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:
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
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.
_______________________________________________________________________________________________________________________________________