer customizable tracking solutions that leverage real-time
tracking data, best practices monitoring, and analytics
capabilities to create complete, end-to-end tracking
solutions.
Recent Developments
Contract with the Gendarmeria de Chile
On
January 25, 2018, the Company entered into a Monitoring Services
Agreement with Gendarmeria de Chile, the Republic of Chile’s
uniform prison service (“Gendarmeria”), for services the
Company began offering to Gendarmeria on October 18, 2017 for a
period of 365 days. As of October 18, 2018, the Gendarmeria
Agreement was automatically extended for periods of 30-days and the
Company anticipates that this option will be exercised by
Gendarmeria for the foreseeable future. Most recently, Gendarmeria
asked the Company’s Chilean subsidiary to extend the maturity
of the performance bond associated with the Gendarmeria
Agreement to July 18, 2019. Furthermore, Gendarmeria will
not make a decision with respect to the Request for Proposal
process until all of the judicial proceedings are complete;
however, management believes
that as the incumbent provider with several years of experience
managing a successful program for the Chilean government, the
Company is best positioned to prevail in such a
process.
Conrent Facility Agreement
On July 19, 2018 the Company and Conrent, amended the Amended
Facility Agreement, which alters certain provisions of the
Company’s existing $30.4 million unsecured debt facility.
Effective July 19, 2018, the Amended Facility
Agreement (i) extended the Maturity Date to the earlier of either
April 1, 2019 or the date upon which the Outstanding Principal
Amount, as defined therein, is repaid by the Company, and (ii)
provided that in the event of a Change of Control, as defined
therein, Conrent shall immediately cancel the facility and declare
the Outstanding Principal Amount, together with unpaid interest,
immediately due and payable. On November 14, 2018, the
Company requested that Conrent extend the maturity of the Amended
Facility Agreement from April 1, 2019 to April 1, 2020. On December
3, 2018, Conrent agreed to convene meetings of the Noteholders and
subsequently issued a notice of a meeting of Noteholders for each
series of Notes to be held on January 16, 2019. Based on the
discussions between the Company and Conrent to date, the Company
anticipates that the Noteholders will agree to extend the maturity
of the Amended Facility Agreement before the maturity on April 1,
2019, however no assurance can be given.
Results of Operations
Continuing Operations - Fiscal Year 2018 Compared to Fiscal Year
2017
Net Revenue
During the fiscal year ended September 30, 2018, we had net revenue
of $30,570,219 compared to net revenue of $29,727,018 for the
fiscal year ended September 30, 2017, an increase of $843,201, or
approximately 3%. Of this revenue, $29,943,563 and
$28,887,460 was from monitoring and other related
services during the 2018 and 2017 fiscal years, respectively,
representing an increase of $1,056,103 or 4%. Growth in revenue
during the year ended September 30, 2018 was principally the result
of (i) growth of offender monitoring in Chile, (ii) an increase in
total growth of our North American monitoring operations
driven by clients in Puerto Rico, Indiana, Virginia and Michigan,
and (iii) the establishment of a new relationship in
Mexico.
Other revenue for the year ended September 30, 2018 decreased to
$626,656 from $839,558 in the same period in 2017 largely due to
lower sales of consumable items and other non-monitoring
revenue items. We are continuing to focus on recurring subscription
based opportunities as opposed to equipment
sales.
Cost of Revenue
During the year ended September 30, 2018, cost of revenue totaled
$13,368,075 compared to cost of revenue during the year ended
September 30, 2017 of $14,125,699, a decrease of $757,624 or
approximately 5%. The decrease in
cost of revenue was largely the result
of lower monitoring costs of $402,934, lower customs expense
of $195,125, lower costs of lost and stolen devices of $179,273,
lower communication costs of $142,216 and lower depreciation and
amortization of $271,934, due to additional
depreciation for devices during the year ended September 30,
2017, partially offset by
higher server costs of $203,910, higher support costs of $121,637
and higher hardware costs of $79,494. In addition, during the year
ended September 30, 2017, we incurred one-time costs of $371,144,
which is reflected in monitoring, products and other related
services in the Consolidated Statement of Operations and
Comprehensive Loss, that did not reoccur in the year ended
September 30, 2018. Excluding these one-time costs, cost of revenue
for the year ended September 30, 2018 would have decreased
$386,480, or approximately 3%, compared to the same period in
2017.
Depreciation and amortization included in cost of revenue for the
fiscal years ended September 30, 2018 and 2017, totaled $1,856,734
and $2,128,668, respectively. These costs represent the
depreciation of ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
certain royalty agreements. We believe the amortization periods are
appropriate due to changes in electronic monitoring technology and
the corresponding potential for obsolescence. Management
periodically assesses the useful life of the devices for
appropriateness. Amortization of a patent related to GPS and
satellite tracking is also included in cost of
sales.
Gross Profit and Margin
During the fiscal year ended September 30, 2018, gross profit
totaled $17,202,144, resulting in a 56% gross margin, compared to
$15,601,319, or a 52% gross margin, during the fiscal year ended
September 30, 2017, an increase of
$1,600,825. The increase in gross
profit is largely due to higher revenue and lower cost of revenue.
The increase in gross margin is due to the decrease in certain
aspects of cost of revenue, including lower monitoring costs, lower
customs expense, lower lost and stolen device costs, lower
communications costs and the absence of one-time costs of
$371,144 incurred in the prior
year indicated above.
Gain / Loss on Sale of Assets
During the year ended September 30, 2018, we sold a fully
depreciated non-core asset for cash of $8,500. During the year
ended September 30, 2017, we sold certain non-core assets for net
cash of $512,500 and incurred a loss on the sale of $763,531. See
Note 4 to the Consolidated Financial Statements.
Restructuring Costs
During the year ended September 30, 2017, we recorded $558,833 of
costs related to the relocation of our headquarters from Salt Lake
City, Utah to our existing Chicagoland office. These costs include
the transfer of our own monitoring center activities to a
highly-specialized third party, severance pay related to a
reduction of approximately 65 monitoring center employees, as well
as other support employees and moving costs. All costs related to
the relocation were paid in the fiscal year ended September 30,
2017.
Impairment of Intangible Assets
In connection with our annual impairment test performed by an
independent valuation firm, a non-cash impairment charge of
$506,413 was recorded during the year ended September 30, 2017
related to a legacy non-core facet of the business.
General and Administrative Expense
During the fiscal year ended September 30, 2018, our general and
administrative expense totaled $13,983,924, compared to $12,216,041
for the fiscal year ended September 30,
2017. The increase of
$1,767,883 or approximately 14%, in general and administrative cost
resulted largely from higher
employee non-cash stock-based compensation of $833,602,
higher legal and professional fees of $782,058,
lower entitlements received from the Canadian government of
$486,228, higher outside service costs of $211,438
and higher wages and benefits
of $756,788,
partially offset by a decrease in bad debt expense of
$866,692,
lower settlement costs of $305,000, lower telecommunication expense
of $81,040 and lower
repairs and maintenance of $61,465.
Selling and Marketing Expense
For the fiscal year ended September 30, 2018, our selling and
marketing expense was $1,895,452 compared to $2,311,725 for the
year ended September 30, 2017. The $416,273, or approximately
18%, decrease resulted largely from lower wages and benefits of
$207,447, lower outside service and consulting expense of $138,362,
and lower travel expense of $62,008.
Research and Development Expense
During the fiscal year ended September 30, 2018, we incurred
research and development expense of $862,142 compared to those
costs recognized during fiscal year 2017 totaling $1,784,867, a
decrease of $922,725 or approximately 52%. The decrease is
largely due to lower wages and benefits of $585,641 and lower
outside service and consulting expense of $326,118 as the Company
is completing its new technology platform. The Company is
significantly enhancing its technology platform to improve the
efficiency of its software, firmware, user interface, and
automation. As a result of these improvements, $1,083,745 was
capitalized as developed technology during the year
ended September 30, 2018, and $2,416,804 was capitalized
during the year ended September 30, 2017. A portion of this
expense would have been recognized as research and development
expense, absent the significant enhancements to the
technology.
Depreciation and Amortization Expense
We maintain a significant portion of our tangible and intangible
assets that are amortized or depreciated. During the fiscal year
ended September 30, 2018, depreciation and amortization included in
operating expense totaled $2,120,746, compared to $2,332,217 for
the fiscal year ended September 30, 2017. This decrease of
$211,471, or approximately 9%, was largely the result of
lower
amortization expense related to the sale of certain non-core assets
in fiscal year ended September 30, 2017, certain intangible assets
becoming fully amortized in fiscal 2018 and certain property and equipment assets becoming
fully depreciated.
Other Income (Expense)
During the fiscal year ended September 30, 2018, other income
(expense) totaled $3,183,696 of expense compared to other income of
$648,133 during fiscal 2017. The increase of
$3,831,829 in net other expense resulted primarily from income
related to a stock payable adjustment with related parties in 2017
of $3,213,940 and negative currency exchange rate movements of
$668,901.
Income taxes
During the fiscal year ended September 30, 2018, income tax expense
totaled $592,725 compared to $501,651 during the fiscal year ended
September 30, 2017. Tax expense in both fiscal years are income
taxes related to a foreign jurisdiction.
Net Loss
We had a net loss for the fiscal year ended September 30, 2018
totaling $5,428,041 or ($0.51) loss per common share, compared to a
net loss of $4,725,826 or ($0.45) per common share for the fiscal
year ended September 30, 2017. This increase in net
loss is largely due to other income from a stock payable adjustment
with related parties of $3.2 million in 2017, and higher general
and administrative expenses in 2018, partially offset by higher
gross margin, lower research and development costs, and lower
selling and marketing expenses in fiscal year ended September 30,
2018, and the absence of restructuring costs and loss on sale of
assets which occurred in 2017.
Liquidity and Capital Resources
Historically, we have been unable to finance our business solely
from cash flows from operating activities. During and prior to the
fiscal year ended September 30, 2017, we supplemented cash flows to
finance the business from borrowings under a credit facility, a
revolving line of credit from one of our shareholders, receipt of
certain disgorgement funds, and from the sale and issuance of
debt securities. As of September 30, 2018, excluding interest,
approximately $3.4 million was owed to Sapinda (the
“Sapinda
Loan Agreement”) and $30.4
million was owed to Conrent (the
“Conrent
Loan Agreement”). No borrowings
or sales of equity securities occurred during the year ended
September 30, 2018.
On July 19, 2018, the Company and Conrent entered into the Amended
Facility Agreement, which Amended Facility Agreement (i) extends
the maturity date of the Facility to the earlier of either April 1,
2019 or the date upon which the outstanding principal amount is
repaid by the Company, and (ii) provides that in the event of a
change of control of the Company, Conrent shall immediately cancel
the Amended Credit Facility and declare the outstanding principal
amount, together with unpaid interest, immediately due and
payable. On November 14,
2018, the Company requested that Conrent extend the maturity of the
Amended Facility Agreement from April 1, 2019 to April 1, 2020. On
December 3, 2018, Conrent agreed to convene meetings of the
investors who purchased the securities from Conrent to finance the
debt, and subsequently issued a notice of a meeting of Noteholders
for each series of Notes, which meetings will be held on January
16, 2019. Based on discussions between the Company and Conrent to
date, the Company anticipates that the Noteholders will agree to
extend the maturity of the Amended Facility Agreement before its
maturity on April 1, 2019, however no assurance can be
given.
Net Cash Flows from Operating Activities.
During the fiscal year ended September 30, 2018, we incurred a net
loss of $5,428,041 and we had cash flows from operating activities
of $6,030,592, compared to a net loss from continuing operations of
$4,725,826 and cash flows from operating activities of $4,147,786
for fiscal year 2017. The increase of cash from operations in
fiscal year 2018 compared to fiscal year 2017 was largely the
result of a decrease in other assets, largely from a repayment of
an international performance bond, an increase in accounts payable
and accrued expense and improved operating results, partially
offset by two new international performance bonds in 2018 and
higher accounts receivables, largely due to new customers in fiscal
year 2018. The increase in accrued expense mentioned above is
largely due to unpaid interest expense. See Notes 5 and 8 to the
Consolidated Financial Statements.
Net Cash Flows from Investing Activities.
The Company used $2,535,204 of cash for investing activities during
the fiscal year ended September 30, 2018, compared to $3,827,832 of
cash used during fiscal year 2017. Cash used for investing
activities was used for significant enhancements of our software
platform and used for purchases of monitoring and other equipment
to meet demand during the twelve months ended September 30,
2018.
Net Cash Flows from Financing Activities.
The Company used $66,252 of cash for financing activities during
the fiscal year ended September 30, 2018, compared to $67,775 of
cash used by financing activities during fiscal year 2017. During
the fiscal years ended September 30, 2018 and September 30, 2017,
we made principal payments of $66,252 and $67,775 on notes payable,
respectively.
Liquidity, Working Capital and Management’s Plan
As of September 30, 2018, we had unrestricted cash of $5,446,557,
compared to unrestricted cash of $2,027,321 as of September 30,
2017. As of September 30, 2018, we had a working capital
deficit of $30,316,328, compared to a working capital deficit of
$30,874,107 as of September 30, 2017. This decrease in working
capital deficit of $557,779 is principally due to the repayment of
a short-term bond from a long-term asset of $2,944,631, and cash
provided by operations, partially offset by a decrease in cash due
to additional capitalized software of $1,083,745, purchases of
monitoring equipment of $1,305,586 and purchases of property and
equipment of $154,373. Although no assurances can be given, in the
event that management is able to successfully extend the maturity
of the Amended Facility Agreement, we currently believe that our
cash on hand in addition to cash derived from our operating
activities will be sufficient to sustain operations through the
next twelve months, although no assurance can be given. In the
event that they are not sufficient, we will need to obtain
additional funding from outside sources, which may include through
the sale of our securities. No assurances can be given that we will
be able to obtain additional funding on terms favorable to us, if
at all.
On March 13, 2017, the Company successfully extended the Sapinda
Loan Agreement from September 30, 2017 to September 30, 2020. On
July 17, 2018, the Company successfully extended the Conrent Loan
Agreement to the earlier of either
April 1, 2019 or the date upon which the outstanding principal
amount is repaid by the Company. In addition, management is currently exploring
options to extend the maturity of debt owed under the Conrent Loan
Agreement. See “Recent Developments” and Note 15 to the
Consolidated Financial Statements.
Inflation
We do not believe that inflation has had a material impact on our
historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The Company has not entered into any transactions with
unconsolidated entities whereby the Company has financial
guarantees, derivative instruments, or other contingent
arrangements that expose the Company to material continuing risks,
contingent liabilities, or any other obligation that provides
financing, liquidity, market risk, or credit risk support to the
Company, except as described below.
|
|
Payments
due in
less than 1 year
|
Payments
due in
1 – 3 years
|
Payments
due in
3 – 5 years
|
Total
|
|
Operating
leases
|
$329,941
|
$438,777
|
$170,957
|
$939,675
|
As of September 30, 2018, the Company’s total future
minimum lease payments under noncancelable operating leases were
$939,675. The Company’s facility leases typically have
original terms not exceeding five years and generally contain
multi-year renewal options.
Critical Accounting Policies
In Note 1, “Summary of Significant Accounting Policies”
to the audited Consolidated Financial Statements included in this
Annual Report, we discuss those accounting policies we consider to
be significant in determining the results of operations and our
financial position.
The preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, and expense. By their
nature, these estimates and judgments are subject to an inherent
degree of uncertainty. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability,
revenue, and income taxes. We base our estimates on historical
experience and other facts and circumstances that are believed to
be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual
results may differ from these estimates under different assumptions
or conditions.
With respect to inventory reserves, revenue recognition, impairment
of long-lived assets and allowance for doubtful accounts
receivable, we apply critical accounting policies discussed below
in the preparation of our financial statements.
Inventory Reserves
The nature of our business requires maintenance of sufficient
inventory on hand at all times to meet the requirements of our
customers. We record inventory and raw materials at the lower of
cost, or market, which approximates actual cost. General
inventory reserves are maintained for the possible impairment of
the inventory. Impairment may be a result of slow moving or
excess inventory, product obsolescence or changes in the valuation
of the inventory. In determining the adequacy of reserves,
management analyzes the following, among other things:
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●
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Current inventory quantities on hand;
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Product acceptance in the marketplace;
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●
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Customer demand;
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●
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Historical sales;
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●
|
Forecast sales;
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|
●
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Product obsolescence; and
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●
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Technological innovations.
|
Any modifications to these estimates of reserves are reflected in
cost of revenue within the statement of operations during the
period in which such modifications are determined necessary by
management.
Revenue Recognition
Our revenue is predominantly derived from two sources: (i)
monitoring services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (i) lease contracts
pursuant to which we provide monitoring services and lease devices
to distributors or end users and we retain ownership of the leased
device; and (ii) monitoring services purchased by distributors or
end users who have previously purchased monitoring devices and opt
to use our monitoring services.
We typically lease our devices under multi-year contracts with
customers that opt to use our monitoring services. However,
some of these contracts may be cancelled by either party at any
time upon 30 days’ notice. Under our standard leasing
contract, the leased device becomes billable on the date of
activation or seven to 21 days from the date the device is assigned
to the lessee, and remains billable until the device is
returned. We recognize revenue on leased devices at the end of
each month that monitoring services have been provided. In
those circumstances in which we receive payment in advance, we
record these payments as deferred revenue.
Product Sales
We may sell monitoring devices in certain situations to our
customers. In addition, we may sell equipment in connection with
the building out and setting up a monitoring center on behalf of
customers. We recognize product sales revenue when persuasive
evidence of an arrangement with the customer exists, title passes
to the customer and the customer cannot return the devices or
equipment, prices are fixed or determinable (including sales not
being made outside the normal payment terms) and collection is
reasonably assured. When purchasing products (such as ReliAlert or
Shadow devices), customers may, but are not required to, enter into
one of our monitoring service contracts. We recognize revenue
on monitoring services for customers that have previously purchased
devices at the end of each month that monitoring services have been
provided.
We sell and install standalone tracking systems that do not require
our ongoing monitoring. We have experience in component
installation costs and direct labor hours related to this type of
sale and can typically reasonably estimate costs; therefore, we
recognize revenue over the period in which the installation
services are performed using the percentage-of-completion method of
accounting for material installations. We typically use labor
hours or costs incurred to date as a percentage of the total
estimated labor hours or costs to fulfill the contract as the most
reliable and meaningful measure that is available for determining a
project’s progress toward completion. We evaluate our
estimated labor hours and costs and determine the estimated gross
profit or loss on each installation for each reporting
period. If it is determined that total cost estimates are
likely to exceed revenue, we accrue the estimated losses
immediately.
Multiple Element Arrangements
The majority of our revenue transactions do not have multiple
elements. However, on occasion, we enter into revenue transactions
that have multiple elements. These may include different
combinations of products or services that are included in a single
billable rate. These products or services are delivered over
time as the customer utilizes our services. For revenue
arrangements that have multiple elements, we consider whether the
delivered devices have standalone value to the customer, there is
objective and reliable evidence of the fair value of the
undelivered monitoring services, which is generally determined by
surveying the price of competitors’ comparable monitoring
services, and the customer does not have a general right of
return. Based on these criteria, we recognize revenue from the
sale of devices separately from the services provided to the
customer as the products or services are delivered.
Other Matters
We consider an arrangement with payment terms longer than our
normal terms not to be fixed or determinable, and we recognize
revenue when the fee becomes due. Normal payment terms for the
sale of products and services are due upon receipt to 30
days. We sell our devices and services directly to end users
and to distributors. Distributors do not have general rights
of return. Also, distributors have no price protection or
stock protection rights with respect to devices we sell to
them. Generally, title and risk of loss pass to the buyer upon
delivery of the devices.
We estimate our product returns based on historical experience and
maintain an allowance for estimated returns, which is recorded as a
reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as
part of net revenue. The related freight costs and supplies
directly associated with shipping products to customers are
included as a component of cost of revenue.
Impairment of Long-Lived Assets
We review our long-lived assets including goodwill and intangibles
for impairment when events or changes in circumstances indicate
that the book value of an asset may not be recoverable, and in the
case of goodwill, at least annually. We evaluate whether events and
circumstances have occurred which indicate possible impairment as
of each balance sheet date. We use an equity method of the related
asset or group of assets in measuring whether the assets are
recoverable. If the carrying amount of an asset exceeds its
market value, an impairment charge is recognized for the amount by
which the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there are an identifiable fair market value
that is independent of other groups of assets.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts
receivable. In doing so, we analyze accounts receivable and
historical bad debts, customer credit-worthiness, current
macroeconomic and geopolitical trends, and changes in customer
payment patterns when evaluating the adequacy of the allowance for
doubtful accounts.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which
are adopted by us as of the specified effective date. Unless
otherwise discussed, we believe that the impact of recently issued
standards that are not yet effective will not have a material
impact on our financial position or results of operations upon
adoption.
Accounting for Stock-Based Compensation
We recognize compensation expense for stock-based awards expected
to vest on a straight-line basis over the requisite service period
of the award based on their grant date fair value. We estimate
the fair value of stock options using a Black-Scholes option
pricing model which requires us to make estimates for certain
assumptions regarding risk-free interest rate, expected life of
options, expected volatility of stock, and expected dividend yield
of stock.
Our business extends to countries outside the United States, and we
intend to continue to expand our foreign operations. As a
result, our revenue and results of operations are affected by
fluctuations in currency exchange rates, interest rates, and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
We had $10,984,263 and $10,279,602 in revenue from sources outside
the United States for the fiscal years ended September 30, 2018 and
2017, respectively. We made and received payments in a
foreign currency during the periods indicated, which resulted in a
foreign exchange loss of $445,426 and foreign exchange gain
$223,475 in fiscal years 2018 and 2017, respectively. Changes
in currency exchange rates affect the relative prices at which we
sell our products and purchase goods and services. Given the
uncertainty of exchange rate fluctuations, we cannot estimate the
effect of these fluctuations on our future business, product
pricing, results of operations, or financial condition. We do
not use foreign currency exchange contracts or derivative financial
instruments for hedging or speculative purposes. To the extent
foreign sales become a more significant part of our business in the
future, we may seek to implement strategies which make use of these
or other instruments in order to minimize the effects of foreign
currency exchange on our business.
The Financial Statements and Supplementary Data required by this
Item are set forth at the pages indicated at Item 15
below.
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure
that material information relating to the Company is made known to
the officers who certify our financial reports and to other members
of senior management and the Board of Directors. These disclosure
controls and procedures are designed to ensure that information
required to be disclosed in the reports that are filed or submitted
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms.
Under the supervision and with the participation of management,
including the principal executive officer and principal financial
officer, an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of September
30, 2018 was completed pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based on this evaluation,
our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective and designed to provide reasonable assurance that the
information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms as of September 30,
2018.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such
term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Our internal control over financial reporting is a
process designed under the supervision of our principal executive
officer and principal financial officer to provide reasonable
assurance regarding the reliability of financial reporting and
preparation of our financial statements for external purposes in
accordance with generally accepted accounting
principles.
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and, even when
determined to be effective, can only provide reasonable, not
absolute, assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) issued in May 2013 and related COSO
guidance. Based on our evaluation under this framework, our
management concluded that our internal control over financial
reporting was effective as of September 30,
2018.
This report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide
only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act)
during our fourth fiscal quarter ended September 30, 2018, that has
materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.
Item 9B. Other Information
None.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2019.
Item 11.
Executive
Compensation
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2019.
Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2019.
Item 13.
Certain Relationships and Related
Transactions, and Director Independence
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2019.
Item 14.
Principal Accounting Fees and
Services
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 28, 2019.
Item 15.
Exhibits and Financial Statement
Schedules
(a) The following documents are filed as part of this
report:
1. Financial
Statements
|
Report of Eide Bailly LLP
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F-2
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Operations
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F-4
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Consolidated Statements of Stockholders’ Equity (Deficit)
and Comprehensive Loss
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F-5
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Consolidated Statements of Cash Flows
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F-7
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Notes to the Consolidated Financial Statements
|
F-9
|
2. Financial Statement
Schedules.
3. Exhibits. The following
exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission:
|
Exhibit
Number
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Title of Document
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3(i)(1)
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3(i)(2)
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3(i)(3)
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3(1)(4)
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3(ii)(2)
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4.01
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4.02
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10.1
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10.2
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10.3
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10.4
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10.5
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10.6
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10.7
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10.8
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10.9
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10.10
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10.11
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10.12
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10.13
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10.14
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14.1
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21
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31(i)
|
Certification of Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
|
31(ii)
|
Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
|
32
|
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) (filed herewith).
|
|
|
|
|
101.INS
|
XBRL INSTANCE DOCUMENT
|
|
101.SCH
|
XBRL TAXONOMY EXTENSION SCHEMA
|
|
101.CAL
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
101.DEF
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
101.LAB
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE
|
|
101.PRE
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
Track Group, Inc.
|
|
|
|
By:
|
/s/
Derek Cassell
|
|
|
|
Derek Cassell
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/
Peter K. Poli
|
|
|
|
Peter K. Poli
Chief Financial Officer (Principal Accounting Officer)
|
Date:
December 19, 2018
Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
Guy Dubois
|
Director
and Chairman of the Board of Directors
|
December 19,
2018
|
|
Guy
Dubois
|
|
|
|
|
|
|
|
/s/
Karen Macleod
|
Director
|
December 19,
2018
|
|
Karen
Macleod
|
|
|
|
|
|
|
|
/s/ Karim
Sehnaoui
|
Director
|
December 19,
2018
|
Karim
Sehnaoui
Index to Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
Report of Eide Bailly LLP
|
|
F-2
|
|
Consolidated Balance Sheets as of September 30, 2018 and
2017
|
|
F-3
|
|
Consolidated Statements of Comprehensive Loss for the fiscal years
ended September 30, 2018 and 2017
|
|
F-4
|
|
Consolidated Statements of Stockholders’ Equity for the
fiscal years ended September 30, 2018 and 2017
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2018 and 2017
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
F-9
|
Report of Independent Registered Public Accounting
Firm
To the Board of Directors
Track Group, Inc.
Naperville, IL
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Track Group, Inc. as of September 30, 2018 and 2017, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred
to as the “consolidated financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of Track Group, Inc. as of
September 30, 2018 and 2017, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the entity’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to Track Group, Inc. in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. Track Group, Inc. is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Eide Bailly LLP
We have served as Track Group, Inc.’s auditor since
2013.
Salt Lake City, Utah
December 19, 2018
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2018 AND 2017
|
Assets
|
2018
|
2017
|
|
Current assets:
|
|
|
|
Cash
|
$5,446,557
|
$2,027,321
|
|
Accounts
receivable, net of allowance for doubtful accounts of $3,152,966
and $3,033,362, respectively
|
5,978,896
|
5,673,297
|
|
Note
receivable, net of allowances for doubtful accounts of $234,733,
respectively
|
-
|
-
|
|
Prepaid
expense and other
|
1,270,043
|
854,122
|
|
Inventory,
net of reserves of $26,934, respectively
|
277,119
|
261,810
|
|
Total
current assets
|
12,972,615
|
8,816,550
|
|
Property
and equipment, net of accumulated depreciation of $1,999,222 and
$1,778,634, respectively
|
745,475
|
903,100
|
|
Monitoring
equipment, net of accumulated amortization of $5,325,654 and
$4,906,925, respectively
|
3,162,542
|
3,493,012
|
|
Intangible
assets, net of accumulated amortization of $12,016,512 and
$9,839,032, respectively
|
23,253,054
|
24,718,655
|
|
Goodwill
|
8,076,759
|
8,226,714
|
|
Other
assets
|
145,839
|
2,989,101
|
|
Total
assets
|
$48,356,284
|
$49,147,132
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
2,518,030
|
2,769,835
|
|
Accrued
liabilities
|
10,333,103
|
6,650,291
|
|
Current
portion of long-term debt, net of discount of $0 and $185,811,
respectively
|
30,437,810
|
30,270,531
|
|
Total
current liabilities
|
43,288,943
|
39,690,657
|
|
Long-term
debt, net of current portion
|
3,428,975
|
3,480,717
|
|
Total
liabilities
|
46,717,918
|
43,171,374
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
-
|
-
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares authorized;
11,401,650 and 10,480,984 shares outstanding,
respectively
|
1,140
|
1,048
|
|
Series
A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares
authorized; 0 shares outstanding
|
-
|
-
|
|
Paid
in capital
|
302,102,866
|
300,717,861
|
|
Accumulated
deficit
|
(299,495,370)
|
(294,067,329)
|
|
Accumulated
other comprehensive loss
|
(970,270)
|
(675,822)
|
|
Total
equity
|
1,638,366
|
5,975,758
|
|
Total
liabilities and stockholders’ equity
|
$48,356,284
|
$49,147,132
|
The
accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
Revenue:
|
|
|
|
Monitoring
and other related services
|
$29,943,563
|
$28,887,460
|
|
Other
|
626,656
|
839,558
|
|
Total
revenue
|
30,570,219
|
29,727,018
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
Monitoring,
products and other related services
|
11,511,341
|
11,997,031
|
|
Depreciation
and amortization included in cost of revenue
|
1,856,734
|
2,128,668
|
|
Total
cost of revenue
|
13,368,075
|
14,125,699
|
|
|
|
|
|
Gross profit
|
17,202,144
|
15,601,319
|
|
|
|
|
|
Operating expense:
|
|
|
|
General
& administrative
|
13,983,924
|
12,216,041
|
|
(Gain)
/ loss on sale of asset
|
(8,500)
|
763,531
|
|
Restructuring
costs
|
-
|
558,833
|
|
Impairment
of intangible assets
|
-
|
506,413
|
|
Selling
& marketing
|
1,895,452
|
2,311,725
|
|
Research
& development
|
862,142
|
1,784,867
|
|
Depreciation
& amortization
|
2,120,746
|
2,332,217
|
|
Total operating
expense
|
18,853,764
|
20,473,627
|
|
|
|
|
|
Loss from operations
|
(1,651,620)
|
(4,872,308)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
242,973
|
20,086
|
|
Interest
expense
|
(3,004,983)
|
(2,820,924)
|
|
Currency
exchange rate gain (loss)
|
(445,426)
|
223,475
|
|
Gain
on settlement of milestone payments
|
-
|
3,213,940
|
|
Other
income/expense, net
|
23,740
|
11,556
|
|
Total other income (expense)
|
(3,183,696)
|
648,133
|
|
Net loss before income taxes
|
(4,835,316)
|
(4,224,175)
|
|
Income
tax expense
|
592,725
|
501,651
|
|
Net loss attributable to common shareholders
|
(5,428,041)
|
(4,725,826)
|
|
Foreign
currency translation adjustments
|
(294,719)
|
169,492
|
|
Comprehensive loss
|
$(5,722,760)
|
$(4,556,334)
|
|
Net
loss per common share, basic and diluted
|
$(0.51)
|
$(0.45)
|
|
Weighted
average common shares outstanding, basic and diluted
|
10,732,523
|
10,408,870
|
The accompanying notes are an integral part of the
financial statements.
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2018
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2017
|
10,480,984
|
$1,048
|
$300,717,861
|
$(294,067,329)
|
$(675,822)
|
$5,975,758
|
|
|
|
|
|
|
|
|
|
Modification
of warrants
|
-
|
-
|
162,418
|
-
|
-
|
162,418
|
|
|
|
|
|
|
|
|
|
Cancellation
of Common Stock issued to Board Member
|
(18,551)
|
(2)
|
2
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Board of Director fees
|
266,358
|
27
|
364,696
|
-
|
-
|
364,723
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to employees for services
|
672,859
|
67
|
638,848
|
-
|
-
|
638,915
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock Warrants for Board of Director fees
|
-
|
-
|
75,000
|
-
|
-
|
75,000
|
|
|
|
|
|
|
|
|
|
Amortization
of equity-based compensation granted to employees
|
-
|
-
|
144,041
|
-
|
-
|
144,041
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
(294,448)
|
(294,448)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(5,428,041)
|
-
|
(5,428,041)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2018
|
11,401,650
|
$1,140
|
$302,102,866
|
$(299,495,370)
|
$(970,270)
|
$1,638,366
|
The
accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2017
(continued)
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
10,333,516
|
$1,034
|
$298,876,399
|
$(289,341,503)
|
$(845,314)
|
$8,690,616
|
|
|
|
|
|
|
|
|
|
Modification
of warrants
|
-
|
-
|
790,313
|
-
|
-
|
790,313
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of milestone achievement services
|
10,602
|
1
|
75,937
|
-
|
-
|
75,938
|
|
Common
shares issued upon vesting of restricted stock
|
42,026
|
4
|
167,281
|
-
|
-
|
167,285
|
|
Stock
for Board of Director fees
|
94,840
|
9
|
464,991
|
-
|
-
|
465,000
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock warrants for Board of Director fees
|
-
|
-
|
75,000
|
-
|
-
|
75,000
|
|
|
|
|
|
|
|
|
|
Amortization
of equity-based compensation granted to employees
|
-
|
-
|
267,940
|
-
|
-
|
267,940
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
169,492
|
169,492
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(4,725,826)
|
-
|
(4,725,826)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
10,480,984
|
$1,048
|
300,717,861
|
(294,067,329)
|
(675,822)
|
5,975,758
|
The
accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(5,428,041)
|
$(4,725,826)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
3,977,480
|
4,460,885
|
|
Impairment
of intangible assets
|
-
|
506,413
|
|
Bad
debt expense
|
182,045
|
1,048,737
|
|
Accretion
of debt discount
|
185,811
|
222,973
|
|
Stock
based compensation
|
1,719,844
|
1,140,520
|
|
(Gain)
/ loss on disposal of property and equipment
|
(8,500)
|
763,531
|
|
Gain
on settlement of milestone payments
|
-
|
(3,213,940)
|
|
Loss
on monitoring equipment included on cost of sales
|
390,098
|
569,371
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
(556,160)
|
583,694
|
|
Inventories
|
-
|
260,041
|
|
Prepaid
expense and other assets
|
2,187,162
|
(433,978)
|
|
Accounts
payable, accrued expense and other
|
3,380,853
|
2,965,365
|
|
Net
cash provided by operating activities
|
6,030,592
|
4,147,786
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(154,373)
|
(84,749)
|
|
Capitalized
software
|
(1,083,745)
|
(2,416,804)
|
|
Purchase
of monitoring equipment and parts
|
(1,305,586)
|
(1,838,779)
|
|
Proceeds
from sale of assets
|
8,500
|
512,500
|
|
Net
cash used in investing activities
|
(2,535,204)
|
(3,827,832)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Principal
payments on notes payable
|
(66,252)
|
(67,775)
|
|
Net
cash used in financing activities
|
(66,252)
|
(67,775)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(9,900)
|
5,221
|
|
|
|
|
|
Net increase in cash
|
3,419,236
|
257,400
|
|
Cash, beginning of year
|
2,027,321
|
1,769,921
|
|
Cash, end of year
|
$5,446,557
|
$2,027,321
|
The
accompanying notes are an integral part of the financial
statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
|
|
|
|
Cash
paid for interest
|
$226,079
|
$22,456
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Issuance
of warrants for accrued Board of Director fees
|
75,000
|
100,000
|
|
Issuance
of common shares in recognition of certain milestone
achievements
|
-
|
75,937
|
|
Non-cash
transfer of inventory to monitoring equipment
|
305,481
|
487,544
|
The accompanying notes are an integral part of the
financial statements.
TRACK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Organization and Nature of Operations
|
General
The Company’s business is based on the 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, full-time 24/7/365 global monitoring capabilities,
case management, and proprietary data analytics. The Company offers
customizable tracking solutions that leverage real-time tracking
data, best-practices monitoring, and analytics capabilities to
create complete, end-to-end tracking solutions.
Business Condition. As of September 30, 2018 and 2017 the
Company had an accumulated deficit of $299,495,370 and
$294,067,329, respectively. The Company incurred a net loss of
$5,428,041 and $4,725,826 for the years ended September 30, 2018
and 2017, respectively. The Company may continue to incur losses
and require additional financial resources. The Company also has
debt maturing in the next 12 months. The Company’s successful
development and transition to attaining profitable operations is
dependent upon achieving a level of revenues adequate to support
its cost structure. Management has evaluated the significance of
these conditions and has determined that the Company can meet its
operating obligations for a reasonable period of time. The Company
expects to fund operations using cash on hand, through operational
cash flows and the extension of its existing debt agreement.
Management of the Company believes that the availability of
financing from these sources is adequate to fund operations through
the upcoming twelve months. (See Note 15)
|
(2)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of Track
Group, Inc. and its subsidiaries, Track Group Analytics Limited,
Track Group Americas, Inc., Track Group International LTD., and
Track Group - Chile SpA. All significant inter-company transactions
have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial
Statements
The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during
the period presented. Actual results could differ from those
estimates. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to,
allowances for doubtful accounts, certain assumptions related to
the recoverability of intangible and long-lived
assets.
Business Combinations
Business combinations are accounted for under the provisions of ASC
805-10, Business Combinations
(ASC 805-10), which requires that the
purchase method of accounting be used for all business
combinations. Assets acquired and liabilities assumed at the date
of acquisition are recorded at their respective fair values. ASC
805-10 also specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart
from goodwill. Acquisition-related expense is recognized separately
from the business combinations and are expensed as incurred. If the
business combination provides for contingent consideration, the
contingent consideration is recorded at its probable fair value at
the acquisition date. Any changes in fair value after the
acquisition date are accounted for as measurement-period
adjustments if they pertain to additional information about facts
and circumstances that existed at the acquisition date and that the
Company obtained during the measurement period. Changes in fair
value of contingent consideration resulting from events after the
acquisition date, such as performance measures, are recognized in
earnings.
Goodwill represents costs in excess of purchase price over the fair
value of the assets of businesses acquired, including other
identifiable intangible assets.
Foreign Currency Translation
The Chilean Peso, New Israeli Shekel and the Canadian Dollar are
used as functional currencies of the 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 exchange rate prevailing at
September 30, 2018. Their respective statements of operations have
been translated into USD using the average exchange rates
prevailing during the periods of each statement. The corresponding
translation adjustments are part of accumulated other comprehensive
income and are shown as part of stockholders’
equity.
Other Intangible Assets
Other intangible assets principally consist of patents, royalty
purchase agreements, developed technology acquired, customer
relationships, trade name, capitalized software development costs,
and capitalized website development costs. The Company accounts for
other intangible assets in accordance with generally accepted
accounting principles and does not amortize intangible assets with
indefinite lives. Intangible assets with finite useful lives are
amortized over their respective estimated useful lives, which range
from three to twenty years. Intangible assets are reviewed for
impairment annually or more frequently whenever events or changes
in circumstances indicate possible impairment.
Fair Value of Financial Investments
The carrying amounts reported in the accompanying consolidated
financial statements for accounts receivable, accounts payable,
accrued liabilities and debt obligations approximate fair values
because of the immediate or short-term maturities of these
financial instruments. The carrying amounts of our debt
obligations approximate fair value as the interest rates
approximate market interest rates.
Concentration of Credit Risk
In the normal course of business, the Company provides credit terms
to its customers and requires no collateral. Accordingly, the
Company performs credit evaluations of our customers' financial
condition.
The Company had sales to entities, two of which represented more
than 10% of gross revenue, as follows for the years ended September
30, 2018 and 2017.
|
|
2018
|
%
|
2017
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$9,201,502
|
30%
|
$8,747,338
|
29%
|
|
Customer
B
|
$3,772,540
|
12%
|
$3,743,508
|
13%
|
|
Customer
C
|
$2,468,472
|
8%
|
$2,326,318
|
8%
|
No other customer represented more than 10% of the Company’s
total revenue for the fiscal years ended September 30, 2018 or
2017.
Concentration of credit risk associated with the Company’s
total and outstanding accounts receivable as of September 30, 2018
and 2017, respectively, are shown in the table below:
|
|
2018
|
%
|
2017
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$1,689,976
|
29%
|
$1,657,316
|
30%
|
|
Customer
B
|
$594,626
|
10%
|
$641,973
|
12%
|
|
Customer
C
|
$428,560
|
7%
|
$394,253
|
7%
|
Based upon the expected collectability of our accounts receivable,
the Company maintains an allowance for doubtful
accounts.
Cash Equivalents
Cash equivalents consist of investments with original maturities to
the Company of three months or less. The Company has cash in
bank accounts that, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The
Company had $2,900,105 and $1,445,364 of cash deposits in excess of
federally insured limits as of September 30, 2018 and 2017,
respectively.
Accounts Receivable
Accounts receivable, which is made up of trade receivables for
monitoring and other related services, are carried at original
invoice amount less an estimate made for doubtful receivables based
on a review of all outstanding amounts on a monthly basis. The
allowance is estimated by management based on certain assumptions
and variables, including the customer’s financial condition,
age of the customer’s receivables and changes in payment
histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously
written off are recorded when cash is received. A trade
receivable is considered to be past due if any portion of the
receivable balance has not been received by the Company within its
normal terms. Interest income is not recorded on trade
receivables that are past due, unless that interest is
collected.
Note Receivable
Notes receivable are carried at the face amount of each note plus
respective accrued interest receivable, less received
payments. The Company does not typically carry notes
receivable in the course of its regular business, but entered into
an agreement with one of its customers during the fiscal year ended
September 30, 2012. Payments under the note are recorded as
they are received and are immediately offset against any
outstanding accrued interest before they are applied against the
outstanding principal balance on the respective note. The note
requires monthly payments of $15,000, and matured in May
2014. The note is currently in default and accrues interest at
a rate of 17% per annum. As of June 30, 2016, the Company no longer
accrues interest on the note. As of September 30, 2018, the
outstanding balance of the note was $120,824 of principal and
$113,909 of accrued interest, which are both fully
reserved.
Prepaid expense and other
The carrying amounts reported in the balance sheet for prepaid
expense and other current assets approximate their fair market
value based on the short-term maturity of these assets. Prepaid
assets and other is comprised largely of performance bond deposits,
tax deposits, vendor deposits and other prepaid supplier expenses.
We generally expect deposits to be returned to the Company as cash
within 12 months and prepaid expenses to be allocated over the
commitment.
Inventory
Inventory is valued at the lower of the cost or net realizable
value. Cost is determined using the standard costing
method. Net realizable value is
determined based on the item selling price. Inventory is
periodically reviewed in order to identify obsolete or damaged
items or impaired values. The Company did not record
impairment of inventory during the fiscal years ended September 30,
2018 and 2017, respectively.
Inventory consists of finished goods that are to be shipped to
customers and parts used for minor repairs of ReliAlert™,
Shadow, and other tracking devices. Completed and shipped
ReliAlert™ and other tracking devices are reflected in
Monitoring Equipment. As of September 30, 2018 and September
30, 2017, respectively, inventory consisted of the
following:
|
|
2018
|
2017
|
|
Finished
goods inventory
|
$304,053
|
$288,744
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$277,119
|
$261,810
|
The Company uses a third-party fulfillment service provider. As a
result of this service, the Company’s employees do not
assemble, repair or process inventory or monitoring equipment being
shipped directly from suppliers. Purchases of monitoring equipment
are recognized directly. Management believes this process reduces
maintenance and fulfillment costs associated with inventory and
monitoring equipment.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are determined using the straight-line method over the estimated
useful lives of the assets, typically three to seven
years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the asset or the term of the lease.
Expenditures for maintenance and repairs are expensed while
renewals and improvements are capitalized.
Property and equipment consisted of the following as of
September 30, 2018 and 2017, respectively:
|
|
2018
|
2017
|
|
Equipment,
software and tooling
|
$1,074,471
|
$1,028,081
|
|
Automobiles
|
6,153
|
52,230
|
|
Leasehold
improvements
|
1,358,984
|
1,307,802
|
|
Furniture
and fixtures
|
305,089
|
293,621
|
|
Total
property and equipment before accumulated depreciation
|
2,744,697
|
2,681,734
|
|
Accumulated
depreciation
|
(1,999,222)
|
(1,778,634)
|
|
Property
and equipment, net of accumulated depreciation
|
$745,475
|
$903,100
|
Property and equipment to be disposed of is reported at the lower
of the carrying amount or fair value, less the estimated costs to
sell and any gains or losses are included in the results of
operations. During the fiscal years ended September 30, 2018 and
2017, the Company recognized an $8,500 gain and $0 gain,
respectively on the disposal of property and equipment. Internally
developed software costs related to the Company’s monitoring
platform are recorded as intangible assets on the Consolidated
Balance Sheet. See Note 14.
Depreciation expense recognized for property and equipment for the
fiscal years ended September 30, 2018 and 2017 was $348,162 and
$366,124, respectively.
Monitoring Equipment
The Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is depreciated using the straight-line method over an
estimated useful life of between one and five years. Monitoring
equipment as of September 30, 2018 and 2017 is as
follows:
|
|
2018
|
2017
|
|
Monitoring
equipment
|
$8,488,196
|
$8,399,937
|
|
Less:
accumulated amortization
|
(5,325,654)
|
(4,906,925)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$3,162,542
|
$3,493,012
|
Amortization expense for the fiscal years ended September 30, 2018
and 2017 was $1,360,753 and $1,678,668, respectively. This
expense was classified as a cost of revenue.
Monitoring equipment to be disposed of is reported at the lower of
the carrying amount or fair value, less the estimated costs to
sell. As part of the sale of assets described in Note 4, the
Company disposed of $771,568 of monitoring equipment and $361,463
of related accumulated amortization in the year ended September 30,
2017.
During the fiscal years ended September 30, 2018 and 2017, the
Company disposed of leased monitoring equipment and parts of
$390,098 and $569,371, respectively.
Impairment of Long-Lived Assets and Goodwill
The Company reviews 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. See Note 14.
Revenue Recognition
Our revenue is predominantly derived from two sources: (i)
monitoring services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (a) lease contracts
pursuant to which the Company provides monitoring services and
leases devices to distributors or end users and the Company retains
ownership of the leased device; and (b) monitoring services
purchased by distributors or end users who have previously
purchased monitoring devices and opt to use the Company’s
monitoring services.
The Company typically leases devices under multi-year contracts
with customers that opt to use our monitoring
services. However, some of these contracts may be cancelled by
either party at any time with 30 days’ notice. Under our
standard leasing contract, the leased device becomes billable on
the date of activation or seven to 21 days from the date the device
is assigned to the lessee, and remains billable until the device is
returned to the Company. The Company recognizes revenue on leased
devices at the end of each month that monitoring services have been
provided. In those circumstances in which the Company receives
payment in advance, we record these payments as deferred
revenue.
Product Sales
The Company may sell monitoring devices in certain situations to
customers. In addition, the Company may sell equipment in
connection with building out and setting up a monitoring center on
behalf of customers. The Company recognizes product sales revenue
when persuasive evidence of an arrangement with the customer
exists, title passes to the customer and the customer cannot return
the devices or equipment, prices are fixed or determinable
(including sales not being made outside the normal payment terms)
and collection is reasonably assured. When purchasing products
(such as ReliAlert™ and Shadow™ devices) from the
Company, customers may, but are not required to, enter into
monitoring service contracts with us. The Company recognizes
revenue on monitoring services for customers that have previously
purchased devices at the end of each month that monitoring services
have been provided.
The Company sells and installs standalone tracking systems that do
not require ongoing monitoring by us. We have experience in
component installation costs and direct labor hours related to this
type of sale and can typically reasonably estimate costs;
therefore, the Company recognizes revenue over the period in which
the installation services are performed using the
percentage-of-completion method of accounting for material
installations. The Company typically uses labor hours or costs
incurred to date as a percentage of the total estimated labor hours
or costs to fulfill the contract as the most reliable and
meaningful measure that is available for determining a
project’s progress toward completion. The Company evaluates
its estimated labor hours and costs and determines the estimated
gross profit or loss on each installation for each reporting
period. If it is determined that total cost estimates are
likely to exceed revenue, the Company accrues the estimated losses
immediately. All amounts billed have been earned.
Multiple Element Arrangements
The majority of the Company’s revenue transactions do not
have multiple elements. However, on occasion, the Company may enter
into revenue transactions that have multiple elements. These may
include different combinations of products or monitoring services
that are included in a single billable rate. These products or
monitoring services are delivered over time as the customer
utilizes our services. For revenue arrangements that have multiple
elements, we consider whether the delivered devices have standalone
value to the customer, there is objective and reliable evidence of
the fair value of the undelivered monitoring services, which is
generally determined by surveying the price of competitors’
comparable monitoring services, and the customer does not have a
general right of return. Based on these criteria, the Company
recognizes revenue from the sale of devices separately from the
monitoring services provided to the customer as the products or
monitoring services are delivered.
Other Matters
The Company considers an arrangement with payment terms longer than
the Company’s normal terms not to be fixed or determinable,
and revenue is recognized when the fee becomes due. Normal
payment terms for the sale of monitoring services and products are
due upon receipt to 30 days. The Company sells devices and services
directly to end users and to distributors. Distributors do not
have general rights of return. Also, distributors have no
price protection or stock protection rights with respect to devices
sold to them by us. Generally, title and risk of loss pass to
the buyer upon delivery of the devices.
The Company estimates product returns based on historical
experience and maintains an allowance for estimated returns, which
is recorded as a reduction to accounts receivable and
revenue.
Shipping and handling fees charged to customers are included as
part of net revenue. The related freight costs and supplies
directly associated with shipping products to customers are
included as a component of cost of revenue.
Research and Development Costs
During the fiscal year ended September 30, 2018 and September 30,
2017, the Company incurred research and development expense of
$862,142 and $1,784,867, respectively.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expense for the fiscal years ended
September 30, 2018 and 2017 was $8,264 and $14,984,
respectively.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards
expected to vest on a straight-line basis over the requisite
service period of the award based on their grant date fair value.
The fair value of stock options is estimated using a Black-Scholes
option pricing model, which requires management to make estimates
for certain assumptions regarding risk-free interest rate, expected
life of options, expected volatility of stock and expected dividend
yield of stock.
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.
The tax effects from uncertain tax positions can be recognized in
the financial statements, provided the position is more likely than
not to be sustained on audit, based on the technical merits of the
position. We recognize the financial statement benefits of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being
realized, upon ultimate settlement with the relevant tax authority.
The Company applied the foregoing accounting standard to all of our
tax positions for which the statute of limitations remained open as
of the date of the accompanying consolidated financial
statements.
The Company's policy is to recognize interest and penalties related
to income tax issues as components of other noninterest expense. As
of September 30, 2018 and September 30, 2017, we did not record a
liability for uncertain tax positions.
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 stockholders 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 stockholders 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 options and warrants to purchase shares of the
Company’s Common Stock, par value $0.0001 per share
(“Common
Stock”). As of
September 30, 2018 and 2017, there were 628,592 and 490,842
outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as
their effect would be anti-dilutive. The Common Stock
equivalents outstanding as of September 30, 2018 and 2017 consisted
of the following:
|
|
2018
|
2017
|
|
Exercise
of outstanding Common Stock options and warrants (excludes 56,667
unvested options and warrants)
|
628,592
|
490,842
|
|
Total
Common Stock equivalents
|
628,592
|
490,842
|
At September 30, 2018 and September 30, 2017, all stock option and
warrant exercise prices were above the market price of $0.90 and
$1.43, respectively, and thus have not been included in the basic
earnings per share calculation.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU No. 2015-11,
“Inventory (Topic 330) -
Simplifying the Measurement of Inventory” (“ASU 2015-11”), which dictates that an entity should
measure inventory within the scope of this update at the lower of
cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The Company adopted this standard in the first
quarter of fiscal year 2018. The Company’s adoption
of ASU 2015-11 did not have a material impact on
its Consolidated Financial Statements.
Recently Issued Accounting Standards
In 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 August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic
230)” requiring the
classification of certain cash receipts and cash payments to
conform the presentation in the statement of cash flows for certain
transactions, including cash distributions from equity method
investments, among others. The adoption of the new standard is
required in 2019. Management does not anticipate that this adoption
will have a significant impact on its consolidated financial
position, results of operations, or cash flows.
In February 2016, FASB issued ASU No. 2016-02,
“Leases (Topic
841).” For lessees, the
amendments in this update require that for all leases not
considered to be short term, a company recognize both a lease
liability and right-of-use asset on its balance sheet, representing
the obligation to make payments and the right to use or control the
use of a specified asset for the lease term. The amendments in this
update are effective for annual periods beginning after December
15, 2018 and interim periods within those annual periods.
Management is currently evaluating the impact of this guidance on
its consolidated financial statments and its operating lease
obligations discussed in Note 13.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with
Customers,”
which supersedes the guidance
in “Revenue Recognition (Topic
605)”
(“ASU
2014-09”) and requires
entities to recognize revenue in a way that depicts the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in
exchange for those goods or services. ASU 2014-09 is effective for
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period and is to be
applied retrospectively, with early application not permitted. The
Company has evaluated the new standard and anticipates a change in
the reporting of revenue as enhanced disclosures will be required.
The Company does not anticipate a significant impact on our
financial statements due to the nature of the Company’s
revenue streams and revenue recognition policy.
|
(3)
|
Acquisitions
|
Track Group Analytics Limited
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 will be subsequently amortized using
a straight-line method to depreciation and amortization expense
over their estimated useful lives.
|
(4)
|
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. We 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
our 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.
|
(5)
|
Accrued Liabilities
|
Accrued liabilities consisted of the following as of September 30,
2018 and 2017:
|
|
2018
|
2017
|
|
Accrued
payroll, taxes and employee benefits
|
$1,937,021
|
$943,066
|
|
Deferred
revenue
|
150,604
|
43,333
|
|
Deposits
payable
|
54,504
|
-
|
|
Accrued
taxes - foreign and domestic
|
351,469
|
529,926
|
|
Accrued
settlement costs
|
-
|
200,000
|
|
Accrued
board of directors fees
|
-
|
125,000
|
|
Accrued
other expense
|
298,268
|
251,038
|
|
Accrued
legal costs
|
473,777
|
116,824
|
|
Accrued
costs of revenue
|
230,514
|
137,884
|
|
Accrued
bond guarantee
|
157,199
|
-
|
|
Accrued
interest
|
6,679,747
|
4,303,220
|
|
Total
accrued liabilities
|
$10,333,103
|
$6,650,291
|
|
(6)
|
Certain Relationships and Related Transactions
|
The Company entered into certain transactions with related parties
during the fiscal year ended September 30, 2018 and 2017. These
transactions consist mainly of financing transactions and service
agreements. Transactions with related parties are reviewed and
approved by the independent and disinterested members of the Board
of Directors.
Related-Party Loan Agreement
On September 25, 2015, the Company entered into the Sapinda Loan
Agreement with Sapinda, a related party at that time, to provide
the Company with a $5.0 million line of credit that accrued
interest at a rate of 3% per annum for undrawn funds, and 8% per
annum for borrowed funds. Pursuant to the terms and conditions of
the Sapinda Loan Agreement, available funds could be drawn down at
the Company’s request at any time prior to the maturity date
of September 30, 2017 (the “Maturity
Date”), when all borrowed
funds, plus all accrued but unpaid interest would have become due
and payable. The Company, however, was entitled to elect to satisfy
any outstanding obligations under the Sapinda Loan Agreement prior
to the Maturity Date without penalties or fees.
On March 13, 2017, the Company and Sapinda entered into Amendment
Number One to the Sapinda Loan Agreement.
Amendment Number One extended the maturity date of all loans made
pursuant to the Sapinda Loan Agreement
to September 30, 2020. In addition, Amendment Number One eliminated
the requirement that the Company pay Sapinda the 3% interest, and forgave
the 3% interest due to Sapinda for all undrawn funds under
the Sapinda Loan Agreement
through the Execution Date. Further, Amendment Number One provided
that all Lender Penalties accrued under the Sapinda Loan Agreement
through the Execution Date were forgiven. Per Amendment Number One,
Lender Penalties began to accrue again because Sapinda failed to
fund the amount of $1.5 million on or before March 31, 2017. The
Company formally notified Sapinda of the breach by letter dated
April 4, 2017. The Company is again accruing Lender Penalties,
amounting to $548,000 at September 30, 2018, under Section 6.3
of the Sapinda Loan Agreement,
as amended, and the Company intends to offset Lender Penalties
against future payments due. We did not draw on this line of credit, nor
did we pay any interest during the year ended September 30, 2018.
The undrawn balance of this line of credit at September 30, 2018
was $1,600,356. Further advances under
the Sapinda Loan Agreement
are not currently expected to be forthcoming, and therefore no
assurances can be given that the Company will obtain additional
funds to which it is entitled under the Sapinda Loan Agreement,
or that the penalties accruing will ever be
paid.
Stock Payable – Related Party
In connection with the acquisition during fiscal year ended
September 30, 2015 described under Note 3 above, the Company
recognized a liability for stock payable to the Sellers of the
entities acquired. In conjunction with the respective purchase
agreements, shares of the Company’s stock are payable based
on the achievement of certain milestones. Changes in the stock
payable liability are shown below:
|
|
September 30,
2018
|
September 30,
2017
|
|
Beginning
balance
|
$-
|
$3,289,879
|
|
Payment
of shares for achieving performance milestones
|
-
|
(75,939)
|
|
Adjustment
to Track Group Analytics stock payable
|
-
|
(213,940)
|
|
Adjustment
to GPS Global stock payable
|
-
|
(3,000,000)
|
|
Ending
balance
|
$-
|
$-
|
Additional Related-Party Transactions and Summary of All
Related-Party Obligations
|
|
2018
|
2017
|
|
|
|
|
|
Related
party loan with an interest rate of 8% per annum for borrowed
funds. Principal and interest due September 30, 2020.
|
$3,399,644
|
$3,399,644
|
|
Total
related-party debt obligations
|
$3,399,644
|
$3,399,644
|
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. Accordingly, the Company
reversed the $3,000,000 contingent liability in the fiscal year
ended September 30, 2017 in “Other Income, net” in the
Consolidated Statements of Operations.
In connection with the acquisition of TGA (see Note 3), the Company
recognized a liability for Common 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.
|
(7)
|
Restructuring
|
In the first quarter of fiscal year 2017, the Company approved a
plan to restructure our business (the “Restructuring
Plan”) to streamline
operations by consolidating our headquarters from Salt Lake City,
Utah into our existing Chicagoland office. The Restructuring Plan,
which was completed in fiscal 2017, also included
outsourcing the Company’s
monitoring center that allowed a significant head count reduction,
lower future expense, and improve the Company’s ability to
align workforce costs with customer demands. During the year ended
September 30, 2017, the Company recognized expense for the
Restructuring Plan of $558,833, including $435,643 of severance
expense and $123,190 of lease and moving costs, all of which were
paid in fiscal 2017.
|
(8)
|
Debt Obligations
|
Debt obligations as of September 30, 2018 and 2017 consisted of the
following:
|
|
2018
|
2017
|
|
|
|
|
|
Unsecured
facility agreement with Conrent S.A. whereby, as of June 30, 2015,
the Company had borrowed $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 April 1, 2019. A
$1.2 million origination fee was paid and recorded as a debt
discount and is being amortized as interest expense over the term
of the loan. As of September 30, 2018, the remaining debt discount
was $0. The Company did not pay interest on this loan during the
year ended September 30, 2018.
|
$30,400,000
|
$30,214,189
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5.0 million at 8%
interest per annum on borrowed funds maturing on September 30,
2020.
|
3,399,644
|
3,399,644
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the G2 acquisition.
|
67,141
|
123,393
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Contract concluded
on September 7, 2018.
|
-
|
14,022
|
|
|
|
|
|
Total
debt obligations
|
33,866,785
|
33,751,248
|
|
Less
current portion
|
(30,437,810)
|
(30,270,531)
|
|
Long-term
debt, net of current portion
|
$3,428,975
|
$3,480,717
|
The following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of
September 30, 2018:
|
Fiscal Year
|
Total
|
|
2019
|
$30,437,810
|
|
2020
|
3,428,975
|
|
2021
& thereafter
|
-
|
|
Total
|
$33,866,785
|
As of September 30, 2018, and 2017, the Company had total capital
lease obligations of $0 and $14,022.
|
(9)
|
Preferred Stock
|
The Company’s Certificate of Incorporation authorizes it to
issue up to 20,000,000 shares of preferred stock, $0.0001 par value
per share, of which 1,200,000 shares have been designated as Series
A Convertible Preferred Stock (“Series A
Preferred”).
The Company’s Board of Directors
has the authority to amend its Certificate of Incorporation,
without further shareholder approval, to designate and determine,
in whole or in part, the preferences, limitations and relative
rights of the preferred stock before any issuance of the preferred
stock and to create additional series of preferred
stock.
Series A Preferred Stock
On October 12, 2017, the Company filed a Certificate of Designation
of the Relative Rights and Preferences (“Certificate
of Designation”) with the
Delaware Division of Corporations, designating 1,200,000 shares of
the Company’s preferred stock as Series A Preferred. Shares
of Series A Preferred rank senior to the Company’s common
stock, and all other classes and series of equity securities of the
Company that by their terms do not rank senior to the Series A
Preferred.
Except with respect to transactions upon which holders of the
Series A Preferred are entitled to vote separately as a class under
the terms of the Certificate of Designation, the Series A Preferred
has no voting rights. The
shares of common stock into which the Series A Preferred is
convertible shall, upon issuance, have all of the same voting
rights as other issued and outstanding shares of our common
stock.
The Series A Preferred has no separate dividend rights; however,
whenever the Board declares a dividend on the Company’s
Common Stock, if ever, each holder of record of a share of Series A
Preferred shall be entitled to receive an amount equal to such
dividend declared on one share of common stock multiplied by the
number of shares of common stock into which such share of Series A
Preferred could be converted on the Record Date.
Each share of Series A Preferred has a Liquidation Preference of
$35.00 per share, and is convertible, at the holder’s option,
into ten shares of the Company’s Common Stock, subject to
adjustments as set forth in the Certificate of Designation, at any
time beginning five hundred and forty days after the date of
issuance.
As of September 30, 2018, no shares of Series A Preferred were
issued and outstanding.
|
(10)
|
Common Stock
|
Common Stock Issuances
The Company is authorized to issue up to 30,000,000 shares of
Common Stock, $0.0001 par value per share.
On April 16, 2018, the Company issued 7,840 shares from the 2012
Equity Compensation Plan (the “2012 Plan”) to a member of the executive team, valued
at $31,360. On April 27, 2018, the Board of Directors approved the
issuance of 931,377 shares of common stock outside of the 2012
Plan. On May 1, 2018, the Company issued the approved shares,
valued at $1,273,503, to directors and certain executives for their
services.
In addition, the Company issued 30,797 warrants to a member of the
Company’s Board of Directors in exchange for 18,551 shares of
Common Stock the director previously received for services provided
during the period of October 2016 to June 2017, which shares were
therefore cancelled in the fiscal year ended September 30,
2018.
During the fiscal year ended September 30, 2017, the Company issued
147,468 shares of Common Stock. Of these shares, 42,026 shares
were issued for services rendered to the Company, valued at
$167,285; 10,602 shares valued at $75,938 were issued in connection
with the acquisition of a subsidiary and for achieving certain
performance milestones; and 94,840 shares were issued to pay Board
of Director fees of $565,000.
|
(11)
|
Stock Options and Warrants
|
Stock Incentive Plan
The 2012 Plan was approved at the Annual Meeting of Shareholders on
December 21, 2011, and at the Annual Meeting of Shareholders on May
19, 2015, the Company’s
shareholders approved an amendment increasing the number of shares
of Common Stock available for issuance under 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 have important
relationships with the Company. At our May 11, 2017 Board of
Directors meeting, the Board of Directors approved a resolution
extending the expiration date of 573,663 warrants held by 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 warrants 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. A total of 803,262 shares
are authorized for issuance pursuant to awards granted under the
2012 Plan.
During the fiscal years ended September 30, 2018 and 2017, options
to purchase 30,797 and 110,000 shares of Common Stock were granted
under the 2012 Plan. During the year ended September 30,
2018, the Company cancelled
18,551 shares of Common Stock under the 2012 Plan. All the shares
of Common Stock issued during 2018 were related to Board of
Director fees, which were earned in fiscal year 2017. As of
September 30, 2018, 27,218 shares of Common Stock were available
for future grants under the 2012 Plan.
All Options and Warrants
On November 30, 2017, the Board of Directors unanimously approved
the adjustment of the exercise price of 605,678 unexercised
warrants, with original exercise prices ranging from $1.81 to
$19.46, issued under the 2012 Plan to $1.24, resulting in
incremental stock-based compensation of $149,088, which was
expensed in the fiscal year ended September 30, 2018.
On January 26, 2018, the Board of Directors unanimously approved
the adjustment of the exercise price of 65,617 unexercised warrants
held by a member of the Company’s Board of Directors whose
unexercised warrants were not repriced along with those that were
adjusted on November 30, 2017, with original exercise prices
ranging from $1.43 to $7.20, issued under the 2012 Plan to $1.15,
resulting in incremental stock-based compensation of $12,530, which
was expensed in the fiscal year ended September 30,
2018.
The Company issued 30,797 warrants to a member of the
Company’s Board of Directors under the 2012 Plan in exchange
for 18,551 shares of common stock the director previously received
for services provided during the period of October 2016 to June
2017, which shares were therefore cancelled in the fiscal year
ended September 30, 2018.
In addition, the Company issued 54,792 restricted warrants outside
of the 2012 Plan for Board of Director services rendered in the
first six months of fiscal year 2018 valued at
$50,000.
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 fiscal years ended September 30, 2018 and 2017, the
Company granted 0 and 137,268 options and warrants to purchase
shares of common stock under the 2012 Plan. The warrants for Board
members vest immediately and expire five years from grant date and
warrants or options issued to employees vest annually over either a
two to three-year period and expire five years after the final
vesting date of the grant. The Company recorded expense of
$169,041 and $244,093 for the fiscal years ended September 30,
2018 and 2017, respectively, related to the issuance and vesting of
outstanding stock options and warrants.
As of September 30, 2018, no compensation expense associated with
unvested stock options and warrants issued previously to members of
the Board of Directors will be recognized over the next
year.
During the fiscal year ended September 30, 2017, the Company
granted 27,268 warrants to members of the Company’s Board of Directors, valued at
$75,000.
The following are the weighted-average assumptions used for options
granted during the fiscal years ended September 30, 2018 and 2017
using the Black-Scholes model, respectively:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
2017
|
|
Expected
stock price volatility
|
102%
|
120%
|
|
Risk-free
interest rate
|
2.09%
|
0.77%
|
|
Expected
life of options/warrants
|
5
Years
|
5
Years
|
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
The expected life of stock options and 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. In fiscal year
2014, the Company changed from
a daily to weekly volatility. The risk-free interest rate
represents the U.S. Treasury bill rate for the expected life of the
related stock options and warrants. The dividend yield represents
our anticipated cash dividends over the expected life of the stock
option and warrants.
A summary of the compensation-based options and warrants activity
for the fiscal years ended September 30, 2018 and 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
|
151,080
|
$3.77
|
|
|
|
Expired
|
(55,229)
|
$16.29
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Outstanding
as of September 30, 2017
|
600,842
|
$8.51
|
4.90 years
|
-
|
|
Granted
|
85,589
|
1.13
|
|
|
|
Expired
|
(1,172)
|
(19.29)
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Outstanding
as of September 30, 2018
|
685,259
|
$1.56
|
3.90
years
|
$-
|
|
Exercisable
as of September 30, 2018
|
628,592
|
$1.59
|
3.95
years
|
$-
|
The fiscal year end intrinsic values are based on a September 29,
2018 closing price of $0.90 per share.
|
(12)
|
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.
On
December 22, 2017, the Tax Cuts and Jobs Act (the
“Tax Act”) was
enacted and implements comprehensive tax legislation which, among
other changes, reduces the federal statutory corporate tax rate
from 35% to 21%, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were
previously deferred, creates new provisions related to foreign
sourced earnings, eliminates the domestic manufacturing deduction
and moves to a territorial system. Additionally,
in December 2017, the Securities and Exchange Commission
staff issued Staff Accounting Bulletin No. 118
(“SAB
118”), which addresses how a company recognizes
provisional amounts when a company does not have the
necessary information available, prepared or analyzed (including
computations) in reasonable detail to complete its accounting for
the effect of the changes in the Tax Act. The measurement period,
as defined in SAB 118, ends when a company has obtained, prepared
and analyzed the information necessary to finalize its accounting,
but cannot extend beyond one year. During the
measurement period, provisional amounts may also be adjusted for
the effects, if any, of interpretative guidance issued after
December 31, 2017, by U.S. regulatory and standard-setting
bodies.
Based
on the provisions of the Tax Act, the Company re-measured its U.S.
deferred tax assets and liabilities and adjusted its deferred tax
balances to reflect the lower U.S. corporate income tax rate at
December 31, 2017. The re-measurement of the Company's U.S.
deferred tax assets and liabilities at the lower enacted U.S.
corporate tax rate resulted in an income tax expense of $23,668,000
which is included in the provision.
For the fiscal years ended September 30, 2018 and 2017,
the Company incurred net losses for
income tax purposes of $5,428,041 and $4,725,826,
respectively. The amount and ultimate realization of the
benefits from the net operating losses is dependent, in part, upon
the tax laws in effect, our 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.
At September 30, 2018, the
Company had net carryforwards available to offset future taxable
income of approximately $206,000,000 of which less than $200,000
will expire in 2018. The utilization of the net loss
carryforwards is dependent upon the tax laws in effect at the time
the net operating loss carryforwards can be utilized. The
Internal Revenue Code contains provisions that likely could reduce
or limit the availability and utilization of these net operating
loss carryforwards. An ownership change generally affects the rate
at which NOLs and potentially other deferred tax assets are
permitted to offset future taxable income. Since
the Company maintains a full valuation
allowance on all U.S. and state deferred tax assets, the impact
of prior year ownership changes on the future
realizability of U.S. and state deferred tax assets did not result
in an impact to the provision for income taxes for the year ended
September 30, 2018, or on net deferred tax asset as of September
30, 2018.
The Company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The tax
provision for the year ended September 30, 2018 was due primarily
to taxes on the income of a foreign-based subsidiary and
U.S. state and local income taxes.
The deferred income tax assets (liabilities) were comprised of the
following for the periods indicated:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
2017
|
|
Net
loss carryforwards
|
$51,296,000
|
$58,134,000
|
|
Accruals
and reserves
|
913,000
|
1,319,000
|
|
Contributions
|
16,000
|
24,000
|
|
Depreciation
|
53,000
|
(113,000)
|
|
Stock-based
compensation
|
1,018,000
|
594,000
|
|
Valuation
allowance
|
(53,296,000)
|
(59,958,000)
|
|
Total
|
$-
|
$-
|
Reconciliations between the benefit for income taxes at the federal
statutory income tax rate and the Company's benefit for income
taxes for the years ended September 30, 2018 and 2017 are as
follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
2017
|
|
Federal
income tax benefit at statutory rate
|
$(1,700,000)
|
$2,382,000
|
|
State
income tax benefit, net of federal income tax
effect
|
(265,000)
|
231,000
|
|
Effect
of foreign income taxes
|
593,000
|
502,000
|
|
Non-deductible
expenses
|
(554,000)
|
(516,000)
|
|
Rate
change due to Tax Cuts and Jobs Act
|
24,222,000
|
-
|
|
Deferred
only adjustment
|
(15,791,000)
|
-
|
|
Change
in valuation allowance
|
(5,912,000)
|
(2,097,000)
|
|
Provision
for income taxes
|
$593,000
|
$502,000
|
During the fiscal year ended September 30, 2014,
the Company began recognizing revenue
from international sources from our products and monitoring
services. During the fiscal year ended September 30,
2014, the Company began
recognizing a liability for value-added taxes, which will be due
upon collection. At September 30, 2018, the Company had a net receivable related to
payments on VAT tax of $400. During the year ended September 30,
2018, the Company recorded income tax expense of $592,725 related
to a foreign jurisdiction, which is included in income tax expense
on the Consolidated Statements of Operations.
The Company’s open tax years for federal and state income tax
returns are for the tax years ended September 30, 2015
through September 30,
2018.
|
(13)
|
Commitments and Contingencies
|
Legal Matters
The Company is, from time to time, involved in various legal
proceedings incidental to the conduct of our business.
Historically, the outcome of all such legal proceedings has not, in
the aggregate, had a material adverse effect on our business,
financial condition, results of operations or liquidity. Other than
as set forth below, there are no additional pending or threatened
legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie
Leybovich and Ben Leybovich filed a complaint in the 11th Circuit
Court in and for Miami-Dade County, Florida alleging breach of
contract with regard to certain Stock Redemption Agreements. The
Plaintiffs are alleging $1,587,604 in combined damages. 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 an Appeal on June 1, 2016 challenging the
Court’s ruling on the motion for Summary Judgment. The
Appellate court ruled in favor of the Plaintiff, finding that
factual issue remains, reversing the Summary Judgment and remanding
the case back to trial. The Company’s motion for partial
Summary Judgment has been denied. A five day trial is tentatively
scheduled to take place in February 2019.
Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc.
et al. On December 3, 2015, Candace Boggs et al. filed a
complaint in the State Court of Dougherty County, Georgia, alleging
breach of contract and negligence in monitoring of certain
offenders in Dougherty County, Georgia, as well as a request for
punitive damages. Plaintiffs withdrew their complaint in February
2016, but refiled the complaint on October 12, 2016. The
Company’s motion for Summary Judgment was denied on February
27, 2017 and a Notice of Appeal was filed by the Company’s
counsel on April 15, 2017. In May the Court of Appeals reversed the
trial court decision and granted the Company’s Motion to
Dismiss the Plaintiff’s claims. Plaintiff has filed a
petition to have the case heard in the Georgia Supreme Court. On
June 27, 2018, Counsel filed a response to the petition and we are
currently waiting on a ruling from the court. We believe the claims
are inaccurate and are defending the case vigorously. We believe
the probability of incurring a material loss to be
remote.
Track Group, Inc. v. I.C.S. of the Bahamas Co.
Ltd. On May 18, 2016, the Company filed a complaint in
the District Court of the Third Judicial District in Salt Lake
County, Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid
principal and interest on the Promissory Note are in the amount of
$230,000, plus per annum interest. The Defendant’s initial
Counterclaims were dismissed; however, the Court granted the
Defendant leave to amend. The Amended Counter Claims were filed on
June 23, 2017 alleging $1,628,667 in damages. The Company’s
Motion to Dismiss the Amended Counterclaims was denied on September
19, 2017. The Company filed an Answer to the Amended Counterclaims
on October 3, 2017. Depositions have taken place for both parties.
The Company’s motion for Summary Judgment on ICS’s
Counterclaims was filed on August 13, 2018. Once the motion is
fully briefed a hearing will be scheduled. We believe we will be
successful in this action for amounts owed under the loan agreement
and promissory note; however, the Company may encounter problems
enforcing a favorable judgment in the foreign jurisdiction where
ICS resides.
Track Group Inc. v. I.C.S. of the Bahamas Co.
Ltd. On September 26, 2016, the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by ICS. Under the terms of
the Commercial and Monitoring Representative Agreement dated
November 30, 2010 (the “C&M
Agreement”) by and
between the Company and ICS, any dispute must be resolved by
binding arbitration. The Company asserts that ICS has failed to pay
the Company fees owed to it under the C&M Agreement. The amount
owed to the Company is approximately $1.0 million. Depositions were
completed in August of 2017. The arbitration hearing took place on
January 31, 2018. The arbitrator requested legal briefings after
the hearing which were submitted in March 2018. Final briefs were
submitted to the arbitrator on May 30, 2018. The arbitrator ruled
that ICS owes the Company $689,000. ICS submitted a Request for
Modification of the arbitration award on August 22, 2018 and the
arbitrator subsequently eliminated the earlier award of $689,000 to
the Company. The Company is currently pursuing legal means to
demonstrate that there is no such basis for the change by the
arbitrator.
John Merrill v. Track Group, Inc. and Guy
Dubois. On
November 30, 2016, the Company was served with a complaint filed by
John Merrill, the former Chief Financial Officer of the Company, in
District Court of the Third Judicial District in Salt Lake County,
Utah alleging breach of contract, among other causes of action,
related to Mr. Merrill’s termination of employment. Mr.
Merrill is seeking not less than $590,577 plus interest, attorney
fees and costs. Mr. Merrill’s employment with the Company was
terminated effective September 27, 2016. The Company filed an
Answer with Counter Claims on December 21, 2016. The Company filed
a motion for Summary Judgment on January 16, 2018. At a hearing on
April 25, 2018, the court dismissed the Plaintiff’s claims
related to an oral look-back agreement and a separation agreement.
The court has not ruled on Plaintiff’s claims related to his
employment agreement. A settlement amount could not be reached by
the parties. The matter will likely proceed to trial after expert
discovery is conducted. 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 alleged damages of at least $250,000. The Company’s
motion for Summary Judgment was granted on August 31,
2018.
SecureAlert, Inc. v. Federal Government of Mexico (Department of
the Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by Defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social of the then Public Security Department, and
presently, an agency of the National Security Commission of the
Department of the Interior, and SecureAlert, Inc., presently Track
Group, Inc. The Company’s claim amount is upwards of $6.0
million. On March 28, 2017, the Federal Administrative Tribunal
rejected our claim, based on its determination that this case
should be resolved by a Civil Court and not by the Federal
Administrative Tribunal. For that reason, on April 25, 2017, the
Company filed an appeal before the Collegiate Tribunals against the
decision of the Federal Administrative Tribunal. The Tribunal ruled
the claims should be resolved in the Civil Court. Following that
ruling the Supreme Court took action to resolve the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal.
Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et
al. On June 9, 2017, the
Plaintiff, Pablo Gonzalez-Cruz, and relatives of the Plaintiff,
filed a Complaint in the Court of First Instance, San Juan Superior
Court, Common Wealth of Puerto Rico against the Company, and
associated parties alleging the death of his daughter was a direct
and immediate result of the gross negligence. The Company’s
insurance carrier reached a settlement with the Plaintiff through
an agreement dated September 5, 2018.
Eli Sabag v. Track Group, Inc., Sapinda Asia Limited and Lars
Windhorst. On May 4, 2018, Eli Sabag filed a
complaint before the Marion Superior Court in Marion County Indiana
for damages and declaratory Judgment against the Company. The
complaint seeks to enforce an “earn-out” clause in a
Share Purchase Agreement (“SPA”) between the Company and
Sabag. Sabag alleges that the Company breached the SPA because
it failed to pay him his earn out after it sold and leased a
sufficient number of GPS devices to meet the earn-out
milestone. In the alternative, Sabag sued the Company for
breach of fiduciary duty and tortious interference, alleging that
the Company avoided selling sufficient GPS devices so as to not
trigger the issuance of Contingent Stock under the SPA. Finally,
Sabag alleges that the Company was unjustly enriched because it
failed to pay full value for his shares under the SPA. The
Company believes the allegations are unfounded and without merit,
and it will defend the case vigorously. Furthermore, according
to the SPA, any disputes are to be resolved through binding
arbitration and enforced in the State of Utah. The Company
filed a motion to dismiss the Complaint and Compel Arbitration on
September 5, 2018 and we are waiting on a ruling from the
court.
Erick Cerda v. Track Group, Inc. On July 25, 2018, former
employee Erick Cerda (“Plaintiff”) filed a complaint in
the United States District Court for the Northern District of
Illinois, Case No. 18-CV-05075, against the Company alleging
violations of Title VII of the Civil Rights Act of 1964
(“Title VII”) and the Age Discrimination in Employment
Act (“ADEA”). Plaintiff seeks injunctive relief
and monetary damages in an unspecific amount. On October 5,
2018, the Company filed its answer and affirmative defenses to
Plaintiff’s First Amended Complaint denying Plaintiff’s
allegations in their entirety. The Company believes that
Plaintiff’s allegations are unfounded and without
merit.
Operating Lease Obligations
The following table summarizes our contractual obligations as of
September 30, 2018:
|
Fiscal Year
|
Total
|
|
|
|
|
2019
|
$329,941
|
|
2020
|
255,646
|
|
2021
|
183,131
|
|
2022
|
167,345
|
|
2023
|
3,612
|
|
Thereafter
|
-
|
|
Total
|
$939,675
|
The total operating lease obligations of $939,675 is largely
related to facilities operating leases. During the years ended
September 30, 2018 and 2017, the Company paid $476,152 and $545,228, in lease
payment obligations, respectively.
|
(14)
|
Intangible Assets
|
The following table summarizes the activity of intangible assets
for the years ended September 30, 2018 and 2017,
respectively:
|
2018
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
|
Net Book Value
|
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
$21,170,565
|
$(7,751,751)
|
$-
|
$13,418,814
|
|
Developed
technology
|
7.60
|
11,835,293
|
(2,885,092)
|
-
|
8,950,201
|
|
Customer
relationships
|
7.70
|
1,860,000
|
(1,050,733)
|
-
|
809,267
|
|
Trade
name
|
9.57
|
325,507
|
(250,735)
|
-
|
74,772
|
|
Website
|
3.00
|
78,201
|
(78,201)
|
-
|
-
|
|
Total
|
|
$35,269,566
|
$(12,016,512)
|
$-
|
$23,253,054
|
|
2017
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
|
Net Book Value
|
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
$21,170,565
|
$(6,415,229)
|
$-
|
$14,755,336
|
|
Developed
technology
|
8.22
|
11,116,738
|
(2,301,259)
|
-
|
8,815,479
|
|
Customer
relationships
|
7.70
|
2,590,683
|
(1,039,336)
|
(499,759)
|
1,051,588
|
|
Trade
name
|
9.57
|
332,183
|
(240,941)
|
-
|
91,242
|
|
Website
|
3.00
|
78,201
|
(73,191)
|
-
|
5,010
|
|
Total
|
|
$35,288,370
|
$(10,069,956)
|
$(499,759)
|
$24,718,655
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through September 30, 2018. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the years ended September 30, 2018 and
2017 was $2,268,846 and $2,416,092, 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 year ended September 30, 2017. See
Note 4. In connection with the
Company’s annual impairment testing performed by an
independent valuation firm, a non-cash impairment charge of
$506,413, based on the monthly average exchange rate, was recorded
during the year ended September 30, 2017 related to a legacy
non-core facet of the business. This charge is included in
Impairment of intangible assets on the Consolidated Statements of
Operations. There was no impairment indicated for the year ended
September 30, 2018.
The following table summarizes the future maturities of
amortization of intangible assets as of September 30,
2018:
|
Fiscal
Year
|
Amortization
|
Patent
|
STOP
Royalty
|
|
2019
|
$2,507,840
|
$1,852
|
$450,000
|
|
2020
|
2,449,940
|
-
|
450,000
|
|
2021
|
2,408,800
|
-
|
450,000
|
|
2022
|
2,232,132
|
-
|
450,000
|
|
2023
|
2,119,313
|
-
|
450,000
|
|
Thereafter
|
9,095,677
|
-
|
187,500
|
|
Total
|
$20,813,702
|
$1,852
|
$2,437,500
|
Goodwill – In accordance
with accounting principles generally accepted in the United States
of America, we do not amortize goodwill. These principles require
the Company to periodically perform tests for goodwill impairment,
at least annually, or sooner if evidence of possible impairment
arises. We evaluated the goodwill for impairment as of September
30, 2018. Based on the evaluation made, the Company concluded that no impairment of
goodwill was necessary.
Goodwill, as of September 30 consisted of the
following:
|
|
September 30,
|
|
|
|
2018
|
2017
|
|
Balance
- beginning of year
|
$8,226,714
|
$7,955,876
|
|
Effect
of foreign currency translation on goodwill
|
(149,955)
|
270,838
|
|
Balance
- end of year
|
$8,076,759
|
$8,226,714
|
|
(15)
|
Subsequent Events
|
On November 14, 2018, the Company requested that Conrent extend the
maturity of the Amended Facility Agreement from April 1, 2019 to
April 1, 2020. On December 3, 2018, Conrent agreed to convene
meetings of the investors who purchased the securities from Conrent
to finance the debt (the “Noteholders”) and subsequently
issued a notice of a meeting of Noteholders for each series of
Notes, which meetings will be held on January 16, 2019. Based on
discussions between the Company and Conrent to date, the Company
anticipates that the Noteholders will agree to extend the maturity
of the Amended Facility Agreement before its maturity on April 1,
2019, however no assurance can be given.
F-27