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, 2016
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ___________ to
____________
Commission file number: 0-23153
Track Group, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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87-0543981
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(State or other jurisdiction of
incorporation or organization )
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(I.R.S. Employer
Identification Number)
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1215 W. Lakeview Court, Romeoville, Il. 60446
(Address
of principal executive offices) (Zip Code)
(877) 260-2010
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large
accelerated filer”, “accelerated filer”, and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer [ ]
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Accelerated
filer [
]
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Non-accelerated
filer [ ]
(Do
not check if a smaller reporting company)
|
Smaller
reporting company [X]
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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 6, 2017 was 10,344,118.
Track Group, Inc.
FORM 10-Q
For the Quarterly Period Ended December 31, 2016
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PAR T I. FINANCIAL
INFORMATION
Item 1. Financial Statements
TRA C K GROUP, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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Assets
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Current assets:
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Cash
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$
2,486,390
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$
1,769,921
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Accounts
receivable, net of allowance for doubtful accounts of $2,695,060
and $2,335,508, respectively
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5,920,597
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6,894,095
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Note
receivable, current
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334,733
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334,733
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Prepaid
expenses and other
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515,000
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816,708
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Inventory,
net of reserves of $98,150 and $98,150, respectively
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464,151
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521,851
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Total current assets
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9,720,871
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10,337,308
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Property and equipment, net of accumulated depreciation of
$1,503,512 and $1,421,389, respectively
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1,075,212
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1,226,461
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Monitoring equipment, net of accumulated amortization of $3,535,297
and $3,438,074, respectively
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4,583,890
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4,358,117
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Intangible assets, net of accumulated amortization of $8,821,745
and $8,233,659, respectively
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25,286,897
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25,540,650
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Goodwill
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7,841,220
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7,955,876
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Other assets
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3,016,318
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2,900,911
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Total
assets
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$
51,524,408
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$
52,319,323
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts
payable
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3,263,481
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2,771,101
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Accrued
liabilities
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5,637,673
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3,976,192
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Current
portion of long-term debt, net of discount of $222,973 and
$222,973, respectively
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3,245,732
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3,245,732
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Total
current liabilities
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12,146,886
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9,993,025
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Stock payable - related party
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3,289,879
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3,289,879
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Long-term debt, net of current portion and discount of $130,068 and
$185,811, respectively
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30,379,358
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30,345,803
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Total
Liabilities
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45,816,123
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43,628,707
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Stockholders’ equity:
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Common stock, $0.0001 par value: 30,000,000 shares authorized;
10,333,516 outstanding at December 31 and September 30,
2016
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1,034
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1,034
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Additional paid-in capital
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299,001,399
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298,876,399
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Accumulated deficit
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(291,955,262
)
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(289,341,503
)
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Accumulated other comprehensive income
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(1,338,886
)
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(845,314
)
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Total
equity
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5,708,285
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8,690,616
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Total
liabilities and stockholders’ equity
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$
51,524,408
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$
52,319,323
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The
accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OP E RATIONS AND
COMPREHENSIVE LOSS
(Unaudited)
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Three Months Ended
December 31,
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Revenues:
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Monitoring
services
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$
7,265,013
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$
5,957,426
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Other
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406,477
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360,178
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Total
revenues
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7,671,490
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6,317,604
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Cost of revenues:
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Monitoring,
products and other related services
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2,933,622
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1,880,212
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Depreciation
& amortization included in cost of revenues
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445,493
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488,967
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Impairment
of monitoring equipment and parts
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74,787
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60,000
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Total
cost of revenues
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3,453,902
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2,429,179
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Gross profit
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4,217,588
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3,888,425
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Operating expenses:
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General
& administrative
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3,768,099
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3,411,643
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Restructuring
costs
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566,330
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-
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Selling
& marketing
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627,749
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620,029
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Research
& development
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530,806
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547,159
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Depreciation
& amortization
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575,111
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700,035
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Total
operating expenses
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6,068,095
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5,278,866
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Loss from operations
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(1,850,507
)
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(1,390,441
)
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Other income (expense):
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Loss
on disposal of equipment
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-
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(33,805
)
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Interest
expense, net
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(647,103
)
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(694,508
)
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Currency
exchange rate loss
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(116,442
)
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(18,149
)
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Other
income, net
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293
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9,665
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Net loss attributable to common shareholders
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(2,613,759
)
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(2,127,238
)
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Foreign
currency translation adjustments
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(493,572
)
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215,095
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Comprehensive loss
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$
(3,107,331
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$
(1,912,143
)
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Net
loss per common share, basic and diluted
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$
(0.25
)
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$
(0.21
)
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Weighted
average common shares outstanding, basic and diluted
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10,333,516
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10,261,288
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The
accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATE M ENTS OF CASH
FLOWS
(Unaudited)
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Three Months Ended
December 31,
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2016
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2015
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Cash flows from operating activities:
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Net
loss
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$
(2,613,759
)
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$
(2,127,238
)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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1,020,604
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1,189,003
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Impairment
of monitoring equipment and parts
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74,787
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60,000
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Bad
debt expense
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359,551
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199,854
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Amortization
of debt discount
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55,743
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55,743
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Stock
based compensation
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225,374
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159,469
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Vesting
and re-pricing of stock options
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-
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196,114
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Loss
on disposal of property and equipment
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-
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33,805
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Change
in assets and liabilities:
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Accounts
receivable, net
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660,834
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(836,330
)
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Notes
receivable
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-
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(9,099
)
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Inventories
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57,700
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131,348
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Prepaid
expenses and other assets
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149,428
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(76,313
)
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Accounts
payable
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684,987
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146,921
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Accrued
expenses
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1,461,547
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418,593
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Net
cash provided by (used in) operating activities
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2,136,796
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(458,130
)
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Cash flow from investing activities:
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Purchase
of property and equipment
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(12,762
)
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(46,970
)
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Capitalized
software
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(570,093
)
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(442,578
)
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Purchase
of monitoring equipment and parts
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(818,600
)
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(898,500
)
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Net
cash used in investing activities
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(1,401,455
)
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(1,388,048
)
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Cash flow from financing activities:
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Principal
payments on notes payable
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(17,266
)
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(587,608
)
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Net
cash used in financing activities
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(17,266
)
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(587,608
)
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Effect of exchange rate changes on cash
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(1,606
)
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3,766
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Net increase (decrease) in cash
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716,469
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(2,430,020
)
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Cash, beginning of period
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1,769,921
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4,903,045
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Cash, end of period
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$
2,486,390
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$
2,473,025
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The
accompanying notes are an integral part of these condensed
consolidated statements.
TRAC K GROUP, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated
financial information of Track Group, Inc. and subsidiaries
(collectively, the “ Company ” or “ Track Group
”) has been prepared in accordance
with the Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission (“
SEC
”). Certain information and
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America (“ GAAP ”) have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the
accompanying interim consolidated financial information contains
all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the Company’s financial position as of
December 31, 2016, and results of its operations for the three
months ended December 31, 2016. These financial statements
should be read in conjunction with the annual consolidated
financial statements and notes thereto that are included in the
Company’s Annual Report on Form 10-K for the year ended September
30, 2016. The results of operations for the three months ended
December 31, 2016 may not be indicative of the results for the
fiscal year ending September 30, 2017.
Certain
prior year amounts in the Condensed Consolidated Financial
Statements have been reclassified to conform with the current year
presentation.
(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements
include the accounts of Track Group and its subsidiaries. All
significant inter-company transactions have been eliminated in
consolidation. Certain prior year
amounts on the consolidated statement of operations have
been reclassified to conform to the current period
presentation. These reclassifications have no impact on the
previously reported results.
(3) RECENTLY ISSUED ACCOUNTING STANDARDS
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“
FASB
”) or other standard setting bodies,
which are adopted by the Company as of the specified effective
date. Unless otherwise discussed, the Company believes that the
impact of recently issued standards that are not yet effective will
not have a material impact on its financial position or results of
operations upon adoption.
In
May 2016, the FASB issued ASU 2016-12. The amendments in this
update affect the guidance in Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements for the
amendments in this Update are the same as the effective date and
transition requirements for Topic 606 (and any other Topic amended
by Update 2014-09). Accounting Standards Update 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of the
Effective Date, defers the effective date of Update 2014-09 by one
year. Management is currently evaluating the impact that this
amendment will have on its consolidated financial
statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing, (“ ASU 2016-10
”). This update was intended to
clarify two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The effective
date for ASU 2016-10 is the same as Topic 606, which begins for
annual reporting periods beginning after December 15, 2017.
Management is currently evaluating the impact of the pending
adoption of ASU 2016-10 on the Company’s consolidated financial
statements.
In
March 2016, FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). This update was intended
to improve the operability and understandability of the
implementation guidance on principal versus agent considerations.
The amendments in this update have the same effective date as ASC
606 as discussed above. Management is currently evaluating the
impact of the pending adoption of ASU 2016-08 on the Company’s
consolidated financial statements.
In
March 2016, FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this update change the
accounting for certain stock-based compensation transactions,
including the income tax consequences and cash flow classification
for applicable transactions. The amendments in this update are
effective for annual periods beginning after December 31, 2016 and
interim periods within those annual periods. Management is
currently evaluating the impact that this amendment will have on
its consolidated financial statements.
In
February 2016, FASB issued ASU No. 2016-02, Leases (Topic 841). For
lessees, the amendments in this update require that for all leases
not considered to be short term, a company recognize both a lease
liability and right-of-use asset on its balance sheet, representing
the obligation to make payments and the right to use or control the
use of a specified asset for the lease term. The amendments in this
update are effective for annual periods beginning after December
15, 2018 and interim periods within those annual periods.
Management is currently evaluating the impact that this amendment
will have on its consolidated financial statements.
In
August 2014, FASB issued ASU 2014-15, Presentation of Financial
Statements-Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going
Concern. The new guidance requires management to assess a company’s
ability to continue as a going concern and to provide related
footnote disclosures in certain circumstances. Disclosures are
required when conditions give rise to substantial doubt.
Substantial doubt is deemed to exist when it is probable that the
company will be unable to meet its obligations within one year from
the financial statement issuance date. The new guidance is
effective for our annual period beginning September 30, 2017, and
all annual and interim periods thereafter. We are currently
evaluating what impact the adoption of this guidance will have on
our financial statements or disclosures in our financial
statements.
(4) 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
$74,787 and $60,000 of impairment expenses related to monitoring
equipment for the three months ended December 31, 2016 and 2015,
respectively.
(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 too much 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.
(6) ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive
loss includes net loss as currently reported under U.S. GAAP and
other comprehensive loss. Other comprehensive loss considers the
effects of additional economic events, such as foreign currency
translation adjustments, that are not required to be recorded in
determining net 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, 2016.
(7) NET LOSS PER COMMON SHARE
Basic net loss per common share (“
Basic EPS
”) is computed by dividing net loss
available to common shareholders by the weighted average number of
common shares outstanding during the period.
Diluted net loss per common share (“
Diluted EPS
”) is computed by dividing net 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, 2016 and
2015, there were 526,901 and 411,390 outstanding common share
equivalents, respectively, that were not included in the
computation of Diluted EPS for the three months ended December 31,
2016 and 2015, respectively as their effect would be anti-dilutive.
The common stock equivalents outstanding as of December 31, 2016
and 2015 consisted of the following:
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Exercise
of outstanding common stock options and warrants
|
526,901
|
411,390
|
|
Total
common stock equivalents
|
526,901
|
411,390
|
(8) ACQUISITION
Track Group Analytics Limited
On November 26, 2014, the Company entered into a
Share Purchase Agreement to purchase from the shareholders of Track
Group Analytics Limited, formerly G2 Research Limited (“
TGA
”), all issued and outstanding shares
of TGA for an aggregate purchase price of up to CAD$4,600,000 (the
“ TGA Acquisition
”), of which CAD$2,000,000 was paid in
cash to the TGA shareholders on the Closing Date with the remainder
of the purchase price to be paid as follows: (i) CAD$600,000 to the
former TGA shareholders in shares of common stock of which one-half
of the shares were issued on the one-year anniversary of the
closing and the balance was issued on the two-year anniversary of
the closing; and (ii) up to CAD$2,000,000 to the former TGA
shareholders in shares of common stock over a two-year period
beginning as of the closing, subject to the achievement of certain
milestones set forth in the purchase agreement. The Company has
paid approximately USD$880,000 of milestone payments through stock
issuances through December 31, 2016 and the final milestone payment
of 10,602 shares of common stock was paid on January 31,
2017.
The fair value of patents, developed technology, customer
contracts/relationship, tradename and trademarks were capitalized
as of the acquisition date and will be subsequently amortized using
a straight-line method to depreciation and amortization expense
over their estimated useful lives.
(9) PREPAID AND OTHER EXPENSES
The
carrying amounts reported in the balance sheets for prepaid
expenses and other current assets approximate their fair market
value based on the short-term maturity of these instruments. As of
December 31, 2016 and September 30, 2016, the outstanding balance
of prepaid and other expenses was $515,000 and $816,708,
respectively. The $515,000 as of December 31, 2016 is
comprised largely of prepayments toward inventory purchases, vendor
deposits and other prepaid supplier expenses.
(10) INVENTORY
Inventory is valued at the lower of the cost or
market. Cost is determined using the first-in, first-out
(“ FIFO ”) method. Market is determined based on the
estimated net realizable value, which generally is the item’s
selling price. Inventory is periodically reviewed in order to
identify obsolete, damaged or impaired items.
Inventory consists of finished goods that are
to be shipped to customers and parts used for minor repairs of
ReliAlert TM
, Shadow, and other tracking devices.
Completed and shipped ReliAlert TM
, and other tracking devices are
reflected in Monitoring Equipment. As of December 31, 2016 and
September 30, 2016, respectively, inventory consisted of the
following:
|
|
|
|
|
|
|
|
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Finished
goods inventory
|
$
562,301
|
$
620,001
|
|
Reserve
for damaged or obsolete inventory
|
(98,150
)
|
(98,150
)
|
|
Total
inventory, net of reserves
|
$
464,151
|
$
521,851
|
(11) PROPERTY AND EQUIPMENT
The
following table summarizes property and equipment at December 31,
2016 and September 30, 2016, respectively:
|
|
|
|
|
|
|
|
|
Equipment,
software and tooling
|
$
1,003,659
|
$
1,028,173
|
|
Automobiles
|
79,814
|
87,313
|
|
Leasehold
improvements
|
1,245,329
|
1,279,500
|
|
Furniture
and fixtures
|
249,921
|
252,864
|
|
Total
property and equipment before accumulated depreciation
|
2,578,723
|
2,647,850
|
|
Accumulated
depreciation
|
(1,503,512
)
|
(1,421,389
)
|
|
Property
and equipment, net of accumulated depreciation
|
$
1,075,211
|
$
1,226,461
|
Property
and equipment depreciation expense for the three months ended
December 31, 2016 and 2015 was $50,291 and $176,088,
respectively.
(12) MONITORING EQUIPMENT
The
following table summarizes monitoring equipment at December 31,
2016 and September 30, 2016, respectively:
|
|
|
|
|
|
|
|
|
Monitoring
equipment
|
$
8,119,187
|
$
7,796,191
|
|
Less:
accumulated amortization
|
(3,535,297
)
|
(3,438,074
)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$
4,583,890
|
$
4,358,117
|
The
Company began leasing monitoring equipment to agencies for offender
tracking in April 2006 under contractual service
agreements. The monitoring equipment is amortized using the
straight-line method over an estimated useful life of three to five
years.
Amortization
of monitoring equipment for the three months ended December 31,
2016 and 2015 was $332,993 and $376,467, respectively. These
expenses were recognized in cost of revenues.
(13) INTANGIBLE ASSETS
The
following table summarizes intangible assets at December 31, 2016
and September 30, 2016, respectively:
|
|
|
|
|
Other
intangible assets:
|
|
|
|
Patent
& royalty agreements
|
21,170,565
|
21,170,565
|
|
Technology
|
10,009,880
|
9,651,074
|
|
Customer
relationships
|
2,535,721
|
2,555,086
|
|
Trade
name
|
314,275
|
319,383
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
34,108,642
|
33,774,309
|
|
Accumulated
amortization
|
(8,821,745
)
|
(8,233,659
)
|
|
Intangible
assets, net of accumulated amortization
|
$
25,286,897
|
$
25,540,650
|
The
intangible assets summarized above were purchased on various dates
from January 2010 through December 2016. The assets have useful
lives ranging from three to ten years. Amortization expense of
intangible assets for the three months ended December 31, 2016 and
2015 was $524,820 and $523,948,
respectively.
(14) GOODWILL
The
following table summarizes the activity of goodwill at December 31,
2016 and September 30, 2016, respectively:
|
|
|
|
|
|
|
|
|
Balance
- beginning of period
|
$
7,955,876
|
$
7,782,903
|
|
Effect
of foreign currency translation on goodwill
|
(114,656
)
|
172,973
|
|
Balance
- end of period
|
$
7,841,220
|
$
7,955,876
|
Goodwill
is recognized in connection with acquisition transactions in
accordance with ASC 805. The Company performs an impairment test
for goodwill annually or more frequently if indicators of potential
impairment exist. No impairment of goodwill had been recognized
through December 31, 2016.
(15) OTHER ASSETS
As
of December 31, 2016 and September 30, 2016, the outstanding
balance of other assets was $3,016,318 and $2,900,911,
respectively. Other assets are comprised largely of a cash
collateralized performance bond for an international
customer. The Company anticipates this restricted cash will be
unrestricted and available to the Company upon completion of its
relationship with the customers, unless mutually agreed
otherwise.
(16) ACCRUED LIABILITES
Accrued
liabilities consisted of the following as of December 31, 2016 and
September 30, 2016:
|
|
|
|
|
|
|
|
|
Accrued
royalties
|
$
11,070
|
$
16,977
|
|
Accrued
payroll, taxes and employee benefits
|
1,772,606
|
1,424,812
|
|
Accrued
consulting
|
96,708
|
123,114
|
|
Accrued
taxes - foreign and domestic
|
115,824
|
311,614
|
|
Accrued
board of directors fees
|
119,468
|
96,000
|
|
Accrued
other expenses
|
156,880
|
143,101
|
|
Accrued
cellular costs
|
77,280
|
84
|
|
Accrued
outside services
|
216,413
|
13,768
|
|
Accrued
restructuring costs
|
566,330
|
-
|
|
Accrued
warranty and manufacturing costs
|
156,025
|
103,441
|
|
Accrued
interest
|
2,349,069
|
1,743,281
|
|
Total
accrued liabilities
|
$
5,637,673
|
$
3,976,192
|
(17) RESTRUCTURING
In the
first quarter of fiscal year 2017, the Company approved a plan to
restructure its business (the “ Restructuring Plan ”) to streamline
operations by consolidating its headquarters from Salt Lake City,
Utah into its existing Chicagoland office. The Restructuring Plan,
which is expected to be completed in fiscal 2017, also included
outsourcing its monitoring center that allowed the Company to
reduce its headcount significantly, lower future expenses and
improve its ability to align workforce costs with customer demands.
The Company recognized expenses for the Restructuring Plan of
$566,330, including $448,330 of severance expense and $118,000 of
lease and moving costs, all of which will be paid in fiscal
2017.
Total
fiscal year 2017 restructuring
charges and their utilization are summarized as
follows:
|
|
|
|
|
|
Liability at
September 30, 2016
|
$
-
|
$
-
|
$
-
|
|
Accrued
|
448,330
|
118,000
|
566,330
|
|
Payments
|
-
|
-
|
-
|
|
Liability at
December 31, 2016
|
$
448,330
|
$
118,000
|
$
566,330
|
(18) DEBT OBLIGATIONS
On September 25, 2015, the Company entered into a
Loan Agreement (the “ Loan Agreement
”) with one of the Company’s related
parties, Sapinda Asia Limited (“ Sapinda ”) to provide the Company with a $5.0 million line
of credit that accrues interest at a rate of 3% per annum for
undrawn funds, and 8% per annum for borrowed funds. Pursuant to the
terms and conditions of the Loan Agreement, available funds may be
drawn down at the Company’s request at any time until the Loan
Agreement matures on September 30, 2017 (the “ Maturity Date
”), when all borrowed funds, plus all
accrued but unpaid interest will become due and payable. The
Company, however, may elect to satisfy any outstanding obligations
under the Loan Agreement prior to the Maturity Date without
penalties or fees. The Company did not draw on this line of credit
nor did it pay any interest during the three months ended December
31, 2016. The undrawn balance of this line of credit at December
31, 2016 was $1,600,356.
On May 1, 2016, the Company entered into an
unsecured Loan Agreement with Conrent Invest S.A., acting with
respect to its Compartment Safety III (the “ Conrent Loan Agreement”
). Under the Conrent Loan
Agreement, the Company can borrow $5.0 million for
working capital, repayment of debt, and operating
purposes. When funded, the unsecured loan will bear interest
at a rate of 8% per annum, payable in arrears semi-annually, with
all principal and accrued unpaid interest due on July 31,
2018. In addition, the Company anticipates paying the lender
an arrangement fee of $112,500 when it receives proceeds from this
loan. As of December 31, 2016, the Company had not received the
funds under the Conrent Loan Agreement.
Debt
obligations as of December 31, 2016 and September 30, 2016,
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, 2016, the remaining debt discount was
$353,041. The Company did not pay interest on this loan during the
three months ended December 31, 2016.
|
|
$
30,046,959
|
$
29,991,216
|
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5.0 million at 8%
interest per annum on borrowed funds maturing on September 30,
2017.
|
|
3,399,644
|
3,399,644
|
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the G2 acquisition.
|
|
161,227
|
182,002
|
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
|
17,260
|
18,673
|
|
|
|
|
|
|
Total
debt obligations
|
|
33,625,090
|
33,591,535
|
|
Less
current portion
|
|
(3,245,732
)
|
(3,245,732
)
|
|
Long-term
debt, net of current portion
|
|
$
30,379,358
|
$
30,345,803
|
The
following table summarizes the Company’s future maturities of debt
obligations, net of the amortization of debt discounts as of
December 31, 2016:
|
Fiscal Year
|
|
|
2017
|
$
3,468,705
|
|
2018
|
30,448,018
|
|
2019
|
42,250
|
|
2020
|
19,158
|
|
2021
& thereafter
|
-
|
|
Debt
discount
|
(353,041
)
|
|
Total
|
$
33,625,090
|
(19) RELATED-PARTY TRANSACTIONS
Related-Party Loan Agreement
On September 25, 2015, the Company entered into a
Loan Agreement (the “ Loan Agreement
”) with one of the Company’s related
parties, Sapinda Asia Limited (“ Sapinda ”) to provide the Company with a $5.0 million line
of credit that accrues interest at a rate of 3% per annum for
undrawn funds, and 8% per annum for borrowed funds. Pursuant to the
terms and conditions of the Loan Agreement, available funds may be
drawn down at the Company’s request at any time until the Loan
Agreement matures on September 30, 2017 (the “ Maturity Date
”), when all borrowed funds, plus all
accrued but unpaid interest will become due and payable. The
Company, however, may elect to satisfy any outstanding obligations
under the Loan Agreement prior to the Maturity Date without
penalties or fees. The Company did not draw on this line of credit
nor did it pay any interest during the three months ended December
31, 2016. The undrawn balance of this line of credit at December
31, 2016 was $1,600,356.
Stock Payable – Related Party
Changes
in the stock payable liability are shown below:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
3,289,879
|
$
3,501,410
|
|
P ayment
of shares for achieving performance milestones
|
-
|
(211,531
)
|
|
Ending
balance
|
$
3,289,879
|
$
3,289,879
|
Shares
of common stock valued at up to $3,000,000, included in the
beginning balance shown above, can be earned by the former owner of
GPS Global Tracking and Surveillance System, Ltd., now
a wholly-owned subsidiary of the Company, subject to
achieving certain milestones. The measurement period of the
milestones ends April 1, 2017.
In
connection with the acquisition of TGA (See Note 8), the Company
recognized a liability for stock payable to the former owners of
the entity acquired. In conjunction with the respective purchase
agreements, shares of the Company’s common stock are payable based
on the achievement of certain milestones on or before November 26,
2016. The final milestone payment of 10,602 shares of common stock
related to the TGA acquisition was paid in the second fiscal
quarter of 2017.
Each
of the foregoing related-party transactions was reviewed and
approved by disinterested and independent members of the Company's
Board of Directors.
(20) 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, 2016, the Company issued no additional shares of
common stock. The Company accrued fees for payment to an individual
for their services as a member of the Board of Directors in the
fourth quarter 2016 that is expected to be issued as stock in
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 Articles of
Incorporation, without further shareholder approval, to designate
and determine, in whole or in part, the preferences, limitations
and relative rights of the preferred stock before any issuance of
the preferred stock, and to create one or more series of preferred
stock. As of December 31, 2016, there were no shares of preferred
stock outstanding.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting
of shareholders on March 21, 2011, the shareholders approved the
2012 Equity Compensation Plan (the “ 2012
Plan ”). The 2012 Plan
provides for the grant of incentive stock options and nonqualified
stock options, restricted stock, stock appreciation rights,
performance shares, performance stock units, dividend equivalents,
stock payments, deferred stock, restricted stock units, other
stock-based awards and performance-based awards to employees and
certain non-employees who provide services to the Company in lieu
of cash. A total of 90,000 shares were initially authorized for
issuance pursuant to awards granted under the 2012 Plan. At the
2015 annual meeting of shareholders held on May 19, 2015, our
stockholders approved a 713,262 share increase to the total number
of shares authorized under the 2012 Plan. As of December 31, 2016, 108,784 shares of
common stock were available for future grants under the 2012
Plan.
All Options
and Warrants
The
fair value of each stock option and warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model.
During the three months ended December 31, 2016 and 2015, the
Company granted 154,410 and 40,261 warrants to purchase shares of
common stock. The warrants for Board members vest immediately and
expire two years from grant date and warrants issued to employees
vest annually over either a two to three year period and expire two
years after the final vesting date of the grant. During the
three months ended December 31, 2016, and December 31, 2015 no
options were issued under the 2012 Plan. The Company recorded
expense of $200,374 and $95,968 for the three months ended December
31, 2016 and 2015, respectively, related to the issuance and
vesting of outstanding stock options and warrants.
The
option and warrant grants for three months ended December 31, 2016
were valued using the Black-Scholes model with the following
weighted-average assumptions:
|
|
Three Months Ended
December 31
|
|
|
|
|
|
Expected
stock price volatility
|
119
%
|
51
%
|
|
Risk-free
interest rate
|
0.60
%
|
0.64
%
|
|
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 activity for the three months ended
December 31, 2016 is presented below:
|
|
|
Shares Under Option
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding
as of September 30, 2016
|
|
|
504,991
|
|
|
$
|
10.78
|
|
1.15
years
|
|
$
|
182,095
|
|
|
Granted
|
|
|
154,410
|
|
|
$
|
4.97
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(32,500)
|
|
|
$
|
(19.58
|
)
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Outstanding
as of December 31, 2016
|
|
|
626,901
|
|
|
$
|
8.90
|
|
1.34
years
|
|
$
|
75,000
|
|
|
Exercisable
as of December 31, 2016
|
|
|
526,901
|
|
|
$
|
9.87
|
|
0.89
years
|
|
$
|
-
|
|
The
intrinsic value of options outstanding and exercisable is based on
the Company’s share price of $4.50 at December 31,
2016.
(22) 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, 2016 and 2015, the Company incurred net losses for income tax
purposes of $2,613,759 and $2,127,238, respectively. The
amount and ultimate realization of the benefits from the net
operating losses is dependent, in part, upon the tax laws in
effect, the Company's future earnings, and other future events, the
effects of which cannot be determined. The Company has
established a valuation allowance for all deferred income tax
assets not offset by deferred income tax liabilities due to the
uncertainty of their realization. Accordingly, there is no
benefit for income taxes in the accompanying statements of
operations.
(23) COMMITMENTS AND CONTINGENCIES
Legal Matters
We are, from time to time, involved in various legal proceedings
incidental to the conduct of our business. Historically, the
outcome of all such legal proceedings has not, in the aggregate,
had a material adverse effect on our business, financial condition,
results of operations or liquidity. Other than as set forth below,
there are no additional pending or threatened legal proceedings at
this time.
Lazar Leybovich et al. v. SecureAlert, Inc. On March 29, 2012,
Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a
complaint in the 11th Circuit Court in and for Miami-Dade County,
Florida alleging breach of contract with regard to certain Stock
Redemption Agreements. The plaintiffs subsequently withdrew the
complaint. The plaintiffs filed an amended complaint on November
15, 2012. On May 2, 2016, the Court resolved this case in favor of
the Company by granting the Company's motion for summary judgment.
The plaintiffs filed a notice of appeal on June 1, 2016 challenging
the court’s ruling on the motion for summary
judgment.
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 breach of
contract and negligence in monitoring of certain offenders in
Dougherty County, Georgia, as well as a request for punitive
damages. Plaintiffs withdrew their complaint in February 2016, but
refiled the complaint on October 12, 2016. We believe the
allegations are inaccurate and are defending the case vigorously.
We believe the probability of incurring a material loss to be
remote.
Track
Group, Inc. v. I.C.S. of the Bahamas Co. Ltd. On May 18, 2016, the Company filed a complaint in
District Court of the Third Judicial District in Salt Lake County,
Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). We believe we will be successful in this
action to for amounts owed under the loan agreement and promissory
note; however, the Company may encounter challenges enforcing a
favorable judgment in the foreign jurisdiction where ICS
resides.
Track
Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016 the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by I.C.S. of the Bahamas
Co. Ltd. (“ICS”). Under the terms of the Commercial and Monitoring
Representative Agreement dated November 30, 2010 (the “C&M
Agreement”) between the Company and ICS any dispute must be
resolved by binding arbitration. The Company asserts that ICS had
failed to pay the Company fees owed to it under the C&M
Agreement. The Company is confident it will be successful in the
arbitration; however, the Company may encounter challenges
enforcing a successful arbitration award in the foreign
jurisdiction where ICS resides.
John
Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with
a complaint filed by John Merrill, the former Chief Financial
Officer of the Company filed in District Court of the Third
Judicial District in Salt Lake County, Utah alleging breach of
contract, among other causes of action, related to Mr. Merrill’s
termination of employment. Mr. Merrill is seeking not less than
$590,577 plus interest, attorney fees and costs. Mr. Merrill’s
employment with the Company was terminated effective September 27,
2016. We believe the allegations and claims are unfounded, are
without merit, and we have submitted counterclaims against Mr.
Merrill. We intend to defend the case vigorously and believe the
probability of incurring a material loss to be
remote.
(24) SUBSEQUENT
EVENTS
In
accordance with the Subsequent Events Topic of the FASB ASC 855, we
have evaluated subsequent events, through the filing date
and noted that no subsequent events have occurred that are
reasonably likely to impact the financial statements.
_______________________________________________________________________________________________________________________________________
I tem 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This Report contains information that constitutes “forward-looking
statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 and Section 21E of the Securities Exchange Act
of 1934 (“Exchange Act”). Generally, the statements contained
in this Quarterly Report on Form 10-Q that are not purely
historical can be considered to be “forward-looking
statements.” These statements represent our expectations,
hopes, beliefs, anticipations, commitments, intentions, and
strategies regarding the future. They may be identified by the
use of words or phrases such as “believes,” “expects,” “intends,”
“anticipates,” “should,” “plans,” “estimates,” “projects,”
“potential,” and “will,” among others. Forward-looking
statements include, but are not limited to, statements contained in
Management’s Discussion and Analysis of Financial Condition and
Results of Operations regarding our financial performance, revenue,
and expense levels in the future and the sufficiency of our
existing assets to fund future operations and capital spending
needs. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. These risks and uncertainties include, but are
not limited to, those described in “Risk Factors” in our most
recent Annual Report on Form 10-K, and those described from time to
time in our reports filed with the SEC.
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial Condition
and Results of Operations in our Annual Report on Form 10-K, for
the fiscal year ended September 30, 2016, and Current Reports on
Form 8-K that have been filed with the SEC through the date of this
Report. Except as otherwise indicated, as used in this Report, the
terms “ the
Company ,” “
Track Group
,” “ we ,” “ our ,” “ us ,” refer to Track Group, Inc., a Delaware
corporation.
General
Our
core business is based on the manufacture and leasing of patented
tracking and monitoring solutions to federal, state and local law
enforcement agencies, both in the U.S and abroad, for the
electronic monitoring of offenders and offering unique data
analytics services on a platform-as-a-service (PaaS) business
model. Currently, the Company deploys offender based
management services that combine patented GPS tracking
technologies, fulltime 24/7/365 global monitoring capabilities,
case management, and proprietary data analytics. We offer
customizable tracking solutions that leverage real-time tracking
data, best-practices monitoring, and analytics capabilities to
create complete, end-to-end tracking solutions.
Our
devices consist principally of the ReliAlert product line, which is
supplemented by the ancillary Shadow and R.A.D.A.R product
lines. 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.
ReliAlert and
Shadow. Our
tracking devices utilize patented technology and are securely
attached around an offender’s ankle with a tamper resistant strap
that cannot be adjusted or removed without detection, unless by a
supervising officer, and which is activated through services
provided by our monitoring centers. The ReliAlert 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
ReliAlert 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.
R.A.D.A.R.
Our Real-Time Alcohol
Detection and Recognition (R.A.D.A.R.) device is a comprehensive
proprietary alcohol offender supervision and monitoring system with
a fuel-cell based, breath-alcohol testing system that incorporates
a number of safeguards to prevent tampering, including biometric
user identification to provide accurate, actionable alcohol alerts.
All breath-alcohol tests are time stamped and include a GPS
fix. The web-enabled reporting center assures testing
compliance with notifications via text or
email.
Monitoring Center
Services. Our
monitoring center facilities provide live 24/7/365 monitoring of
all alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, we staff our centers with highly-trained,
bi-lingual individuals. These operators act as an extension of
agency resources receiving alarms, communicating and intervening
with offenders regarding violations, and interacting with
supervision staff, all pursuant to agency-established
protocols. The facilities have redundant power source, battery
back-up and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in the U.S. and Chile. In
addition the Company has assisted in the establishment of
monitoring centers for customers and local partners in other global
locations. During the first and second fiscal quarters of 2017, the
company has transitioned one of its monitoring centers to an
independent vendor, whom we monitor closely. See Note 17 to the
Condensed Consolidated Financial Statements.
Data Analytics
Services. Our
TrackerPAL software, TrackerPAL Mobile, combined with our Data
Analytic analysis tools, provide an integrated platform allowing
case managers and law enforcement officers’ quick access views of a
targets travel behavior, mapping, and provide inference on
patterns. Our advanced data analytics service offers a highly
complex predictive reporting mechanism that combines modern
statistical methods, developed using computer science and used by
intelligence agencies that separate noteworthy events from normal
events, rank offender cases according to their need for
supervision, and relate decision-relevant metrics to benchmarks in
real-time.
Strategy
Our
global growth strategy is to continue to expand service offerings
on a subscription basis that empowers professionals in security,
law enforcement, corrections and rehabilitation organizations
worldwide with a single-sourced, real-time, end-to-end offender
management solution that integrates reliable intervention
technologies to support re-socialization, monitoring, and
predictive analytics for offenders. To accomplish this objective,
we have and will continue to innovate and grow our portfolio of
proprietary and non-proprietary real-time monitoring and
intervention products and services. These include GPS, RF, drug and
alcohol testing for offenders, and predictive analytics. Given
the flexibility of our platform, our device technology, tracking,
monitoring, and analytical capabilities, we believe that our
solutions may apply to other industry verticals that require
tracking, monitoring and predictive analytics such as those
entities responsible for individuals on parole or
bail.
Critical Accounting Policies
From
time to time, management reviews and evaluates certain accounting
policies that are considered to be significant in determining our
results of operations and financial position.
A description of the Company’s critical accounting policies that
affect the preparation of the Company’s financial statements is set
forth in the Company’s Annual Report on Form 10-K for the year
ended September 30, 2016. Such policies were unchanged during the
three months ended December 31, 2016.
The
preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. By their
nature, these judgments are subject to an inherent degree of
uncertainty. We assess the reasonableness of our estimates,
including those related to bad debts, inventories, intangible
assets, warranty obligations, product liability, revenue, legal
matters and income taxes. We base our estimates on historical
experience as well as available current information on a regular
basis. Management uses this information to form the basis for
making judgments about the carrying value of assets and
liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
Results of Operations
Three Months Ended December 31, 2016, Compared to Three Months
Ended December 31, 2015
Revenue
For
the three months ended December 31, 2016, the Company recognized
revenue from operations of $7,671,490 compared to $6,317,604 for
the three months ended December 31, 2015, an increase of $1,353,886
or 21%. The increase in revenue was principally the result of
(i) expansion and growth of offender monitoring in Chile, and (ii)
increases in total growth of our North American
monitoring operations driven by clients in Indiana and
Virginia.
Other
revenue for the three months ended December 31, 2016 increased to
$406,477 from $360,178 in the same period in 2015 largely due to
higher sales of consumable items. Notwithstanding, we will continue
to focus on recurring subscription based opportunities and not
equipment sales.
Cost of Revenue
During the three months ended December 31, 2016,
cost of revenue totaled $3,453,902 compared to cost of revenue
during the three months ended December 31, 2015 of $2,429,179, an
increase of $1,024,723 or approximately 42%.
The
increase in cost of revenue was largely the result of increases in
total monitoring and analytics activity, which drove up
monitoring center personnel costs by
$116,821, communication costs by $411,222, repairs and maintenance
by $157,338, outside monitoring costs by $321,704 and other
incremental revenue related costs.
The
Company is examining ways to lower device manufacturing costs and
increase automation of our software system to offset other
increases in cost of revenue. During the second fiscal quarter of
2017, the Company will complete the outsourcing of our monitoring
centers to an independent vendor to lower monitoring
costs.
Depreciation and amortization included in cost of
revenue for the three months ended December 31, 2016 and 2015
totaled $445,493 and $488,967, respectively. Certain devices became
fully depreciated in the first quarter of 2017. These costs
represents depreciation of monitoring devices as well as the
amortization of certain royalty agreements. Devices are depreciated
over a three to five year useful life. Royalty agreements are being
amortized over a ten year useful life. The Company believes these
lives are appropriate due to rapid changes in electronic monitoring
technology and the corresponding potential for obsolescence.
Management periodically assesses estimates for useful lives of
assets for appropriateness.
Impairment cost for equipment and parts for the three months ended
December 31, 2016 and 2015 were $74,787 and $60,000,
respectively. These costs relate to disposal of obsolete
inventory, monitoring equipment and parts as we continue to make
significant enhancements to our various devices and monitoring
platform.
Gross Profit and Margin
During the three months ended December 31, 2016,
gross profit totaled $4,217,588, resulting in a gross margin of 55%
compared to $3,888,425 or a gross margin of 62% during the three
months ended December 31, 2015. The increase in
absolute gross profit is due to higher overall revenues. The
decrease in gross margin is due to the increase in certain aspects
of cost of revenue, including communication costs, internal and
external monitoring costs and repairs and
maintenance.
General and Administrative Expense
During
the three months ended December 31, 2016, general and
administrative expense totaled $3,768,099 compared to $3,411,643
for the three months ended December 31, 2015. The increase of
$356,456 or approximately 10% in general and administrative costs
resulted largely from increases in bad debt expense, outside
service fees, training and recruiting costs and board of director
fees, partially offset by lower legal and professional fees and
lower travel related expenses.
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 moving costs. (See Note 17 to the
Condensed Consolidated Financial Statements).
Selling and Marketing Expense
During
the three months ended December 31, 2016, selling and marketing
expense increased to $627,749 compared to $620,029 for the three
months ended December 31, 2015. The $7,720, or approximately 1%
increase resulted from additional consulting and outside services,
largely offset by lower wages and travel related
expenses.
Research and Development Expense
During
the three months ended December 31, 2016, research and development
expense totaled $530,806 compared to $547,159 for the three months
ended December 31, 2015, a decrease of $16,353 or approximately
3%. The Company is significantly enhancing its technology
platform to improve the efficiency of its software, firmware, user
interface, and automation. As a result of these improvements,
$570,093 was capitalized as developed technology during the three
months ended December 31, 2016 and $442,578 was capitalized in the
three months ended December 31, 2015. A portion of these expenses
would have been recognized as research and development expense,
absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During
the three months ended December 31, 2016, depreciation and
amortization expense totaled $575,111 compared to $700,035 for the
three months ended December 31, 2015. The $124,924, or
approximately 18% decrease was largely the result of certain
property and equipment assets becoming fully
depreciated.
Other Income and Expense
For the three months ended December 31, 2016, net
interest expense was $647,103 compared to $694,508 for the three
months ended December 31, 2015, a decrease of $47,405 or
approximately 7%. The decrease in net
interest expense resulted primarily from a penalty due from the
lender under the agreement, partially offset interest payable on
the undrawn funds of the agreement and interest expense on drawn
funds for the three months ended December 31,
2016.
Net Loss
The Company had a net loss of $2,613,759 for the
three months ended December 31, 2016, compared to a net loss of
$2,127,238 for the three months ended December 31, 2015, an
increase of $486,521. This increase in net
loss is largely due to an increase in cost of revenues,
restructuring costs and general and administrative
costs.
Liquidity and Capital Resources
During prior fiscal
years, the Company has supplemented cash flows to finance the
business from borrowings under a credit facility, a revolving line
of credit from one of its shareholders, receipt of certain
disgorgement funds, and from the sale and issuance of debt
securities. No such borrowings or sales of equity securities
occurred during the three months ended December 31, 2016.
As
of December 31, 2016, the Company had unrestricted cash of
$2,486,390 and a working capital deficit of $2,426,015, compared to
unrestricted cash of $1,769,921 and a working capital surplus of
$344,283 as of September 30, 2016.
The
Company provided $2,136,796 from operating activities during the
three months ended December 31, 2016, compared to a use of funds of
$458,130 in the three months ended December 31, 2015. The Company
had a net loss of $2,613,759 for the three months ended December
31, 2016, which included certain non-cash items, such as
depreciation and amortization, stock-based compensation, and bad
debt expense. In addition accounts receivable was $660,834 lower
and accounts payable and accrued expenses increased $2,144,520 for
the three months ended December 31, 2016.
The Company used cash of $1,401,455 for investing
activities during the three months ended December 31, 2016,
compared to $1,388,048 of cash used in investing activities in the
three months ended December 31, 2015. Cash used for investing
activities was spent on significant enhancements of the Company’s
next generation software platform and for purchases of monitoring
and other equipment to meet demand during the three months ended
December 31, 2016.
The
Company used $17,266 of cash for financing activities during the
three months ended December 31, 2016, compared to $587,608 in cash
used in the three months ended December 31, 2015.
The
Company's Restructuring Plan approved in the quarter ended December
31, 2016 is intended to reduce certain expenses, and reduce the
Company's dependence on external sources of financing. While the
Restructuring Plan is intended to result in a reduction in
operating losses and cash used in operations, the Company currently
remains dependent on external sources of financing to continue
operations. As a result, management intends to pursue certain
options to reduce its dependence on external sources of capital,
which may include refinancing certain debt, extending debt
maturities, converting certain debt to equity, selling certain
non-core assets, and/or raising additional capital, although no
assurances can be given that management will be successful in
consummating any of the foregoing. In addition to the
foregoing, the Company intends to meet its working capital
requirements by (i) requesting advances under the Loan Agreement
with Sapinda Asia Limited (“ Sapinda ”) (“ Sapinda Loan Agreement ”) and Loan
Agreement with Conrent Invest S.A. (“ Conrent ”) (“ Conrent Loan Agreement ”), and (ii)
further reducing operating and other costs under the Restructuring
Plan; provided, however,
advances under the Sapinda Loan Agreement and Conrent Loan
Agreement may not be available to the Company. As of December
31, 2016, $3.4 million and $30.4 million were owed to Sapinda and
Conrent under the Sapinda Loan Agreement and Conrent Loan Agreement
(together, the “ Loan
Agreements ”), respectively. Together with available
cash and cash flow from operations, and assuming the Company is
able to obtain further advances under the Loan Agreements,
management believes that the Company may have adequate working
capital to provide for its working capital requirements through the
remainder of its fiscal year ending September 30, 2017, although no
assurances can be given.
I tem 3. Quantitative and
Qualitative Disclosures About Market Risk
The
Company footprint extends to several countries outside the United
States, and we intend to continue to expand our foreign
operations. As a result, our revenues and results of
operations are affected by fluctuations in currency exchange rates,
interest rates, and other uncertainties inherent in doing business
in more than one currency. In addition, our operations are
exposed to risks that are associated with changes in social,
political, and economic conditions in the foreign countries in
which we operate, including changes in the laws and policies that
govern foreign investment, as well as, to a lesser extent, changes
in United States laws and regulations relating to foreign trade and
investment.
Foreign
Currency Risks
We
had $2,795,781 and $2,554,808 in revenue from sources outside the
United States for the three months ended December 31, 2016 and
2015, respectively. Although we typically transact the sale of
monitoring equipment and services in U.S. Dollars, we do receive
payments in an equivalent value of foreign currencies which
resulted in foreign exchange losses of $116,442 and $18,149 during
the three months ended December 31, 2016 and 2015,
respectively. Changes in currency exchange rates affect the
relative prices at which we sell our products and purchase goods
and services. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations
on our future business, product pricing, results of operations, or
financial condition.
We
did not use foreign currency exchange contracts or derivative
financial instruments for trading or speculative purposes. To
the extent foreign sales become a more significant part of our
business in the future, we may seek to implement strategies which
make use of these or other hedging instruments in order to minimize
the effects of foreign currency exchange on our
business.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to
ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934, as
amended (the “ Exchange Act
”), (i) is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and (ii) is
accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer (our principal
financial and accounting officer), to allow timely decisions
regarding required disclosure. Our management evaluated, with
the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and
procedures, as such term is defined under Rules 13a-15(e) and
15d-15(e) promulgated under the Exchange Act. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were
effective as of December 31, 2016.
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, 2016 that materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings
We are, from time to time, involved in various legal proceedings
incidental to the conduct of our business. Historically, the
outcome of all such legal proceedings has not, in the aggregate,
had a material adverse effect on our business, financial condition,
results of operations or liquidity. Other than as set forth below,
there are no additional pending or threatened legal proceedings at
this time.
Lazar
Leybovich et al v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich,
Dovie Leybovich and Ben Leybovich filed a complaint in the 11th
Circuit Court in and for Miami-Dade County, Florida alleging breach
of contract with regard to certain Stock Redemption
Agreements. The plaintiffs subsequently withdrew the
complaint. The plaintiffs filed an amended complaint on
November 15, 2012. On May 2, 2016, the Court resolved this case in
favor of the Company by granting the Company's motion for summary
judgment. The plaintiffs filed a notice of appeal on June 1,
2016 challenging the court’s ruling on the motion for summary
judgment.
Boggs
et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et
al. On December 3, 2015,
Candace Boggs et al. filed a complaint in the State Court of
Dougherty County, Georgia, alleging breach of contract and
negligence in monitoring of certain offenders in Dougherty County,
Georgia, as well as a request for punitive damages. Plaintiffs
withdrew their complaint in February 2016, but refiled the
complaint on October 12, 2016. We believe the allegations are
inaccurate and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
Track
Group, Inc. v. I.C.S. of the Bahamas Co. Ltd. On May 18, 2016, the Company filed a complaint in
District Court of the Third Judicial District in Salt Lake County,
Utah alleging breach of contract, under the terms of a loan
agreement and promissory note between the Company and I.C.S. of the
Bahamas Co. Ltd (“ICS”). We believe we will be successful in this
action to for amounts owed under the loan agreement and promissory
note; however, the Company may encounter problems enforcing a
favorable judgment in the foreign jurisdiction where ICS
resides.
Track
Group Inc. v. I.C.S. of the Bahamas Co. Ltd. On September 26, 2016 the Company filed a Notice
of Arbitration with the International Centre for Dispute
Resolution, alleging breach of contract by I.C.S. of the Bahamas
Co. Ltd. (“ICS”). Under the terms of the Commercial and Monitoring
Representative Agreement dated November 30, 2010 (the “C&M
Agreement”) between the Company and ICS any dispute must be
resolved by binding arbitration. The Company asserts that ICS had
failed to pay the Company fees owed to it under the C&M
Agreement. The Company is confident it will be successful in the
arbitration; however, the Company may encounter problems enforcing
a successful arbitration award in the foreign jurisdiction where
ICS resides.
John
Merrill v. Track Group, Inc. and Guy Dubois . On November 30, 2016, the Company was served with
a complaint filed by John Merrill, the former Chief Financial
Officer of the Company filed in District Court of the Third
Judicial District in Salt Lake County, Utah alleging breach of
contract, among other causes of action, related to Mr. Merrill’s
termination of employment. Mr. Merrill is seeking not less
than $590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated effective
September 27, 2016. We believe the allegations and claims are
unfounded, are without merit, and we have submitted
counterclaims against Mr. Merrill. We intend to defend
the case vigorously and believe the probability of incurring a
material loss to be remote.
We
have identified the following risk factor in addition to the risk
factors previously disclosed in Part I, Item 1A, "Risk Factors" in
our Annual Report on Form 10-K for the year ended September 30,
2016:
We rely on significant suppliers and other third parties for key
products, cellular access and monitoring services. If
we do not renew these agreements when they expire, or if these
suppliers or other third parties otherwise fail to comply with
their contractual obligations, our results of operations or
financial condition could be adversely affected.
We
have entered into an agreement with three national providers for
cellular services. We also rely currently on a single source for
the large majority of the manufacturing of our products, as well as
for our offender monitoring services provided to all of our U.S.
and certain of our international customers. If any of these
significant suppliers were to cease providing products or services
to us, or if the service levels fall below levels required by our
customers, we would be required to seek alternative sources. No
assurances can be provided that alternate sources could be located
or that the delay or additional expense associated with locating
alternative sources for these products or services or otherwise
addressing the deficiency in service levels would not materially
and adversely affect our business and financial
condition.
Ite m 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None.
It e m 3. Defaults Upon
Senior Securities.
None.
Item 4. Mine Safety
Disclosures.
Not
applicable.
Item 5. Other
Information
None.
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(a)
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Exhibits Required by Item 601 of Regulation S-K
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Exhibit Number
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Title of Document
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31(i)
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Certification
of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
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31(ii)
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Certification
of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
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32
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Certifications
under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
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10.1
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Employment
Agreement by and between Track Group, Inc. and Derek Cassell dated,
December 1, 2016.
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10.2
+
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Services
Agreement, dated December 7, 2016.
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10.3
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Amendment
to Employment Agreement by and between Track Group Inc. and Derek
Cassell, dated February 13, 2017.
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101.INS
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XBRL
INSTANCE DOCUMENT
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101.SCH
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XBRL
TAXONOMY EXTENSION SCHEMA
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101.CAL
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XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
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101.DEF
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XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
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101.LAB
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XBRL
TAXONOMY EXTENSION LABEL LINKBASE
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101.PRE
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XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
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+ 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.
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Track Group, Inc.
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Date: February 14, 2017
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By:
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/s/ Guy Dubois
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Guy Dubois
Principal Executive Officer
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Date: February 14, 2017
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By:
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/s/ Peter K. Poli
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Peter K. Poli, Chief Financial Officer
(Principal Accounting Officer)
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