UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
2018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 0-23153
Track Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 87-0543981 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
200 E. 5th Avenue Suite 100, Naperville, IL 60563
(Address of principal executive offices) (Zip Code)
(877) 260-2010
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
| Smaller reporting company [X] |
| | Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐ [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant’s common stock as of February 1, 201813, 2019 was 10,462,433.11,401,650.
FORM 10-Q
For the Quarterly Period Ended December 31, 20172018
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PART I. FINANCIALFINANCIAL INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATEDBALANCESHEETS
| Assets | December 31, 2017 (unaudited) | | December 31, 2018 (unaudited) | |
| Current assets: | | |
| Cash | $1,755,437 | $2,027,321 | $5,865,546 | $5,446,557 |
| Accounts receivable, net of allowance for doubtful accounts of $3,432,985 and $3,268,095, respectively | 5,526,000 | 5,438,564 | |
| Note receivable, current portion | 234,733 | |
| Prepaid expenses and other | 4,219,135 | 854,122 | |
| Accounts receivable, net of allowance for doubtful accounts of $3,218,902 and $3,152,966, respectively | | 6,192,940 | 5,978,896 |
| Note receivable, net of allowance for doubtful accounts of $234,733, respectively | | - |
| Prepaid expense and other | | 1,337,300 | 1,270,043 |
| Inventory, net of reserves of $26,934, respectively | 172,347 | 261,810 | 154,408 | 277,119 |
| Total current assets | 11,907,652 | 8,816,550 | 13,550,194 | 12,972,615 |
| Property and equipment, net of accumulated depreciation of $1,862,347 and $1,778,634, respectively | 883,039 | 903,100 | |
| Monitoring equipment, net of accumulated amortization of $4,767,061 and $4,906,925, respectively | 3,460,685 | 3,493,012 | |
| Intangible assets, net of accumulated amortization of $10,444,569 and $9,839,032, respectively | 24,410,468 | 24,718,655 | |
| Property and equipment, net of accumulated depreciation of $2,034,514 and $1,999,222, respectively | | 781,704 | 745,475 |
| Monitoring equipment, net of accumulated amortization of $5,693,930 and $5,325,654, respectively | | 2,968,188 | 3,162,542 |
| Intangible assets, net of accumulated amortization of $12,455,608 and $12,016,512, respectively | | 22,537,375 | 23,253,054 |
| Goodwill | 8,275,308 | 8,226,714 | 7,892,845 | 8,076,759 |
| Other assets | 785,195 | 2,989,101 | 124,237 | 145,839 |
| Total assets | $49,722,347 | $49,147,132 | $47,854,543 | $48,356,284 |
| | | |
| Liabilities and Stockholders’ Equity | | |
| Liabilities and Stockholders’ Equity (Deficit) | | |
| Current liabilities: | | |
| Accounts payable | 2,529,632 | 2,769,835 | $2,346,015 | $2,518,030 |
| Accrued liabilities | 8,021,419 | 6,650,291 | 11,664,052 | 10,333,103 |
| Current portion of long-term debt, net of discount of $130,067 and $185,811, respectively | 30,322,191 | 30,270,531 | |
| Current portion of long-term debt | | 30,437,810 |
| Total current liabilities | 40,873,242 | 39,690,657 | 44,447,877 | 43,288,943 |
| Long-term debt, net of current portion | 3,466,468 | 3,480,717 | 3,416,296 | 3,428,975 |
| Total liabilities | 44,339,710 | 43,171,374 | 47,864,173 | 46,717,918 |
| | | |
| Stockholders’ equity: | | |
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 10,462,433 and 10,480,984 shares outstanding, respectively | 1,046 | 1,048 | |
| Additional paid-in capital | 300,978,608 | 300,717,861 | |
Commitments and contingencies (Note 21)
| | -
|
| | | |
| Stockholders’ equity (deficit): | | |
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,401,650 shares outstanding, respectively | | 1,140 |
| Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | | - |
| Paid in capital | | 302,186,084 | 302,102,866 |
| Accumulated deficit | (295,109,920) | (294,067,329) | (301,323,257) | (299,495,370) |
| Accumulated other comprehensive loss | (487,097) | (675,822) | (873,597) | (970,270) |
| Total equity | 5,382,637 | 5,975,758 | |
| Total liabilities and stockholders’ equity | $49,722,347 | $49,147,132 | |
| Total equity (deficit) | | (9,630) | 1,638,366 |
| Total liabilities and stockholders’ equity (deficit) | | $47,854,543 | $48,356,284 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| | Three Months Ended December 31, |
| | | |
| Revenues: | | |
| Monitoring services | $7,350,805 | $7,265,013 |
| Other | 139,889 | 406,477 |
| Total revenues | 7,490,694 | 7,671,490 |
| | | |
| Cost of revenues: | | |
| Monitoring, products and other related services | 2,542,007 | 3,607,276 |
| Depreciation & amortization included in cost of revenues | 477,142 | 445,493 |
| Impairment of monitoring equipment and parts | - | 74,787 |
| Total cost of revenues | 3,019,149 | 4,127,556 |
| | | |
| Gross profit | 4,471,545 | 3,543,934 |
| | | |
| Operating expenses: | | |
| General & administrative | 3,657,738 | 3,175,054 |
| Restructuring costs | - | 566,330 |
| Selling & marketing | 409,737 | 589,768 |
| Research & development | 163,946 | 488,178 |
| Depreciation & amortization | 564,740 | 575,111 |
| Total operating expenses | 4,796,161 | 5,394,441 |
Loss from operations | (324,616) | (1,850,507) |
| | | |
| Other income (expense): | | |
| Interest expense, net | (673,827) | (647,103) |
| Currency exchange rate loss | (55,072) | (116,442) |
| Other income/expense, net | 10,924 | 293 |
| Total other income (expense) | (717,975) | (763,252) |
| Net loss attributable to common shareholders | (1,042,591) | (2,613,759) |
| Foreign currency translation adjustments | 188,725 | (493,572) |
| Comprehensive loss | $(853,866) | $(3,107,331) |
| Net loss per common share, basic and diluted | $(0.10) | $(0.25) |
| Weighted average common shares outstanding, basic and diluted | 10,476,346 | 10,333,516 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDISUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ALRIESOSS (Unaudited)
| | Three Months Ended December 31, |
| | | |
| Revenue: | | |
| Monitoring and other related services | $8,060,328 | $7,350,805 |
Product sales and other
| 151,207 | 139,889 |
| Total revenue | 8,211,535 | 7,490,694 |
| | | |
| Cost of revenue: | | |
| Monitoring, products and other related services | 3,100,193 | 2,542,007 |
| Depreciation & amortization included in cost of revenue | 478,289 | 477,142 |
| Total cost of revenue | 3,578,482 | 3,019,149 |
| | | |
| Gross profit | 4,633,053 | 4,471,545 |
| | | |
| Operating expense: | | |
| General & administrative | 3,422,272 | 3,657,738 |
| Selling & marketing | 503,930 | 409,737 |
| Research & development | 248,865 | 163,946 |
| Depreciation & amortization | 514,981 | 564,740 |
| Total operating expense | 4,690,048 | 4,796,161 |
| | | |
| Loss from operations | (56,995) | (324,616) |
| | | |
| Other income (expense): | | |
| Interest expense, net | (601,239) | (673,827) |
| Currency exchange rate loss | (932,677) | (55,072) |
| Other income/expense, net | - | 10,924 |
| Total other expense | (1,533,916) | (717,975) |
| Loss before income taxes | (1,590,911) | (1,042,591) |
| Income tax expense | 144,007 | - |
| Net loss attributable to common shareholders | (1,734,918) | (1,042,591) |
| Foreign currency translation adjustments | 96,673 | 188,725 |
| Comprehensive loss | $(1,638,245) | $(853,866) |
| Net loss per common share, basic and diluted | $(0.16) | $(0.10) |
| Weighted average common shares outstanding, basic and diluted | 11,101,650 | 10,476,346 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)
| | Three Months Ended December 31, | Three Months Ended December 31, |
| | | | | |
| Cash flows from operating activities: | | |
| Net loss | $(1,042,591) | $(2,613,759) | $(1,734,918) | $(1,042,591) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| Depreciation and amortization | 1,041,882 | 1,020,604 | 993,270 | 1,041,882 |
| Impairment of monitoring equipment and parts | - | 74,787 | |
| Bad debt expense | 186,910 | 359,551 | 90,400 | 186,910 |
| Accretion of debt discount | 55,744 | 55,743 | - | 55,744 |
| Stock based compensation | 787,590 | 225,374 | 83,217 | 787,590 |
| Loss on monitoring equipment included in cost of sales | 95,817 | - | |
| Other | (36,454) | - | |
| Loss on monitoring equipment included in cost of revenue | | 104,079 | 95,817 |
| Foreign currency exchange loss | | 932,677 | 55,072
|
| Change in assets and liabilities: | | |
| Accounts receivable, net | (354,633) | 660,834 | (380,133) | (354,633) |
| Inventories | 69,836 | 57,700 | - | 69,836 |
| Prepaid expenses and other assets | (1,009,813) | 149,428 | |
| Prepaid expense and other assets | | (106,071) | (1,009,813) |
| Accounts payable | (238,490) | 684,987 | (153,689) | (238,490) |
| Accrued expenses | 772,412 | 1,461,547 | |
| Accrued liabilities | | 1,309,601
| 680,886
|
| Net cash provided by operating activities | 328,210 | 2,136,796 | 1,138,433 | 328,210 |
| | | |
| Cash flow from investing activities: | | |
| Purchase of property and equipment | (28,685) | (12,762) | (141,595) | (28,685) |
| Capitalized software | (254,899) | (570,093) | (275,623) | (254,899) |
| Purchase of monitoring equipment and parts | (311,142) | (818,600) | (133,981) | (311,142) |
| Net cash used in investing activities | (594,726) | (1,401,455) | (551,199) | (594,726) |
| | | | |
| Cash flow from financing activities: | | | |
| Principal payments on notes payable | (17,289) | (17,266) | |
Principal payments on long-term debt
| | (9,357) | (17,289) |
| Net cash used in financing activities | (17,289) | (17,266) | (9,357) | (17,289) |
| | | | |
| Effect of exchange rate changes on cash | 11,921 | (1,606) | (158,888) | 11,921 |
| | | | |
| Net increase (decrease) in cash | (271,884) | 716,469 | 418,989 | (271,884) |
| Cash, beginning of period | 2,027,321 | 1,769,921 | 5,446,557 | 2,027,321 |
| Cash, end of period | $1,755,437 | $2,486,390 | $5,865,546 | $1,755,437 |
| | | | |
| Cash paid for interest | $10,708 | $4,587 | $8,858 | $10,708 |
| | | |
| Supplemental schedule of non-cash investing and financing activities: | | |
| Non-cash transfer of inventory to monitoring equipment | $81,893 | $62,193 | $128,044 | $81,893 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP,GROUP, INC. AND SUBSIDIARIES NOTESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial information of Track Group, Inc. and subsidiaries (collectively, the “Company” or “Track Group”) has been prepared in accordance with the Instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of December 31, 2017,2018, and results of its operations for the three months ended December 31, 2017.2018. These financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 20172018, filed with the SEC on December 19, 2017.2018. The results of operations for the three months ended December 31, 20172018 may not be indicative of the results for the fiscal year ending September 30, 2018.2019.
Reclassifications– Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income (loss) or shareholders’ equity (See Note 4).
Business condition -As of December 31, 20172018 and 20162017, the Company had an accumulated deficit of $295,109,920$301,323,257 and $291,955,262,$295,109,920, respectively. The Company incurred a net loss of $1,042,592$1,734,918 and $2,613,759$1,042,591 for the three months ended December 31, 2018 and 2017, and 2016, 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 revenuesrevenue adequate to support its cost structure. Management has evaluated the significance of these negative 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 restructuringextension 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.
(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Track Group, Inc. and its subsidiaries.active 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.Certain prior year amounts on the consolidated statement of operations have been reclassified to conform to the current period presentation. These reclassifications have no impact on the previously reported results.
(3) RECENT ACCOUNTING STANDARDS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which are adopted by the Company as of the specified effective date. During the three months ended December 31, 2017,2018, there were no new accounting pronouncements that had a material impact on the Company’s consolidated financial statements.
Recently adopted accounting standardsAdopted Accounting Standards
In July 2015,May 2014, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”Accounting Standards Update (“ASU 2015-11”) 2014-09 and related amendments “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”), which dictatessuperseded all prior revenue recognition methods and industry-specific guidance. The principle of ASC 606 is that an entity should measure inventory withinrecognize revenue to depict the scopetransfer of this update atcontrol for promised goods or services to customers in an amount that reflects the lower of cost and net realizable value. Net realizable value isconsideration to which the estimated selling pricesentity expects to be entitled in exchange for those goods or services. On October 1, 2018, we adopted ASC 606 using the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard inmodified retrospective method, whereby the first quarter of fiscal year 2018. The Company’s adoption of ASU 2015-11 diddoes not have a material impact on its Consolidated Financial Statements.any prior periods. See Note 8.
RecentlyIn May 2017, the FASB issued accounting standardsASU 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. The Company’s adoption of ASU 2017-09 did not have an 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 ASU 2016-15 did not have an effect on the Company’s consolidated statement of cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment.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) classification of certain cash receipts and cash payments to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. The adoption of the new standard is required in 2019. Management does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 841).” For lessees, the amendments in this update require that for all leases not considered to be short term, a company recognize both a lease liability and right-of-use asset on its balance sheet, representing the obligation to make payments and the right to use or control the use of a specified asset for the lease term. The amendments in this update are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Management does not anticipate thatis currently evaluating the impact of this adoption will have a significant impactguidance on its consolidated financial position, results of operations, or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidancestatements and its operating lease obligations discussed in “Revenue Recognition (Topic 605)” (“ASU 2014-09”) and requires entities to recognize revenue is a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company has evaluated the new standard and anticipates a change in the reporting of revenue as enhanced disclosures will be required. The Company does not anticipate a significant impact on our financial statements due to the nature of our revenue streams and our revenue recognition policy.Note 21.
(4) IMMATERIAL ERROR CORRECTIONS
This Quarterly Report on Form 10-Q of the Company for the period ended December 31, 2017 includes the revision of the Company’s previously filed consolidated income statements for the three months ended December 31, 2016.
Management concluded that the general and administrative section of the Condensed Consolidated Income Statement contained an error and that for comparative purposes in fiscal year 2017 filings, these figures should be revised but that the adjustments are not material modifications. Accordingly, the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial. Furthermore, the Company has determined that correcting prior year financial statements for immaterial changes would not require previously filed reports to be amended.
Under general and administrative expense, we have reclassified costs related to repairs and maintenance of monitoring devices and certain other costs, including installation, communications and transportation costs that were previously recorded in general and administrative expense to cost of revenues, selling and marketing, and research and development. Net income (loss) and shareholders’ equity were not affected by the reclassification. The effect of these revisions on the Company’s results of operations for the three months ended December 31, 2016 previously reported are as follows:
| | Three months ended December 31, 2016 Previously Reported | | Three months ended December 31, 2016 (Revised) |
| Cost of revenues: | | | |
| Monitoring, products & other related services | $2,933,622 | $673,654 | $3,607,276 |
| | | | |
| General & administrative expenses | 3,768,099 | (593,045) | 3,175,054 |
| Selling & marketing | 627,749 | (37,981) | 589,768 |
| Research & development | 530,806 | (42,628) | 488,178 |
(5) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair value that is independent of other groups of assets. The Company recorded $0 and $74,787 of impairment expenses related to monitoring equipment for the three months ended December 31, 2017 and 2016, respectively.
(6)(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree, and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company has agreed to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain future goals, which may include revenue milestones, new customer accounts, and earnings targets. The Company records contingent consideration based on its estimated fair value as of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward and likely achievement of certain targets on which issuance of the contingent consideration is based. Any differences between the acquisition-date fair value and the changes in fair value of the contingent consideration subsequent to the acquisition date are recognized in current period earnings until the arrangement is settled. If there is uncertainty surrounding the value of contingent consideration, then the Company’s policy is to wait until the end of the measurement period before making an adjustment.
(7)(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as currently reported under U.S. GAAP and other comprehensive income (loss). Other comprehensive income (loss) considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the prevailing exchange rate at December 31, 2017.2018.
(8)(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income (loss) attributable to common shareholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants. As of December 31, 20172018 and 2016,2017, there were 570,467681,926 and 526,901570,467 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS for the three months ended December 31, 20172018 and 2016,2017, respectively, as their effect would be anti-dilutive. The common stock equivalents outstanding as of December 31, 20172018 and 20162017 consisted of the following:
| | | |
| | | | | |
| Exercisable common stock options and warrants | 570,467 | 526,901 | 681,926 | 570,467 |
| Total common stock equivalents | 570,467 | 526,901 | 681,926 | 570,467 |
At December 31, 2018 and 2017, all stock option and warrant exercise prices were above the market price of $0.51 and $1.05, respectively, and thus have not been included in the basic earnings per share calculation.
(8) REVENUE RECOGNITION
In May 2014, the FASB issued ASU 2014-09 and related amendments, which superseded all prior revenue recognition methods and industry-specific guidance. The principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (i.e., either over time or at a point in time). ASC 606 further requires that companies disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On October 1, 2018, the Company adopted ASC 606 using the modified retrospective method, whereby the adoption does not impact any prior periods.
Monitoring and Other Related 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. Sales of devices and leased GPS devices provided by the Company are required to use the Company’s monitoring service and both the GPS leased devices and monitoring services are accounted for as a single performance obligation. The rates for leased devices and monitoring services are considered to be stated at their individual stand-alone selling prices. We recognize revenue on leased devices and monitoring services at the end of each month the services have been provided and payment terms are 30 days from invoice date. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue.
(9) PREPAID EXPENSES AND OTHERProduct Sales and Other. The Company sells replacement parts to customers under certain contracts, as well as law enforcement software licenses and maintenance, and analytical software. The Company recognizes product sales: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. We recognize revenue from other services as the customer receives services and the Company has the right to payment.
Multiple Element Arrangements.The majority of our revenue transactions do not have multiple elements. However, on occasion, we may 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. In cases where obligations in a contract are distinct and thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle of promises has been met.
The carrying amounts reportedstandalone selling price for each performance obligation is an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the balance sheets for prepaid expenses and other current assets approximate their fair marketgood or service. When there is only one performance obligation associated with a contract, the entire sale value based onis attributed to that obligation. When a contract contains multiple performance obligations the short-term maturity of these instruments. As of December 31, 2017, and September 30, 2017,transaction value is first allocated using the outstanding balance of prepaid and other expenses was $4,219,135 and $854,122, respectively. The $4,219,135 as of December 31, 2017 is comprised largely of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. The increase in prepaid and other expenses at December 31, 2017 was primarily due to a cash collateralized performance bond for an international customer of $2,860,358,observable price, which is scheduledgenerally a list price net of applicable discount or the price used to sell in similar circumstances. In circumstances when a selling price is not directly observable, we will estimate the standalone selling price using information available to us.
Effect of Adopting ASC 606. The Company adopted ASC 606 using the modified retrospective method. Under the modified retrospective method, the Company recognized the cumulative effect of initially applying this accounting standard as an adjustment to the opening balance in retained earnings of $92,969, relating to one contract for the sale of products and associated use of software. For this contract, the Company now recognizes revenue for the product and software over time, rather recording the sale of products at a point in time and the use of software over time, as this measure more accurately depicts the transfer of control to the customer relative to the goods or services promised under the contract, since the product cannot be repaid inused without the third fiscal quarter and has been re-classified as a short-term asset in the three-month period ended December 31, 2017, as well as increases in prepaid taxes, vendor deposits and insurance.Company’s proprietary software.
The cumulative effect of the changes made to the Company's Consolidated October 1, 2018 Balance Sheet for the adoption of ASC 606 is as follows:
| Balance Sheet | As Reported at September 30, 2018 | | Balance as of October 1, 2018 |
| | | | |
| LIABILITIES | | | |
| Accrued liabilities | 10,333,103 | 92,969 | 10,426,072 |
| Total current liabilities | 43,288,943 | 92,969 | 43,381,912 |
| Total liabilities | 46,717,918 | 92,969 | 46,810,887 |
| | | | |
| STOCKHOLDERS' EQUITY | | | |
| Accumulated deficit | (299,495,370) | (92,969) | (299,588,339) |
| Total equity | 1,638,366 | (92,969) | 1,545,397 |
| Total liabilities and stockholders’ equity | 48,356,284 | (92,969) | 48,263,315 |
The following tables present the Company’s revenue disaggregated by geography, based on management’s assessment of available data:
| | Three months ended December 31, 2018 | Three months ended December 31, 2017 |
| | | | | |
| | | | | |
| United States | $5,061,559 | 62% | $4,929,390 | 66% |
| Latin America | 3,107,553 | 38% | 2,506,023 | 33% |
| Other | 42,423 | 0% | 55,281 | 1% |
| Total | $8,211,535 | 100% | $7,490,694 | 100% |
The above table includes total revenue for the Company, of which monitoring and other related services is the majority (approximately 98%) of the Company’s revenue. Other revenue, including product sales, license renewals and parts, is considered immaterial to the Company’s overall revenue.
(9) PREPAID EXPENSE AND OTHER
As of December 31, 2018, and September 30, 2018, the outstanding balance of prepaid and other expense was $1,337,300 and $1,270,043, respectively. These balances are comprised largely of a performance bond deposit, tax deposits, vendor deposits and other prepaid supplier expense.
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”)standard costing method.Net realizable value is determined based on the estimateditem selling prices on the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired items.values. The Company did not record impairment of inventory during the quarters ended December 31, 2018 and 2017, respectively.
Inventory consists of finished goods that are to be shipped to customers and parts used for minor repairs of ReliAlertTMReliAlert™, Shadow, and other tracking devices. Completed and shipped ReliAlertTMReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of December 31, 20172018 and September 30, 2017, respectively,2018, inventory consisted of the following:
| | | | |
| | | | | |
| Finished goods inventory | $199,281 | $288,744 | $181,342 | $304,053 |
| Reserve for damaged or obsolete inventory | (26,934) | (26,934) |
| Total inventory, net of reserves | $172,347 | $261,810 | $154,408 | $277,119 |
The Company uses a third-party fulfillment service provider.As a result of this service, the Company’s employees do not actively assemble new product or repair damaged inventory or monitoring equipment 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.
(11) PROPERTY AND EQUIPMENT
The following table summarizes propertyProperty and equipment atconsisted of the following as of December 31, 20172018 and September 30, 2017,2018, respectively:
| | | | | |
| Equipment, software and tooling | $1,045,090 | $1,028,081 | $1,128,701 | $1,074,471 |
| Automobiles | 40,048 | 52,230 | 5,834 | 6,153 |
| Leasehold improvements | 1,351,025 | 1,307,802 | 1,376,603 | 1,358,984 |
| Furniture and fixtures | 309,223 | 293,621 | 305,080 | 305,089 |
| Total property and equipment before accumulated depreciation | 2,745,386 | 2,681,734 | 2,816,218 | 2,744,697 |
| Accumulated depreciation | (1,862,347) | (1,778,634) | (2,034,514) | (1,999,222) |
| Property and equipment, net of accumulated depreciation | $883,039 | $903,100 | $781,704 | $745,475 |
Property and equipment depreciation expense for the three months ended December 31, 2018 and 2017 was $79,636 and 2016 was $114,417, and $50,291, respectively.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is amortizeddepreciated using the straight-line method over an estimated useful life of between one toand five years. Monitoring equipment as of December 31, 20172018 and September 30, 20172018 was as follows:
| | | | | |
| Monitoring equipment | $8,227,746 | $8,399,937 | $8,662,118 | $8,488,196 |
| Less: accumulated amortization | (4,767,061) | (4,906,925) | (5,693,930) | (5,325,654) |
| Monitoring equipment, net of accumulated depreciation | $3,460,685 | $3,493,012 | $2,968,188 | $3,162,542 |
AmortizationDepreciation of monitoring equipment for the three months ended December 31, 2018 and 2017 was $354,626 and 2016 was $353,027, and $332,993, respectively. These expenses wereDepreciation expense for monitoring devices is recognized in cost of revenues.
revenue. During the three months ended December 31, 2018 and December 31, 2017, the Company recorded charges of $104,079 and $95,817, respectively, for devices that were lost, stolen, damaged or otherwise impaired. Lost, stolen and damaged items are included in Monitoring, products & other related services in the Condensed Consolidated Statement of Operations.
(13) INTANGIBLE ASSETS
The following table summarizes intangible assets at December 31, 20172018 and September 30, 2017,2018, respectively:
| | | | | |
| Other intangible assets: | | |
| Patent & royalty agreements | 21,170,565 | $21,170,565 |
| Developed technology | 11,410,921 | 11,116,738 | 11,566,373 | 11,835,293 |
| Customer relationships | 1,860,000 | 1,860,000 |
| Trade name | 335,350 | 332,183 | 317,844 | 325,507 |
| Website | 78,201 | 78,201 |
| Total intangible assets | 34,855,037 | 34,557,687 | 34,992,983 | 35,269,566 |
| Accumulated amortization | (10,444,569) | (9,839,032) | (12,455,608) | (12,016,512) |
| Intangible assets, net | $24,410,468 | $24,718,655 | $22,537,375 | $23,253,054 |
The intangible assets summarized above were purchased or developed on various dates from January 2010 through December 2017.31, 2018. The assets have useful lives ranging from three to twenty years. Amortization expense for the three months ended December 31, 2018 and 2017 was $559,008 and 2016 was $574,438, and $637,320, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwill at December 31, 2017:2018 and September 30, 2018, respectively:
| Three months ended December 31,
|
| |
Balance - beginning of period | $8,226,714
|
Effect of foreign currency translation on goodwill | 48,594
|
Balance - end of period | $8,275,308
|
| | | |
| | | |
Balance - beginning of period | $8,076,759 | $8,226,714 |
| Effect of foreign currency translation on goodwill | (183,914) | (149,955) |
| Balance - end of period | $7,892,845 | $8,076,759 |
Goodwill is recognized in connection with acquisition transactions in accordance with ASC 805. The Company performs an impairment test for goodwill annually or more frequently if indicators of potential impairment exist. No impairment of goodwill was recognized through December 31, 2017.2018.
(15) OTHER ASSETS
As of December 31, 2017 and September 30, 2017, the outstanding balance of other assets was $785,195 and $2,989,101, respectively. A cash collateralized performance bond for an international customer, which is expected to be repaid in the third fiscal quarter has been re-classified as a current asset in the three-month period ended December 31, 2017.
(16)(15) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of December 31, 20172018 and September 30, 2017:2018, respectively:
| | | | | |
| Accrued payroll, taxes and employee benefits | $1,573,440 | $943,066 | $2,206,196 | $1,937,021 |
| Accrued consulting | 8,954 | 11,631 | |
| Deferred revenue | | 234,012 | 150,604 |
| Deposits payable | | 54,504 |
| Accrued taxes - foreign and domestic | 573,322 | 529,926 | 363,397 | 351,469 |
| Accrued settlement costs | 50,000 | 200,000 | |
| Accrued board of directors fees | 275,000 | 125,000 | |
| Accrued other expenses | 151,804 | 178,092 | |
| Accrued other expense | | 309,962
| 298,268 |
| Accrued legal costs | 57,394 | 116,824 | 607,376 | 473,777 |
| Accrued cellular costs | 25,000 | 81,100 | |
| Accrued manufacturing costs | 100,000 | 137,884 | |
| Accrued costs of revenue | | 460,784 | 230,514 |
| Accrued bond guarantee | 304,270 | 23,548 | 149,059 | 157,199 |
| Accrued interest | 4,902,235 | 4,303,220 | 7,278,762 | 6,679,747 |
| Total accrued liabilities | $8,021,419 | $6,650,291 | $11,664,052
| $10,333,103 |
(17) RESTRUCTURING(16) DEBT OBLIGATIONS
In the first quarterDebt obligations as 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 outsourcingthe Company’s monitoring center which allowed a significant head count reductionDecember 31, 2018 and lower future expenses, and improved the Company’s ability to align workforce costs with customer demands. During the twelve-months ended September 30, 2017,2018, respectively, are comprised of the Company recognized expenses 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 the fiscal year ended September 30, 2017.following:
Total restructuring charges for the three-months ended| | | |
| | | |
| 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. The Company did not pay interest on this loan during the three months ended December 31, 2018. | $30,400,000 | $30,400,000 |
| | | |
| 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. | 54,462 | 67,141 |
| | | |
| Total debt obligations | 33,854,106 | 33,866,785 |
| Less current portion | (30,437,810) | (30,437,810) |
| Long-term debt, net of current portion | $3,416,296 | $3,428,975 |
The following table summarizes future maturities of debt obligations as of December 31, 2016 and their utilization are summarized as follows:2018:
Twelve-month period ended December 31, | |
| | |
| 2019 | $30,437,810 |
| 2020 | 3,416,296 |
| Thereafter | - |
| Total | $33,854,106 |
| | | | |
| Liability at September 30, 2016 | $- | $- | $- |
| Accrued expenses | 448,330 | 118,000 | $566,330 |
| Payments | - | - | - |
| Liability at December 31, 2016 | $448,330 | $118,000 | $566,330 |
(17) RELATED-PARTY TRANSACTIONS
(18) DEBT OBLIGATIONSRelated-Party Loan Agreement
On September 25, 2015, the Company entered into a loan agreement (the “the Sapinda Loan Agreement”) with Sapinda, Asia Limited (“Sapinda”), a related party at that time, to provide the Company with a $5.0 million line of credit that accruesaccrued 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 maycould 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 willwould have become due and payable. The Company, however, may electwas entitled to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.
On March 13, 2017 (the “Execution Date”), the Company and Sapinda entered into Amendment Number One to theSapinda Loan Agreement. Amendment Number One extends the maturity date of all loans made pursuant to theSapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminates the requirement that the Company pay Sapinda the3%Interest, and forgives the 3% interest due to Sapinda for all undrawn funds under theSapinda Loan Agreement through the Execution Date. Further, Amendment Number One provides that all failure to fund penalties (“Lender Penalties”) accrued under theSapinda Loan Agreement through the Execution Date are forgiven. Per Amendment Number One, Lender Penalties shall begin to accrue again provided Sapinda has not funded the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000 at December 31, 2017, under Section 6.3 of theSapinda Loan Agreement, as amended. We did not draw on this line of credit, nor did we pay any interest during the three months ended December 31, 2017. The undrawn balance of this line of credit at December 31, 2017 was $1,600,356.Further advances under theSapinda Loan Agreement are not currently expected to be forthcoming.
On May 1, 2016, the Company entered into an unsecured Loan Agreement with Conrent Invest S.A., a public limited liability company incorporated under the laws of the Grand Duchy of Luxembourg (“Conrent”), acting with respect to its Compartment Safety III (the “Conrent Loan Agreement”). Pursuant to its terms, available borrowing capacity under the Conrent Loan Agreement was $5.0 million; however, due to the failure of the lender to satisfy certain conditions precedent to its obligation to fund, the Company has not received funds under the Conrent Loan Agreement as of December 31, 2017, and no proceeds thereunder are anticipated.
On October 9, 2017, the Company entered into a Debt Exchange Agreement with Conrent Invest S.A. regarding total debt and unpaid interest of approximately $34.7 million as of October 31, 2017 (the “Debt”) (the “Debt Exchange”). The Debt Exchange called for the Company to exchange newly issued shares of preferred stock for the entire Debt subject to approval by the investors who purchased securities from Conrent to finance the Debt (the “Noteholders”). On November 2, 2017, Conrent convened a meeting of the Noteholders to approve the Debt Exchange; however, the quorum required to approve the Debt Exchange was not achieved. Management continues to negotiate with Conrent regarding terms for the Debt Exchange acceptable to Noteholders with the objective of reaching an agreement acceptable to both Conrent and the Noteholders before the Debt matures on July 31, 2018.
Debt obligations as of December 31, 2017 and September 30, 2017, respectively, are comprised of the following:
| | | |
| | | |
| Unsecured facility agreement with an entity whereby, as of June 30, 2015, the Company may borrow up to $30.4 million bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on July 31, 2018. A $1.2 million origination fee was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of December 31, 2017, the remaining debt discount was $130,067. We did not pay interest on this loan during the three months ended December 31, 2017. | $30,269,933 | $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. | 105,593 | 123,393 |
| | | |
| Capital lease with effective interest rate of 12%. Lease matures August 15, 2019. | 13,489 | 14,022 |
| | | |
| Total debt obligations | 33,788,659 | 33,751,248 |
| Less current portion | (30,322,191) | (30,270,531) |
| Long-term debt, net of current portion | $3,466,468 | $3,480,717 |
The following table summarizes our future maturities of debt obligations, net of the amortization of debt discounts as of December 31, 2017:
| Fiscal Year | |
| 2018 | $30,452,258 |
| 2019 | 43,842 |
| 2020 | 3,422,626 |
| 2021 | - |
2022
| - |
| Debt discount | (130,067) |
| Total | $33,788,659 |
(19) RELATED-PARTY TRANSACTIONS
Related-Party Loan Agreement
On September 25, 2015, the Company entered into the Sapinda Loan Agreement with Sapinda, a related party, to provide the Company with a $5.0 million line of credit that accrues interest at a rate of 3% per annum for undrawn funds, and 8% per annum for borrowed funds. Pursuant to the terms and conditions of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “Maturity Date”), when all borrowed funds, plus all accrued but unpaid interest will become due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.
On March 13, 2017, the Company and Sapinda entered into Amendment Number One to the Sapinda Loan Agreement. Amendment Number One extendsextended the maturity date of all loans made pursuant to the Sapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminateseliminated the requirement that the Company pay Sapinda the 3% interest, and forgivesforgave the 3% interest due to Sapinda for all undrawn funds under the Sapinda Loan Agreement through the Execution Date. Further, Amendment Number One providesprovided that all Lender Penalties accrued under the Sapinda Loan Agreement through the Execution Date arewere forgiven. Per Amendment Number One, Lender Penalties shall beginbegan to accrue again providedbecause Sapinda has not fundedfailed to fund the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000$640,000 at December 31, 2018, 2017, under Section 6.3 of the Sapinda Loan Agreement, as amended.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 three months ended December 31, 2017.2018. The undrawn balance of this line of credit at December 31, 20172018 was $1,600,356. Further advances under the Sapinda Loan Agreement are not currently expected to be forthcoming, and therefore no assurances can be given that the Company will obtain additional funds to which it is entitled under the Sapinda Loan Agreement, or that the penalties accruing will ever be paid.
Additional Related-Party Transactions and Summary of All Related-Party Obligations
| | | | | |
| | | |
| Related party loan with an interest rate of 3% and 8% per annum for undrawn and borrowed funds, respectively. Principal and interest due September 30, 2020. | $3,399,644 | |
| Related party loan with an interest rate of 8% per annum for borrowed funds. Principal and interest due September 30, 2020. | | $3,399,644 | $3,399,644�� |
| Total related-party debt obligations | $3,399,644 | $3,399,644 |
Each of the foregoing related-party transactions was reviewed and approved by disinterested and independent members ofthe Company’s Board of Directors.
(20)(18) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share. During the three months ended December 31, 2017, no shares of common stock were issued to Board of Director members for their services earned in the first quarter of 2018. The Company has deferred the issuance of shares of common stock and warrants since the fourth quarter of 2017, and $275,000 for unpaid Board of Director fees has been accrued at December 31, 2017.
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s Board of Directors has the authority to amend the Company’s Certificate of Incorporation, without further shareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock, and to create one or more series of preferred stock. As of December 31, 2017,2018, there were no shares of preferred stock outstanding.
In NovemberSeries A Preferred Stock
On October 12, 2017, the BoardCompany filed a Certificate of Directors approvedDesignation of the grantRelative Rights and Preferences (“Certificate of 241,935Designation”) 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 valued at $300,000, as compensation for services rendered tointo which the Company, whichSeries A Preferred is convertible shall, upon issuance, have not yet been issued. In addition, the Company issued 30,797 warrants to a memberall 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 BoardCommon Stock, if ever, each holder of Directors in exchange for 18,551record 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 director previously received for services provided duringRecord Date.
Each share of Series A Preferred has a Liquidation Preference of $35.00 per share, and is convertible, at the periodholder’s option, into ten shares of October 2016the Company’s Common Stock, subject to June 2017, which shares were thereby cancelledadjustments as set forth in the three month period endedCertificate of Designation, at any time beginning five hundred and forty days after the date of issuance.
As of December 31, 2017.2018, no shares of Series A Preferred were issued and outstanding.
(21) (19) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholders on March 21, 2011, theour shareholders approved the 2012 Equity Compensation Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who provide services to the Company in lieu of cash. A total of 90,000 shares were initially authorized for issuance pursuant to awards granted under the 2012 Plan. At the 2015 annual meeting of shareholders held on May 19, 2015, our stockholders approved a 713,262 share increase to the total number of shares authorized under the 2012 Plan. Warrants for Board members vest immediately and warrants issued to employees vest annually over either a two or three-year period after the grant date.
As of December 31, 2018, the Board of Directors suspended further awards under the 2012 Plan until further notice. The Company recorded expense of $65,312 and $149,088 for the three months ended December 31, 2018 and 2017, respectively, related to the vesting of Common Stock. There were 27,218 shares of common stock were available for future grantsissuance 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 issued under the 2012 Plan, 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 three-month period ending December 31, 2017.
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 three months ended December 31, 20172018 and 2016,2017, the Company granted 30,7970 and 154,410, respectively,30,797 options and warrants to purchase shares of common stock under the 2012 Plan. ExcludingThe 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 incremental stock-based compensation mentioned above,final vesting date of the grant. The Company recorded expense of $638,502$17,905 and $200,374$638,502 for the three months ended December 31, 20172018 and 2016,2017, respectively, related to the issuance and vesting of outstanding stock options and warrants.
The option and warrant grants for three months ended December 31, 2018 and 2017 were valued using the Black-Scholes model with the following weighted-average assumptions:
| | Three Months Ended December 31 | Three Months Ended December 31 |
| | | | | |
| Expected stock price volatility | 120% | 119% | N/A | 120% |
| Risk-free interest rate | 1.92% | 0.60% | N/A | 1.92% |
| Expected life of options/warrants | | | |
The expected life of stock options (warrants) represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options (warrants).
A summary of stock option (warrant) activity for the three months ended December 31, 20172018 is presented below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | | Shares Under Option | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| Outstanding as of September 30, 2017 | 600,842 | $8.51 | | $- | |
| Outstanding as of September 30, 2018 | | | 685,259 | | $ | 1.56 | | 3.90 years | | $ | - | |
| Granted | 30,797 | $4.87 | | | | - | | $ | - | | | | | |
| Expired/Cancelled | (1,172) | $(19.29) | | | | - | | $ | - | | | | | |
| Exercised | - | $- | | | | | - | | $ | - | | | | | | |
| Outstanding as of December 31, 2017 | 630,467 | 1.78 | 4.63 | $- | |
| Exercisable as of December 31, 2017 | 570,467 | 1.84 | 4.67 | $- | |
| Outstanding as of December 31, 2018 | | | 685,259 | | $ | 1.56 | | 3.65 years | | $ | - | |
| Exercisable as of December 31, 2018 | | | 681,926 | | $ | 1.57 | | 3.65 years | | $ | - | |
The intrinsic value of options and warrants outstanding and exercisable is based on the Company’s share price of $1.05$0.51 at December 31, 2017.2018.
(22)(20) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the three months ended December 31, 20172018 and 2016,2017, the Company incurred a net loss for income tax purposes of $1,042,591$1,734,918 and $2,613,759,$1,042,591, respectively. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company’sour future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
In computing income tax, we recognize an income tax provision in tax jurisdictions in which we have pre-tax income for the period and are expecting to generate pre-tax book income during the fiscal year.
(23)
(21) COMMITMENTS AND CONTINGENCIES
Legal Matters
We are,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 a Notice ofan Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. Plaintiff’s appeal succeededThe Appellate court ruled in favor of the Plaintiff, finding that factual issue remains, reversing the Summary Judgment and will result in a trial occurring within the next four to eight months. We intend to defendremanding the case vigorously.back to trial. The Company’s motion for partial Summary Judgment was denied. A five day trial is tentatively scheduled to take place February 19, 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 in an amount sufficient to deter similar conduct in the future.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 Thethe Company’s counsel on April 15, 2017. We are awaitingIn 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 ruling on an oral argument that took place on December 13, 2017 regarding a new statute which exempts vendors who assist law enforcement officials. We believe the allegations are inaccurate and are defendingpetition to have the case vigorously. We believeheard in the probabilityGeorgia Supreme Court. On June 27, 2018, the Company’s Counsel filed a response to the petition, and on January 7, 2019, the Supreme Court of incurring a material loss to be remote.Georgia denied the petition, thereby concluding the case.
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, areas of November 16, 2018, were in the amount of $230,000.00,$291,313.81, plus per annum interest.interest as it continues to accrue. The Defendant’s initial Counterclaims wereCounterclaim was dismissed; however, the Court granted the Defendant leave to amend. The Amended Counter Claims wereCounterclaim was filed on June 23, 2017. The Company’s Motion to Dismiss2017 alleging $1,628,667 in damages. Depositions have taken place for both parties. In late 2018, both parties filed motions for summary judgment on all the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period ends on March 30, 2018, the Company will proceed withclaims and counterclaims, both of which motions are still pending. If Track Group obtains a Motion for Summary Judgment. We believe we will be successful in this actionjudgment for amounts owed under the loan agreement and promissory note; however,note, it is unknown whether the Company may encounter problems enforcing a favorable judgmentwill be able to collect any sums from ICS 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 AgreementAgreement””) by and between the Company and ICS, any dispute must be resolved by binding arbitration.ICS. The Company assertsasserted that ICS has failed to pay the Company fees owed to it under the C&M Agreement. TheOn August 22, 2018, the arbitrator issued a ruling awarding the Company $689,613.50. However, on October 15, 2018, the arbitrator issued a “corrected award” in which he reduced the amount owedof his award to zero. On January 8, 2019, the Company filed a motion in the United States District Court, District of Puerto Rico to vacate the “corrected award” and confirm the original arbitration award of $689,613.50, which motion is still pending. If the Company is approximately $1.0 million. Depositions were completedsuccessful in August of 2017. The arbitration hearing took place on January 31, 2018 and we expect a ruling within 30 days. The Companyconfirming the $689,613.50 award, it is confidentunknown whether it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration awardable to collect any sums from ICS in the foreign jurisdiction where ICS resides.
John Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with a complaintcomplaint 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 we expect a ruling within six months.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 alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company plans to file a motion for Summary Judgment before the end of February 2018. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, 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. Counsel estimatesThe Tribunal ruled the Tribunalclaims should have abe resolved in the Civil Court. Following that ruling on or before June 30, 2018. If the Company’s appeal is successful,Supreme Court took action to resolve the caseconflicting precedent regarding the jurisdiction of such claims and determined that such claims will be sent back toresolved by the Federal Administrative TribunalTribunal.
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 resolutionShare 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 meritscourt.
Erick Cerda v. Track Group, Inc. On July 25, 2018, former employee Erick Cerda, the Plaintiff, filed a complaint against the Company in the United States District Court for the Northern District of Illinois, Case No. 18-CV-05075, alleging violations of Title VII of the case.Civil Rights Act of 1964 and the Age Discrimination in Employment Act. 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
Inversiones Tecnologicas SpA v. Track Group Chile SpA. On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position) filed a complaint beforeThe following table summarizes our contractual lease obligations as of December 31, 2018:
| Fiscal Year | |
| | |
| 2019 (nine months) | $246,857 |
| 2020 | 255,646 |
| 2021 | 183,131 |
| 2022 | 167,345 |
| 2023 | 3,612 |
| Thereafter | - |
| Total | $856,591 |
The total operating lease obligations of $856,591 is largely related to facilities operating leases. During the Civil Court of Santiago, in order to collect $1.0 million of fees for alleged services rendered with occasion of the public tender for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13,three months ended December 31, 2018 and 2017, the Court issued its decision, rejecting the Plaintiff’s claim, under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA)Company paid $111,973 and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal may be scheduled$107,974, in late February, 2018. The Company expects the court to make a decision within three months of the hearing date.
Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al. On June 9, 2017, 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 and guilty indifferent actions and omissions of all the defendants. Plaintiff is requesting damages of no less than $2.0 million. The Company’s Answer and Appearance were filed August 13, 2017. We are currently in the discovery period.lease payment obligations, respectively.
(23)(22) SUBSEQUENT EVENTS
Effective January 1,On November 14, 2018, the Company entered intorequested 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 multi-year Monitoring Services Agreement with Marion County Community Corrections Agency, by and through the Marion County Community Corrections Board (collectively, “notice of a meeting of Noteholders for each series of Notes, which meetings were held on January 16, 2019. On January 17, 2019, Marion County”), pursuant to whichConrent notified the Company shall provide Marion County with GPS and alcohol monitoring equipment, certain services, and software(via telephone), that the Noteholders agreed to be used for offenders ordered intoextend the Marion County Community Corrections program bymaturity of the courts. In exchange forAmended Facility Agreement to April 1, 2020, subject to the products and services provided bysigning of a written loan amendment. While the Company Marion County shall make periodic payments,believes the sumNoteholders will sign an amendment to extend the maturity of which shallthe Amended Facility Agreement, no assurance can be determined based on the duration of use of individual units of equipment.
On January 18, 2018, the Company entered into a Monitoring Services Agreement (the “Gendarmeria Agreement”) with Gendarmeria de Chile, the Republic of Chile’s uniform prison service (“Gendarmeria”), for services the Company began offering to Gendarmeria in October 2017. The Company currently provides Gendarmeria with GPS monitoring devices, certain services, and software to be used for offenders ordered into a corrections program by the Chilean courts. In exchange for the products and services provided by the Company, Gendarmeria shall make periodic payments, the sum of which shall be determined based on installation fees and the duration of use of individual units of equipment. Pursuant to its terms, the Gendarmeria Agreement will expire in October 2018.given.
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted that, other than as disclosed above, no additional subsequent events have occurred that are reasonably likely to impact the financial statements.
Item 2. ManagMement’sanagement’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report contains information that constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, the statements contained in this Quarterly Report on Form 10-Q that are not purely historical can be considered to be “forward-looking statements.” These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “intends,” “anticipates,” “should,” “plans,” “estimates,” “projects,” “potential,” and “will,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in our most recent Annual Report on Form 10-K, and those described from time to time in our reports filed with the SEC.Securities and Exchange Commission (“SEC”).
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, for the fiscal year ended September 30, 2017,2018, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report. Except as otherwise indicated, as used in this Report, the terms “the Company,” “Track Group,” “we,” “our,” “us,” refer to Track Group, Inc., a Delaware corporation.
General
Our core business is based on the manufacture and leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (“PaaS”)(PaaS) business model. Currently, we deploy offender-basedoffender based management services that combine patented GPS tracking technologies, fulltime 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. We offer customizable tracking solutions that leverage real-time tracking data, best practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.
Our devices consist principally of the ReliAlertTM product line, which is supplemented by the Shadow product line. These devices are generally leased on a daily rate basis and may be combined with our monitoring center services, proprietary software and data analytics subscription to provide an end-to-end PaaS.
ReliAlertTM and Shadow.Shadow. Our tracking devices utilize patented technology and are securely attached around an offender’s ankle with a tamper resistant strap that cannot be adjusted or removed without detection, unless by a supervising officer, and which isare activated through services provided by our monitoring centers. The ReliAlertTM and Shadow units are intelligent devices with integrated computer circuitry, utilizing both GPS and RF, and constructed from case-hardened plastics designed to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing. The ReliAlertTM platform also incorporates voice communication technology that provides officers with 24/7/365 voice communication with the offenders. Both devices are FCC, CE and PTCRB certified and protected by numerous patents and trademarks.
Monitoring Center Services.Services. Our monitoring center facilities provide live 24/7/365 monitoring of all alarms generated from our devices, as well as customer and technical support. Our monitoring center operators play a vital role, and as such, we staff our centers with highly-trained, bi-lingual individuals. These operators act as an extension of agency resources receiving alarms, communicating and intervening with offenders regarding violations, and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power source, battery back-up and triple redundancy in voice, data, and IP. The Company has established monitoring centers in the U.S. and Chile. In addition, the Company has assisted in the establishment of monitoring centers for customers and local partners in other global locations
Data Analytics Services.Services. Our TrackerPALTMsoftware, TrackerPALTMMobile, combined with our Data Analytic analysis tools, provide an integrated platform allowing case managers and law enforcement officers’officers quick access views of an offender’s travel behavior, mapping, and provide inference on patterns. Our advanced data analytics service offers a highly complex predictive reporting mechanism that combines modern statistical methods, developed using computer science and used by intelligence agencies that separate noteworthy events from normal events, rank offender cases according to their need for supervision, and relate decision-relevant metrics to benchmarks in real-time.
Business Strategy
Our global growthWe 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, is towe continue to expand service offerings on a subscription basis that empower professionals in security, law enforcement, correctionsour device-agnostic platformto not only collect, but also store, analyze, assess and rehabilitation organizations worldwide with a single-sourced, real-time, end-to-end offender management solution that integrates reliable intervention technologiescorrelate location data for both accountability and auditing reasons, as well as to support re-socialization, monitoring, anduse for predictive analytics for offenders. In selective circumstances, we will also assist agencies by operating offender pay programs. To accomplish these objectives, we have and will continue to innovateassessment of effective and growemerging techniques in criminal behavior and rehabilitation.We believe a high-quality customer experience with knowledgeable salespersons who can convey the value of our portfolio of proprietary and non-proprietary real-time monitoring and intervention 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. These products include GPS, RF, drug and alcohol testing for offenders, domestic violence applications and predictive analytics. Givenother monitoring services is critical to the flexibilitydevelopment and sale of our platform, our device technology, tracking, monitoring,innovative technologies and analytical capabilities, we believe that ourintegrated solutions may apply to other industry verticals that require tracking, monitoringtoday and predictive analytics such as those entities responsible for pre-trial participants or individuals on bail.in the future.
Critical Accounting Policies
From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining our results of operations and financial position.
A description of the Company’s critical accounting policies that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 20172018, filed with the SEC on December 19, 20172018.During the three months ended December 31, 20172018 there have been no material changes to the Company'sCompany’s critical accounting policies.policies other than the adoption of ASU 2014-09 as described in Note 8.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses.expense. By their nature, these judgments are subject to an inherent degree of uncertainty. We assess the reasonableness of our estimates, including those related to bad debts, inventories, estimated useful lives, intangible assets, warranty obligations, product liability, revenue, legal matters and income taxes. We base our estimates on historical experience as well as available current information on a regular basis. Management uses this information to form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
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.
On February 7, 2019, the Company received authorization from BIS for its customers, contractors and subsidiaries in Chile, Mexico, Bahamas, Saudi Arabia, Pakistan and Vietnam and for its Swedish and Mexican foreign national employees to continue using electronic monitoring devices and the associated software and technology.
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.
Results of Operations
Three Months Ended December 31, 2017,2018 Compared to Three Months Ended December 31, 20162017
Revenue
For the three months ended December 31, 2017,2018, the Company recognized revenue from operations of $7,490,694$8,211,535 compared to $7,671,490$7,490,694 for the three months ended December 31, 2016, a decrease2017, an increase of $180,796$720,841 or 2%approximately 10%. The decreaseincrease in revenue was principally the result of (i) a loss of a Caribbean customer whose contract ended in November 2016, partially offset by (ii) an increase in total growth of our North American monitoring operations driven by clients in IndianaPuerto Rico, Mexico, Bahamas, and Virginia, and (iii) growth of offender monitoring in Chile.Michigan.
Other revenue for the three months ended December 31, 2017 decreased2018 increased to $139,889$151,207 from $406,477$139,889 in the same period in 20162017 largely due to lowerhigher sales of consumable items. We will continue to focus on recurring subscription based opportunities as opposed to equipment sales.
Cost of Revenue
During the three months ended December 31, 2017,2018, cost of revenue totaled $3,019,149$3,578,482 compared to cost of revenue during the three months ended December 31, 20162017 of $4,127,556, a decrease$3,019,149, an increase of $1,108,407$559,333 or 27%approximately 19%. The decreaseincrease in cost of revenue was largely the result of decreases inhigher device repair costs of $437,307, lowercommunication costs$315,049, incurred to distribute additional devices to meet demand of $286,326, lower customs costsgrowing clients, which revenue should be fully recognized in the second fiscal quarter of $189,8792019, and lowerhigher monitoring costs of $158,554. During the three-month period ended December 31, 2016, we incurred one-time costs of $371,144, which is reflected in monitoring, products and other related services in the condensed consolidated income statement, that did not reoccur in the three months ended December 31, 2017. Excluding these one-time costs, cost of revenue for the three-months ended December 31, 2017 would have decreased $575,206, or 15%, compared to the same period in 2016.$59,007.
Depreciation and amortization included in cost of revenue for the three months ended December 31, 2018 and 2017 totaled $478,289 and 2016 totaled $477,142, and $445,493, respectively. These costs represent the depreciation of TrackerPAL™,ReliAlert™ and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. We believe this lifethe equipment lives on which the depreciation is based are appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales.
Impairment cost for equipment and parts for the three months ended December 31, 2017 and 2016 were $0 and $74,787, respectively. These costs relate to disposal of obsolete inventory, monitoring equipment and parts for enhancements to our various devices and monitoring platform.
Gross Profit and Margin
During the three months ended December 31, 2017,2018, gross profit totaled $4,471,545,$4,633,053, representing an increase of $927,611$161,508 or 26%approximately 4% compared to the same period last year, and resulting in a gross margin of 60%approximately 56% compared to $3,543,934$4,471,545 or a gross margin of 46%approximately 60% during the three months ended December 31, 2016.2017. The increase in gross profit margin is largely due to higher revenue offset by the lowerhigher costs of revenue mentioned above. Excluding the one-time costs of revenue previously mentioned, gross profit for the three-months ended December 31, 2016 would have been $3,915,078 and gross profit margin would have been 51%.
General and Administrative Expense
During the three months ended December 31, 2017,2018, general and administrative expense totaled $3,657,738$3,422,272 compared to $3,175,054$3,657,738 for the three months ended December 31, 2016.2017. The increasedecrease of $482,684$235,466 or 15%approximately 6% in general and administrative costs resulted largely from an increasea decrease in stock-basedstock based compensation of $704,372, and lower bad debt expense of $562,216,$96,510, partially offset by higher legal and professional fees of $147,903$325,367, higher business taxes of $70,819, higher insurance costs of $34,971 and higher wagesfees and benefit costs of $137,161, partially offset by lower bad debt expense of $172,642, lower recruiting costs of $63,303, lower repairlicenses, and maintenance costs of $52,776, lower rent expense of $36,125 and lower outside labor expenses of $28,283.
Restructuring Costs
During the three months ended December 31, 2016, we recorded $566,330 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 movinghigher consulting costs. All costs related to the relocation were paid in the fiscal year ended September 30, 2017. See Note 17 to the Condensed Consolidated Financial Statements.
Selling and Marketing Expense
During the three months ended December 31, 2017,2018, selling and marketing expense decreasedincreased to $409,737$503,930 compared to $589,768$409,737 for the three months ended December 31, 2016.2017. The reductionincrease in expensesexpense of $180,031,$94,193, or approximately 31% decrease23% is principally the result of lowerhigher travel and entertainment of $50,710 visiting growing or new customers, higher outside service costsexpense of $84,438, lower travel related expenses of $41,489$18,059 and lowerhigher wages and benefits of $31,546.$15,697 for a marketing employee responding to requests for proposals.
Research and Development Expense
During the three months ended December 31, 2017,2018, research and development expense totaled $163,946$248,865 compared to $488,178$163,946 for the three months ended December 31, 2016, a decrease2017, an increase of $324,232$84,919 or approximately 66%52%. The decreaseincrease resulted largely from lowerhigher wages and benefits of $203,349 and lower outside service costs of $96,078.$82,763. In addition, we are significantly enhancing our technology platform to improve the efficiency of our software, firmware, user interface, and automation. As a result of these improvements, $254,899$275,623 was capitalized as developed technology during the three months ended December 31, 20172018 and $570,093$254,899 was capitalized in the three months ended December 31, 2016.2017. A portion of these expensesthis expense would have been recognized as research and development expense, absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During the three months ended December 31, 2017,2018, depreciation and amortization expense totaled $564,740$514,981 compared to $575,111$564,740 for the three months ended December 31, 2016,2017, a decrease of $10,371$49,759 or approximately 9%, which was largely the result of certain property and equipment assets becoming fully depreciated.
Total Operating Expense
During the three months ended December 31, 2018, total operating expense decreased to $4,690,048 compared to $4,796,161 for the three months ended December 31, 2017, a decrease of $106,113 or approximately 2%. The decrease was largely due to lower general and administrative expense of $235,466 and lower depreciation and amortization of $49,759. These costs were partially offset by higher selling and marketing expense of $94,193, and higher research and development expense of $84,919.
Loss from Operations
During the three months ended December 31, 2018, loss from operations was $56,995 compared to a loss of $324,616 for the three months ended December 31, 2017, a decrease of $267,621 or approximately 82%. This improvement was due to an improvement in gross profit of $161,508 and a reduction in operating expense of $106,113.
Other Income and Expense
For the three months ended December 31, 2017,2018, other income (expense) totaled $717,975($1,533,916) compared to $763,252($717,975) for the three months ended December 31, 2016, a decrease2017, an increase in net expense of $45,277$815,941 or approximately 6%114%. The decreaseincrease in other income (expense) is due to positivenegative currency exchange rate movements of $877,595 partially offset by lower interest expense, net of $72,588, largely due to higher interest expense, net.income in the three-month period ended December 31, 2018.
Net Loss Attributable to Common Shareholders
The Company had Netnet loss attributable to common shareholders of $1,734,918 for the three months ended December 31, 2018, compared to a net loss attributable to common shareholders of $1,042,591 for the three months ended December 31, 2017, compared to a Net loss attributable to common shareholdersan increase of $2,613,759 for the three months ended December 31, 2016, a decrease of $1,571,168$692,327 or 60%approximately 66%. This decreaseincrease in net loss is largely due tohighergross profit, the absence of restructuring costs, lower selling and marketing expense, lower research and development costs and lowernegative currency exchange expense. These amounts wererate movements, largely offset by higher stock-based compensation costs.gross profit. Other costs, including operating expense and interest expense, net and income taxes, are largely offsetting.
Liquidity and Capital Resources
Historically, we have been unable to finance our business solely from cash flows from operating activities. During and prior periods,to the Companyfiscal 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 December 31, 2017,2018, excluding interest, approximately $3.4 million was owed to Sapinda under thea loan agreement (the “Sapinda Loan Agreement”) and $30.4 million was owed to Conrent under a loan (the “theConrent Loan Agreement.Agreement”). No borrowings or sales of equity securities occurred during the three months ended December 31, 2017.2018 or during the year ended September 30, 2018.
On October 9, 2017,July 19, 2018, the Company and Conrent entered into a Debt Exchangean amendment to their Facility Agreement with Conrent regarding total debt and unpaid interest of approximately $34.7 million as of October 31, 2017 (the “DebtAmended Facility Agreement”) (the “Debt Exchange”). The Debt Exchange called for, 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 exchange newly issued sharesApril 1, 2020. On December 3, 2018, Conrent agreed to convene meetings of preferred stock for the entire Debt subject to approval by the investors who purchased the securities from Conrent to finance the Debt (the “Noteholders”). On November 2, 2017, Conrent conveneddebt, and subsequently issued a notice of a meeting of Noteholders for each series of Notes, which meetings will be held on January 16, 2019. On January 17, 2019,Conrent notified the Company (via telephone), that the Noteholders agreed to approveextend the Debt Exchange; however,maturity of the quorum requiredAmended Facility Agreement to approveApril 1, 2020, subject to the Debt Exchange was not achieved. Management continues to negotiate with Conrent regarding terms forsigning of a written loan amendment. While the Debt Exchange acceptable to Noteholders with the objective of reaching an agreement acceptable to both Conrent andCompany believes the Noteholders beforewill sign an amendment to extend the Debt matures on July 31, 2018. maturity of the Amended Facility Agreement, no assurance can be given.
Net Cash Flows from Operating Activities.
During the three months ended December 31, 20172018, we incurred a net loss of $1,042,591 and we had cash flows from operating activities of $328,210,$1,138,433, compared to a net loss from continuing operations of $2,613,759 and cash flows from operating activities of $2,136,796$328,210 for the three months ended December 31, 2016.2017, representing an increase of 247%. The decreaseincrease of cash from operations compared to the prior year period was largely the result of an increase in prepaid expenses and deposits,accrued liabilities, a decrease in accounts payable,prepaid and higher accounts receivable,other assets, partially offset by improved operating results. a larger in net loss.
Net Cash Flows from Investing Activities.
The Company used $594,726$551,199 of cash for investing activities during the three months ended December 31, 2017,2018, compared to $1,401,455$594,726 of cash used during the three months ended December 31, 2016.2017. 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 customer demand during the three months ended December 31, 2017.2018.
Net Cash Flows from Financing Activities.
The Company used $17,289$9,357 of cash for financing activities during the three months ended December 31, 2017,2018, compared to $17,266$17,289 of cash used in financing activities during the three months ended December 31, 2016.2017.
Liquidity, Working Capital and Management’s Plan
As of December 31, 2017,2018, we had unrestricted cash of $1,755,437,$5,865,546, compared to unrestricted cash of $2,027,321$5,446,557 as of September 30 2017, 2018. As of December 31, 2017,2018, we had a working capital deficit of $28,965,590,$30,897,683, compared to a working capital deficit of $30,874,107$30,316,328 as of September 30, 2017.2018. This increase in working capital deficit of $581,355 is principally due to a transfer of a short-term bond from a long-term asset of $2,860,358, partially offset byan increase in accrued interest and a decrease in cash due to additional capitalized software of $254,899 and$275,623, purchases of monitoring equipment of $311,142.$133,981 and purchases of property and equipment of $141,595, partially offset by cash provided by operations.
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 tothe 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 restructureworking on extending the maturity of debt owed under the Conrent Loan Agreement to April 2020, which may include exchanging debt for equity or extending the maturity of the Conrent Loan Agreement.
The Company incurredwas agreed to by Noteholders at a net loss of $1,042,591 and $2,613,759 for the three months ended December 31, 2017 and 2016, respectively. The Company may continue to incur losses until it is able to achieve a level of revenues adequate to support its cost structure. In addition, although no assurances can be given, in the event that management is able to successfully restructure the debt owed under the Conrent Loan Agreement, management has evaluated the significance of all conditions and determined that it will have adequate cash flow from operations to meet its operating obligations and provide for its working capital requirements for the upcoming twelve months. However, in the event we are unable to successfully restructure the debt under the Conrent Loan Agreement, our available cash resources together with cash flow from operations will be inadequate to satisfy out working capital requirements.meeting held on January 16, 2019. See Note 22.
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 | |
| Operating leases | $329,252 | $479,023 | $58,808 | $867,083 |
| | Payments due in fiscal year 2019 | Payments due in fiscal years 2020-2021 | Payments due in fiscal years 2022-2023 | |
| Operating leases | $246,857 | $438,777 | $170,957 | $856,591 |
As of December 31, 2017,2018, the Company’s total future minimum lease payments under noncancelable operating leases were $867,083.$856,591. The Company’s facility leases typically have original terms not exceeding 5five years and generally contain multi-year renewal options.
Item 3. QuantitativQeuantitative and Qualitative Disclosures About Market Risk
The Company footprint extends to severala few countries outside the United States, and we intend to continue to examine international opportunities. As a result, our revenuesrevenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, transfer pricing changes, taxes and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
Foreign Currency Risks
We had $2,561,305$3,149,976 and $2,795,781$2,561,305 in revenue from sources outside of the United States for the three months ended December 31, 20172018 and 2016,2017, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange expense of $932,677 and of $55,072 and $116,442 in the three months ended December 31, 2018 and 2017, respectively. The increase in the exchange loss was due to the strengthening of the U.S. dollar against the Chilean Peso and 2016, respectively.Canadian dollar. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
Item 4. ControClsontrols 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 December 31, 20172018 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 December 31, 2017.2018.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There was no change in our internal control over financial reporting during our quarter ended December 31, 20172018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHEROTHER INFORMATION
Item 1. Legal ProceedingsProceedings
We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
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 a Notice ofan Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. Plaintiff’s appeal succeededThe Appellate court ruled in favor of the Plaintiff, finding that factual issue remains, reversing the Summary Judgment and will result in a trial occurring within the next four to eight months. We intend to defendremanding the case vigorously.back to trial. The Company’s motion for partial Summary Judgment was denied. A five day trial is tentatively scheduled to take place February 19, 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 in an amount sufficient to deter similar conduct in the future.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 Thethe Company’s counsel on April 15, 2017. We are awaitingIn 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 ruling on an oral argument that took place on December 13, 2017 regarding a new statute which exempts vendors who assist law enforcement officials. We believe the allegations are inaccurate and are defendingpetition to have the case vigorously. We believeheard in the probabilityGeorgia Supreme Court. On June 27, 2018, the Company’s counsel filed a response to the petition, and on January 7, 2019, the Supreme Court of incurring a material loss to be remote.Georgia denied the petition, thereby concluding the case.
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”ICS”). The Company’s damages of unpaid principal and interest on the Promissory Note, areas of November 16, 2018, were in the amount of $230,000.00,$291,313.81, plus per annum interest.interest as it continues to accrue. The Defendant’s initial Counterclaims wereCounterclaim was dismissed; however, the Court granted the Defendant leave to amend. The Amended Counter Claims wereCounterclaim was filed on June 23, 2017. The Company’s Motion to Dismiss2017 alleging $1,628,667 in damages. Depositions have taken place for both parties. In late 2018, both parties filed motions for summary judgment on all the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period ends on March 30, 2018, the Company will proceed withclaims and counterclaims, both of which motions are still pending. If Track Group obtains a Motion for Summary Judgment. We believe we will be successful in this actionjudgment for amounts owed under the loan agreement and promissory note; however,note, it is unknown whether the Company may encounter problems enforcing a favorable judgmentwill be able to collect any sums from ICS 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“C&M Agreement”Agreement”) by and between the Company and ICS, any dispute must be resolved by binding arbitration.ICS. The Company assertsasserted that ICS has failed to pay the Company fees owed to it under the C&M Agreement. TheOn August 22, 2018, the arbitrator issued a ruling awarding the Company $689,613.50. However, on October 15, 2018, the arbitrator issued a “corrected award” in which he reduced the amount owedof his award to zero. On January 8, 2019, the Company filed a motion in the United States District Court, District of Puerto Rico to vacate the “corrected award” and confirm the original arbitration award of $689,613.50, which motion is still pending. If the Company is approximately $1.0 million. Depositions were completedsuccessful in August of 2017. The arbitration hearing took place on January 31, 2018 and we expect a ruling within 30 days. The Companyconfirming the $689,613.50 award, it is confidentunknown whether it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration awardable to collect any sums from ICS in the foreign jurisdiction where ICS resides.
John Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment. Mr. Merrill is seeking not less than $590,577 plus interest, attorney fees and costs. Mr. Merrill’s employment with the Company was terminated effective September 27, 2016. The Company filed an Answer with Counter Claims on December 21, 2016. The Company filed a motion for Summary Judgment on January 16, 2018. At a hearing on April 25, 2018, the court dismissed the Plaintiff’s claims related to an oral look-back agreement and we expect a ruling within six months.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 alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company plans to file a motion for Summary Judgment before the end of February 2018. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, 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. Counsel estimatesThe Tribunal ruled the Tribunalclaims should have abe resolved in the Civil Court. Following that ruling on or before June 30, 2018. If the Company’s appeal is successful,Supreme Court took action to resolve the caseconflicting precedent regarding the jurisdiction of such claims and determined that such claims will be sent back toresolved by the Federal Administrative Tribunal for a resolution on the merits of the case.Tribunal.
Inversiones Tecnologicas SpAEli Sabag v. Track Group, Chile SpA.Inc., Sapinda Asia Limited and Lars Windhorst. On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position)May 4, 2018, Eli Sabag filed a complaint before the CivilMarion 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 Santiago, in orderGPS devices to collect $1.0 millionmeet the earn-out milestone. In the alternative, Sabag sued the Company for breach of fees for alleged services rendered with occasionfiduciary duty and tortious interference, alleging that the Company avoided selling sufficient GPS devices so as to not trigger the issuance of the public tender for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim,Contingent Stock under the considerationSPA. Finally, Sabag alleges that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA)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 Inversiones Tecnologicas SpA, was submittedwithout merit, and it will defend the case vigorously. Furthermore, according to the Court. Moreover,SPA, any disputes are to be resolved through binding arbitration and enforced in the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissalState of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal may be scheduled in late February, 2018.Utah. The Company expectsfiled a motion to dismiss the court to makeComplaint and Compel Arbitration on September 5, 2018 and we are waiting on a decision within three months ofruling from the hearing date.court.
Pablo Gonzalez-Cruz, et al.Erick Cerda v. Track Group-Puerto Rico, et al.Group, Inc. On June 9, 2017, the Plaintiff, Pablo Gonzalez-Cruz, and relatives ofJuly 25, 2018, former employee Erick Cerda, the Plaintiff, filed a Complaint in the Court of First Instance, San Juan Superior Court, Common Wealth of Puerto Ricocomplaint against the Company and associated partiesin the United States District Court for the Northern District of Illinois, Case No. 18-CV-05075, alleging the deathviolations of his daughter was a direct and immediate resultTitle VII of the gross negligenceCivil Rights Act of 1964 and guilty indifferent actionsthe Age Discrimination in Employment Act. Plaintiff seeks injunctive relief and omissions of allmonetary damages in an unspecific amount. On October 5, 2018, the defendants. Plaintiff is requesting damages of no less than $2.0 million.Company filed its answer and affirmative defenses to Plaintiff’s First Amended Complaint denying Plaintiff’s allegations in their entirety. The Company’s AnswerCompany believes that Plaintiff’s allegations are unfounded and Appearance were filed August 13, 2017. We are currently in the discovery period.without merit.
Item 1A. Risk FactorsFactors
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended September 30, 2017,2018, filed on December 19, 2017.2018. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of February 8February 13, 2019, 2018, there have been no material changes to the disclosures made in the above-referenced Form 10-K.
Item 2. UnregiUsterednregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. DefaultsDefaults Upon Senior Securities
None.
Item 4. Mine SafetySafety Disclosures
Not applicable.
Item 5. Other Information
None.
| (a) | Exhibits Required by Item 601 of Regulation S-K |
Exhibit Number | | Title of Document |
| | Monitoring Services Agreement, dated December 18, 2017, by and between Track Group, Inc. and Marion County Community Corrections Agency, by and through Marion County Community Corrections Board (filed herewith). |
| | | |
| | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). |
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| 101.INS | | XBRL INSTANCE DOCUMENT |
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| 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA |
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| 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
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| 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
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| 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
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| 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
+ Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Track Group, Inc. |
| | | |
Date: February 8, 2018 14, 2019 | By: | /s/ Derek Cassell | |
| | | Derek Cassell, Chief Executive Officer Principal Executive Officer |
| | | |
Date: February 8, 201814, 2019 | By: | /s/ Peter K. Poli | |
| | | Peter K. Poli, Chief Financial Officer (Principal Accounting Officer) |