TRACK GROUP, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2016
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ____________
to ___________
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Commission file number
:
000-23153
TRACK GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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87-0543981
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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1215 W. Lakeview Court Romeoville, Illinois 60446
(Address of principal executive offices, Zip Code)
(877) 260-2010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
, $0.0001 par
value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer
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[ ]
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Non-Accelerated Filer
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[ ]
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Accelerated Filer
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[ ]
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Smaller Reporting Company
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[X]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes
[ ] No [X]
The aggregate market value of the registrant’s Common Stock
held by non-affiliates of the registrant computed by reference to
the closing price on March 31, 2016 was $20.6 million. As of
December 6, 2016, there were 10,333,516 shares of Common Stock
issued and outstanding.
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Track Group, Inc.
FORM 10-K
For the Fiscal Year Ended September 30, 2016
I
NDEX
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PART I
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17
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PART II
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PART III
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PART IV
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30
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32
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the “
Securities
Act
”) and Section 21E of
the Securities Exchange Act of 1934 (the “
Exchange
Act
”), as amended,
relating to our operations, results of operations, and other
matters that are based on our current expectations, estimates,
assumptions, and projections. Words such as “may,”
“will,” “should,” “likely,”
“anticipates,” “expects,”
“intends,” “plans,” “projects,”
“believes,” “estimates,” and similar
expressions are used to identify these forward-looking
statements. These statements are not guarantees of future
performance and involve risks, uncertainties, and assumptions that
are difficult to predict. Forward-looking statements are based
upon assumptions as to future events that might not prove to be
accurate. Actual outcomes and results could differ materially
from what is expressed or forecast in these forward-looking
statements. Risks, uncertainties, and other factors that might
cause such differences, some of which could be material, include,
but are not limited to the factors discussed under the section of
this Annual Report entitled “Risk
Factors.”
Track Group, Inc., a Delaware corporation, formerly SecureAlert,
Inc., was incorporated in 1995 as a Utah corporation. Our principal
place of business is located at 1215 W. Lakeview Court, Romeoville,
Illinois 60446. Our telephone number is (877) 260-2010. We maintain
a corporate website at www.trackgrp.com. Our common stock, par
value $0.0001 (“
Common
Stock
”), is currently
listed for quotation on the OTCQX Premier marketplace
(“
OTCQX
”) under the symbol TRCK. Unless
specified otherwise, as used in this Form 10-K, “we,”
“us,” “our,” “Track Group” or
the “Company” refer to Track Group, Inc. and its
subsidiaries.
Company Background
The
Company designs, manufactures, and markets location tracking
devices and develops and sells a variety of related software,
services, accessories, networking solutions, and monitoring
applications. The Company’s products and services include
ReliAlert™ XC3 ®, Shadow™, TrackerPAL™,
TrackerPAL Mobile™, a portfolio of software applications
including predictive analytics, a device-agnostic operating
systems, and a variety of accessory, service and support offerings.
In January 2016, the Company announced Shadow™, which is
currently available worldwide, and Track Group Analytics™,
which became available in late 2015. The Company sells its products
worldwide through its direct sales force, as well as through
value-added resellers. The Company sells to government customers on
federal, state and local levels in the US and to members of the
Ministry of Justice (MOJ) Internationally.
Business Strategy
The
Company is committed to increasing public safety by helping its
customers improve offender rehabilitation and re-socialization
outcomes through its innovative hardware, software and
services.
The Company
treats its business as a service
business. Although they still manufacture patented tracking
technology, they see the physical goods as only a small part of the
integrated offender monitoring solutions they provide. So,
rather than receiving a stream of ongoing revenue just for a piece
of manufactured equipment, the Company is now receiving a steady
stream of revenue for ongoing device agnostic subscription
contracts that help make the administration of justice better,
faster, and less expensive for taxpayers. As part of its strategy,
the Company continues to expand its device-agnostic platform
to not only collect, but store,
analyze, assess and correlate location data for reasons of both
accountability and auditing as well as to use for predictive
analytics and assessment of effective and emerging techniques in
criminal behavior and rehabilitation.
The Company believes a
high-quality customer experience with knowledgeable salespersons
who can convey the value of the Company’s products and
services greatly enhances its ability to attract and retain
customers. Therefore, the Company’s strategy also includes
building and expanding its own direct sales force and its
third-party distribution network to effectively reach more
customers and provide them with a world-class sales and post-sales
support experience. The Company believes continual investment in
research and development (“
R&D
”), marketing and branding
is critical to the development and sale of innovative technologies
and integrated solutions.
Recent Developments
Reincorporation to Delaware
On August 5, 2016
(the “
Effective
Date
”), the Company filed
the following documents to change its state of incorporation from
the State of Utah to the State of Delaware (the
“
Reincorporation
”):
(i) articles of transfer (the “
Utah Articles of
Transfer
”) with the Utah
Division of Corporations and Commercial Code, and (ii) a
certificate of conversion (the “
Delaware Certificate of
Conversion
”) and a
certificate of incorporation (the “
Delaware Certificate of
Incorporation
”) with the
Delaware Division of Corporations. In connection with the
Reincorporation, the Company also adopted new bylaws, which became
effective on the Effective Date (the “
Delaware
Bylaws
”). In addition to
the adoption of the Delaware Certificate of Incorporation and the
Delaware Bylaws, the following changes took effect as a result of
the Reincorporation on the Effective
Date:
●
the affairs of the
Company ceased to be governed by the Utah Revised Business
Corporation Act, the Company’s Amended and Restated Articles
of Incorporation under Utah law and the Company’s Amended and
Restated Bylaws under Utah law, and the affairs of the Company
became subject to the Delaware General Corporation Law, the
Delaware Certificate of Incorporation and the Delaware
Bylaws;
●
each outstanding
share of common stock of the Company as incorporated in Utah
converted into an outstanding share of common stock of the Company
as incorporated in Delaware;
●
each outstanding
option, right or warrant to acquire shares of common stock of the
Company as incorporated in Utah converted to an option, right or
warrant to acquire under the same terms and conditions an equal
number of shares of common stock of the Company as incorporated in
Delaware; and
●
the directors and
officers of the Company immediately prior to the Reincorporation
continued to serve as the directors and officers of the Company
following the Reincorporation.
Certain rights of the Company's shareholders changed on the
Effective Date as a result of the Reincorporation, which are more
fully described in the Company's Definitive Information Statement
on Schedule 14C, filed with the Securities and Exchange Commission
on July 5, 2016.
The Reincorporation did not involve any change in the business,
properties, corporate headquarters or management of the Company and
there was no change in the operations, assets, liabilities or
obligations of the Company as a result of the
Reincorporation.
Marion County Agreement
On May 5, 2016, the Company executed an agreement with Marion
County Community Corrections (
"Agency"
), the largest county in the state of Indiana, to
provide electronic monitoring services across the full range of
sentences under the Agency's oversight. Under the terms of the
Agreement, the Company will provide solutions based on GPS and
alcohol monitoring technology to monitor over 2,300 offenders and
defendants. This includes the Company's newest tracking
device, Shadow, which is the smallest, lightest and most advanced
device. The term of the Agreement is eighteen months, and is
expected to contribute over $4.0 million in revenue over the 18
month term of the agreement.
Conrent Loan Agreement
On May 1, 2016 we 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. The Conrent Loan Agreement contains a condition
precedent, which provides that the lender is not obligated to fund
the loan until it has received total proceeds of $5.0 million from
the sale of fixed rate notes, which are to be issued by the lender
through its Compartment Safety III. As of September 30, 2016 this
condition precedent has not been satisfied. When funded, the 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 September 30, 2016, the Company had not
received the funds under the Conrent Loan
Agreement.
Increase in Authorized Common
Stock
.
On February 26, 2016, our Board of Directors and the holder of a
majority of our outstanding voting stock, acting by written
consent, approved an amendment to our Amended and Restated Articles
of Incorporation to increase the total number of shares of Common
Stock authorized thereunder from 15.0 million shares to 30.0
million.
Products and Services
Devices
ReliAlert
™
XC
3
ReliAlert™XC3
is the Company’s flagship GPS device that sets the standard
for reliability and performance in the offender monitoring
industry. Advanced features enable agencies to more effectively
track offender movements and communicate directly with offenders in
real-time, through a patented, on-board two/three-way voice
communication technology. This device includes an enhanced GPS
antenna and GPS module for higher sensitivity GPS, enhanced voice
audio quality, increased battery performance of 50+ hours, 3G
cellular capabilities, improved tamper sensory and durability
enhancements.
Shadow™
Driven
by customer demand to improve the performance and affordability of
offender tracking devices, Shadow™ is the smallest and
lightest device of its kind with a sleek, modern design featuring
an enhanced mobile charging capability that makes it easier to use.
The device is 3G compliant and fully supported by all global
mobility providers.
Operating System Software
TrackerPAL™
TrackerPAL™
is a secure, cloud-based monitoring system that
gives customers the ability to not only collect,
but store, analyze, assess and correlate offender data for reasons
of both accountability and auditing as well as to use with
predictive analytics applications and assess criminal behavior and
rehabilitation opportunities.
Application Software
TrackerPAL™
Mobile
A
mobile application of the TrackerPAL™ software is available
for Android and iOS devices.
Data Analytics
Track Group’s data analytics services help
facilitate
the discovery and
communication of meaningful patterns in diverse data that address
strategic and tactical information needs. The Company’s
analytics applications use various combinations of statistical
analysis procedures, data and text mining, and predictive modeling
to proactively analyze information on community-released offenders
to discover hidden relationships and patterns in their behaviors
and to predict future outcomes.
Real-Time Alcohol Monitoring
BACtrack is the
world’s first smartphone-based remote alcohol monitoring
system. The award-winning BACtrack Mobile integrates a smartphone
app and police-grade breathalyzer to bring blood-alcohol content
(BAC) wirelessly to a mobile device. We can quickly and easily
estimate an enrollee’s blood alcohol content (BAC) and track
the results over time. The smartphone monitoring application allows
supervisors to send scheduled or random notifications to enrollees
to take BAC tests, providing photo/location-verified and time
stamped results. There's also an onboard calendar reminding an
enrollee of court dates, testing dates, medications to take,
mandatory events to attend and other matters.
Victim and Survivor Support
Track
Group’s Domestic Violence Smartphone Application creates a
mobile geo-zone around a survivor of domestic abuse and
communicates with the offender’s tracking device –
providing an early-warning notification to survivor if they are in
proximity of the offender or group of offenders.
Accessories
SecureCuff™
The
SecureCuff™ is a patented, optional accessory available
exclusively for ReliAlert™XC3 and is the only uncuttable
strap in the industry specifically made for high-risk offenders.
SecureCuff™ has encased, hardened steel bands that provide
extreme cut-resistance and includes the same fiber-optic technology
as the standard strap for tampering notification.
RF
Beacon™
The
Beacon™ is a completely self-contained, short-range
transmitting station that provides a Radio Frequency (RF) signal
communicating with assigned offender GPS devices to increase the
ability to maintain critical offender location information and
provide agencies with an effective way to more accurately
“tether” an offender to a specific
location.
Product Support and Services
Monitoring Center
The
Company’s monitoring center provides 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
backup and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in Salt Lake City, Utah USA, and
Santiago, Chile, SA. In addition the Company has assisted in
the establishment of monitoring centers for customers and local
partners in the Bahamas and in Puerto
Rico.
Customer Care
The
Company offers a range of support options for its customers. These
include assistance that is built into software products, printed
and electronic product manuals, online support including
comprehensive product information as well as technical
assistance.
Research and Development Program
During the fiscal year ended September 30, 2016, we incurred
research and development expense of $2,627,228 compared to those
costs recognized during fiscal year 2015 totaling
$1,562,566. The $1,064,622 increase in research and
development cost reflects
costs to (i) streamline our device
hardware, therefore expediting manufacturing time, and (ii) enhance
both the firmware and software of our devices to improve the
overall user experience. As a result of these improvements,
$1,949,813 was capitalized as developed technology during the
twelve months ended September 30, 2016. A portion of these expenses
would have been recognized as research and development expense,
absent the software enhancements.
Competition
The
markets for the Company’s products and services are highly
competitive and the Company is confronted by aggressive competition
in all areas of its business. These markets are characterized by
frequent product introductions and technological advances. The
Company’s competitors who sell tracking devices have
aggressively cut prices and lowered their product margins to gain
or maintain market share. The Company’s financial condition
and operating results can be adversely affected by these and other
industry-wide downward pressures on gross margins. Principal
competitive factors important to the Company include price, product
features, relative price/performance, product quality and
reliability, design innovation, a strong software ecosystem,
service and support and corporate reputation.
The
Company is focused on expanding its market opportunities related to
offender monitoring. These markets are highly competitive and
include many large, well-funded and experienced participants. The
Company expects competition in these markets to intensify
significantly as competitors attempt to imitate some of the
features of the Company’s products and applications within
their own products or, alternatively, collaborate with third-party
providers to offer solutions that are more competitive than those
they currently offer. These markets are characterized by aggressive
pricing practices, frequent product introductions, evolving design
approaches and technologies, rapid adoption of technological and
product advancements by competitors and price sensitivity on the
part of customers.
The
Company’s future financial condition and operating results
depend on the Company’s ability to continue to win large
contracts and develop and offer new innovative products and
services in the markets in which it competes. The Company believes
it offers superior innovation and integration of the entire
offender monitoring solution including the hardware (ReliAlert and
Shadow), software (TrackerPAL), and applications (Analytics,
Domestic Violence, and Alcohol). Some of the Company’s
current and potential competitors have substantial resources and
may be able to provide such products and services at little or no
profit or even at a loss to compete with the Company’s
offerings.
Dependence on Major Customers
We had sales to entities, one of which represents more than ten
percent of gross revenues as follows for the years ended September
30, 2016 and 2015
|
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2016
|
%
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2015
|
%
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Customer
A
|
$
7,543,116
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28
%
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$
3,930,167
|
19
%
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Customer
B
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$
2,013,929
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7
%
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$
-
|
0
%
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Customer
C
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$
1,449,500
|
5
%
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$
1,437,033
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7
%
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Customer D
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$
1,178,439
|
4
%
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$
1,535,203
|
7
%
|
Concentration of credit risk associated with our total and
outstanding accounts receivable as of September 30, 2016 and 2015,
respectively, are shown in the table
below:
|
|
2016
|
%
|
2015
|
%
|
|
Customer
A
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$
2,476,168
|
36
%
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$
1,127,044
|
19
%
|
|
|
|
|
|
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Customer
B
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$
899,428
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13
%
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$
-
|
0
%
|
|
|
|
|
|
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Customer
C
|
$
1,151,859
|
17
%
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$
900,834
|
15
%
|
|
|
|
|
|
|
|
Customer D
|
$
512,800
|
7
%
|
$
498,944
|
8
%
|
Dependence on Major Suppliers
We purchase cellular services from several suppliers. The cost to
us for these services during the fiscal years ended September 30,
2016 and 2015 was approximately $790,829 and $718,333,
respectively. The 10% increase in cellular service expense in 2016
compared to 2015 resulted from increased costs associated with
higher revenue and resulting cost of sales.
During the years ended September 30, 2016 and 2015, we also
purchased a significant portion of our inventory and monitoring
equipment from certain suppliers. The cost of these purchases was
$1,488,515 and $1,095,903, respectively. The 36% increase was due
to higher demand for products purchased from these
suppliers.
Intellectual Property
The
Company currently holds rights to patents and copyrights relating
to certain aspects of its hardware devices, accessories, software
and services. The Company has registered or has applied for
trademarks and service marks in the U.S. and a number of foreign
countries. Although the Company believes the ownership of such
patents, copyrights, trademarks and service marks is an important
factor in its business and that its success does depend in part on
the ownership thereof, the Company relies primarily on the
innovative skills, technical competence and marketing abilities of
its personnel.
The
Company regularly files patent applications to protect innovations
arising from its research, development and design, and is currently
pursuing thousands of patent applications around the
world. Over time, the Company has accumulated a large
portfolio of issued patents around the world. The Company
holds copyrights relating to certain aspects of its products and
services. No single patent or copyright is solely responsible for
protecting the Company’s products. The Company believes the
duration of its patents is adequate relative to the expected lives
of its products.
Many of
the Company’s products are designed to include intellectual
property obtained from third parties. It may be necessary in the
future to seek or renew licenses relating to various aspects of its
products, processes and services. While the Company has generally
been able to obtain such licenses on commercially reasonable terms
in the past, there is no guarantee that such licenses could be
obtained in the future on reasonable terms or at all. Because of
technological changes in the industries in which the Company
competes, current extensive patent coverage and the rapid rate of
issuance of new patents, it is possible that certain components of
the Company’s products, processes and services may
unknowingly infringe existing patents or intellectual property
rights of others. From time to time, the Company has been notified
that it may be infringing certain patents or other intellectual
property rights of third parties.
Trademarks. We have developed and use trademarks in our
business, particularly relating to our corporate and product names.
We own 11 trademarks that are registered with the United
States Patent and Trademark Office, plus one trademark registered
in Mexico and one in Canada. In addition, we have one
trademark registered in Europe.
We will file additional applications for the registration of our
trademarks in foreign jurisdictions as our business expands under
current and planned distribution
arrangements. Protection of registered trademarks in
some jurisdictions may not be as extensive as the protection
provided by registration in the United States.
The following table summarizes our trademark registrations and
applications:
|
Trademark
|
Application
Number
|
Registration Number
|
Status/
Next
Action
|
|
Mobile911
Siren with 2-Way Voice Communication &
Design®
|
76/013,886
|
2,595,328
|
Registered
|
|
PAL
Services®
|
78/514,514
|
3,100,192
|
Registered
|
|
TrackerPAL®
|
78/843,035
|
3,345,878
|
Registered
|
|
Mobile911®
|
78/851,384
|
3,212,937
|
Registered
|
|
TrackerPAL®
|
CA
1,315,487
|
749,417
|
Registered
|
|
TrackerPAL®
|
MX
805,365
|
960954
|
Registered
|
|
Foresight®
|
77/137/822
|
3481509
|
Registered
|
|
ReliAlert™
|
85/238,049
|
4200738
|
Registered
|
|
HomeAware™
|
85/238,064
|
4111064
|
Registered
|
|
SecureCuff™
|
85/238,058
|
4271621
|
Registered
|
|
TrueDetect™
|
85/237,202
|
4365120
|
Registered
|
|
SecureAlert™
|
86/031,550
|
4623370
|
Registered
|
|
TrackGroup™
|
86/301716
|
4701636
|
Registered
|
|
Track
Group™ and Design
|
86/469103
|
4793747
|
Registered
|
|
Track
Group™ and Design
|
1257077
|
1257077
|
Registered
|
Patents
. We have 21
patents issued and two patents pending in the United
States. At foreign patent offices we have seven patents issued
and 16 patents pending. We are also preparing patents that
will be filed in other countries in the coming
year.
-6-
The following tables summarize information regarding our patents
and patent applications. There is no assurance given that the
pending applications will be granted or that they will, if granted,
contain all of the claims currently included in the
applications.
|
US
Patents
|
Application Serial No.
|
Date Filed
|
Patent No.
|
Issue Date
|
|
Remote Tracking and
Communication Device
|
11/202427
|
10-Aug-05
|
7330122
|
12-Feb-08
|
|
Remote
Tracking and Communications Device
|
12/028088
|
8-Feb-08
|
7804412
|
28-Sep-10
|
|
Remote
Tracking and Communications Device
|
12/875,988
|
3-Sep-10
|
8031077
|
4-Oct-11
|
|
Alarm
and Alarm Management System for Remote Tracking Devices
|
11/486992
|
14-Jul-06
|
7737841
|
15-Jun-10
|
|
Alarm
and Alarm Management System for Remote Tracking Devices
|
12/792,572
|
2-Jun-10
|
8013736
|
6-Sep-11
|
|
A
Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
|
11/486989
|
14-Jul-06
|
8797210
|
5-Aug-14
|
|
A
Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between the Device and a Monitoring
Center
|
14/323,831
|
3-Jul-14
|
9491289
|
8-Nov-16
|
|
A
Remote Tracking System with a Dedicated Monitoring
Center
|
11/486976
|
14-Jul-06
|
7936262
|
3-May-11
|
|
Remote
Tracking System and Device With Variable Sampling and Sending
Capabilities Based on Environmental Factors
|
11/486991
|
14-Jul-06
|
7545318
|
9-Jun-09
|
|
Tracking Device
Incorporating Enhanced Security Mounting Strap
|
12/818,453
|
18-Jun-10
|
8,514,070
|
20-Aug-13
|
|
Tracking Device
Incorporating Cuff with Cut Resistant Materials
|
14/307,260
|
17-Jun-14
|
9129504
|
8-Sep-15
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device
|
12/399151
|
6-Mar-09
|
8232876
|
31-Jul-12
|
|
Panic
Button Phone
|
09/044497
|
19-Mar-98
|
6044257
|
28-Mar-00
|
|
Emergency Phone
for Automatically Summoning Multiple Emergency Response
Services
|
09/173645
|
16-Oct-98
|
6226510
|
1-May-01
|
|
Combination
Emergency Phone and Personal Audio Device
|
09/185191
|
3-Nov-98
|
6285867
|
4-Sep-01
|
|
Emergency Phone
with Single-Button Activation
|
11/174191
|
30-Jun-05
|
7251471
|
31-Jul-07
|
|
Biometric Identification System Using Pulse
Waveform (PWId)
|
13/079,219
|
4-Apr-11
|
8,773,239
|
8-Jul-14
|
|
Breath Alcohol Sampling System With
Spirometric Client Identity Confirmation (Breath
Print)
|
13/169,603
|
27-Jun-11
|
9,192,324
|
24-Nov-15
|
|
System for Biometric Identity Confirmation
(BPWId)
|
13/739,224
|
11-Jan-13
|
9,274,509
|
1-Mar-16
|
|
System for Biometric Identity Confirmation
(U-Key)
|
13/706,610
|
6-Dec-12
|
TBD
|
Allowed
|
|
Biometric Identification System Using Pulse
Waveform (PWId CIP)
|
13/916,818
|
13-Jun-13
|
9,223,298
|
29-Dec-15
|
|
Removable Tamper-Resistant Breath Alcohol
Sampling System
|
14/729,361
|
3-Jun-15
|
|
Pending
|
|
System for Biometric Identity
Confirmation
|
15/051,935
|
16-Jun-16
|
|
Pending
|
|
International Patents
|
Application Serial No.
|
Date Filed
|
Patent No.
|
Issue Date
|
|
Remote
Tracking and Communication Device - Brazil
|
PI0614742.9
|
4-Aug-06
|
|
Pending
|
|
Remote
Tracking and Communication Device - Canada
|
2617923
|
4-Aug-06
|
2617923
|
7-Jun-16
|
|
Remote
Tracking and Communication Device - Mexico
|
MX/a/2008/001932
|
4-Aug-06
|
278405
|
24-Aug-10
|
|
A
Remote Tracking System with a Dedicated Monitoring Center -
EPO
|
07812596.0
|
3-Jul-07
|
|
Pending
|
|
A
Remote Tracking System with a Dedicated Monitoring Center -
Brazil
|
PI0714367.2
|
3-Jul-07
|
|
Pending
|
|
Secure
Strap Mounting System For an Offender Tracking Device -
EPO
|
10009091.9
|
9-Jan-10
|
|
Pending
|
|
Secure
Strap Mounting System For an Offender Tracking Device -
Brazil
|
PI11001593
|
28-Feb-11
|
|
Pending
|
|
Secure
Strap Mounting System For an Offender Tracking Device -
Mexico
|
MX/a/2011/002283
|
28-Feb-11
|
319057
|
4-Apr-14
|
|
Secure
Strap Mounting System For an Offender Tracking Device - Mexico -
DIV
|
MX/a/2013/12524
|
28-Feb-11
|
|
Pending
|
|
Secure
Strap Mounting System For an Offender Tracking Device -
Canada
|
2732654
|
25-Oct-13
|
|
Pending
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Brazil
|
PI0909172-6
|
1-Sep-10
|
|
Pending
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Canada
|
2717866
|
3-Sep-10
|
2717866
|
17-May-16
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - EPO
|
09 716
860.3
|
6-Oct-10
|
2260482
|
9-Jan-13
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device
- United
Kingdom
|
Refer
to EP Patent # 2260482
|
|||
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device - Mexico
|
MX/a/2010/009680
|
2-Sep-10
|
306920
|
22-Jan-13
|
|
System for Biometric Identity
Confirmation
-
Australia
|
2012-240307
|
3-Apr-12
|
|
Pending
|
|
System for Biometric Identity
Confirmation
-
Canada
|
2,832,315
|
3-Apr-12
|
|
Pending
|
|
System for Biometric Identity
Confirmation
-
Israel
|
228,691
|
3-Apr-12
|
|
Pending
|
|
System for Biometric Identity
Confirmation
-
Europe
|
12-768-677.2
|
3-Apr-12
|
|
Pending
|
|
Biometric
Identification System Using Pulse Waveform - Australia
|
2014278558
|
5-Jun-14
|
|
Pending
|
|
Biometric
Identification System Using Pulse Waveform - Canada
|
2,915,265
|
3-Apr-12
|
|
Pending
|
|
Biometric
Identification System Using Pulse Waveform - Israel
|
228,691
|
3-Apr-12
|
|
Pending
|
|
Biometric
Identification System Using Pulse Waveform - Europe
|
12-768-677.2
|
3-Apr-12
|
|
Pending
|
Trade Secrets
. We
own certain intellectual property, including trade secrets that we
seek to protect, in part, through confidentiality agreements with
employees and other parties. Even where these agreements exist,
there can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or
independently developed by competitors.
We intend to protect our legal rights concerning intellectual
property by all appropriate legal action. Consequently, we may
become involved from time to time in litigation to determine the
enforceability, scope, and validity of any of the foregoing
proprietary rights. Any patent litigation could result in
substantial cost and divert the efforts of management and technical
personnel.
Seasonality
Given the consistency in recurring domestic monitoring revenues by
customers throughout 2016, we detected no apparent seasonality in
our business. However, as in previous years, incremental
domestic device deployment opportunities typically slow down in the
months of July and August. We believe this is due to the
unavailability of judicial and corrections officials who observe a
traditional vacation season during this
period.
Employees
As of November 25, 2016, we had 223 full-time employees and 10
part-time employees. None of the employees are represented by
a labor union or subject to a collective bargaining
agreement. We have never experienced a work stoppage and
management believes that relations with employees are
good.
Additional Available Information
We make available, free of charge, at our corporate website copies
of our annual reports filed with the United States Securities and
Exchange Commission (“
SEC
”) on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements,
and all amendments to these reports, as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act. We also provide copies of our Forms 8-K, 10-K,
10-Q, and proxy statements at no charge to investors upon
request.
All reports filed by us with the SEC are available free of charge
via EDGAR through the SEC website at www.sec.gov. In addition, the
public may read and copy materials we have filed with the SEC at
the SEC's public reference room located at 450 Fifth Street,
N.W., Washington, D.C. 20549.
Our business is subject to significant risks. You should carefully
consider the risks described below and the other information in
this Annual Report on Form 10-K, including our financial statements
and related notes, before you decide to invest in our Common Stock.
If any of the following risks or uncertainties actually occurs, our
business, results of operations or financial condition could be
materially harmed, the trading price of our Common Stock could
decline and you could lose all or part of your investment. The
risks and uncertainties described below are those that we currently
believe may materially affect us; however, they may not be the only
ones that we face. Additional risks and uncertainties of which we
are unaware or currently deem immaterial may also become important
factors that may harm our business. Except as required by law, we
undertake no obligations to update any risk factors.
Risks Related to Our Business, Operations and
Industry
We face risks
related to our substantial indebtedness, including the risk related
to the repayment of our short-term indebtedness.
As of September 30, 2016, we had $34,000,319 of indebtedness
outstanding, of which approximately $3,468,705 becomes due and
payable within the next 12 months. Our significant
indebtedness could adversely affect our ability to raise additional
capital to fund our operations, make interest payments as they come
due, limit our ability to react to changes in the economy or our
industry, and prevent us from meeting our obligations under our
outstanding debt instruments. As a result, we may have to
raise additional capital or restructure such indebtedness during
the next 12 months, and no assurances can be given that we may be
successful in that regard.
Our high degree of leverage could have adverse consequences to
us, including:
|
●
|
making it more difficult for us to make payments on our
debt;
|
|
|
|
|
●
|
increasing our vulnerability to general economic and industry
conditions;
|
|
|
|
|
●
|
requiring a substantial portion of cash flow from operations to be
dedicated to the payment of principal and interest on our debt,
thereby reducing our ability to use our cash flow to fund our
operations, capital expenditures, and future business
opportunities;
|
|
|
|
|
●
|
restricting us from making strategic acquisitions or causing us to
make non-strategic divestitures;
|
|
|
|
|
●
|
limiting our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions, and general corporate or other
purposes; and
|
|
|
|
|
●
|
limiting our ability to adjust to changing market conditions and
placing us at a competitive disadvantage compared to our
competitors who may be less highly leveraged.
|
We may not be able to generate sufficient cash to service all of
our indebtedness, and may be forced to take other actions to
satisfy our obligations under our indebtedness, which may not be
successful.
Our ability to make scheduled payments on or to refinance our debt
obligations depends on our financial condition and operating
performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business and other
factors beyond our control. We cannot assure you that we will
maintain a level of cash flows sufficient to permit us to pay the
principal, premium, if any, and interest on our
indebtedness.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, or to sell assets, seek
additional capital or restructure or refinance our
indebtedness.
These alternative measures may not be successful and may not permit
us to meet our scheduled debt service obligations. In the absence
of such operating results and resources, we could face substantial
liquidity difficulties and might be required to dispose of material
assets or operations to meet our debt service and other
obligations. We may not be able to consummate those
dispositions or the proceeds that we realize from them may not be
adequate to meet the debt service obligations then
due.
There is no certainty that the market will continue to accept or
expand the use of our products and
services.
Our targeted markets may be slow to or may never expand the use of
our products or services. Governmental organizations may not
use our products unless they determine, based on experience,
advertising or other factors, that those products are a preferable
alternative to other available methods of tracking or
incarceration. In addition, decisions to adopt new tracking
devices can be influenced by government administrators, regulatory
factors, and other factors largely outside our control. No
assurance can be given that key decision-makers will continue to
accept or expand the use of our products, which could have a
material adverse effect on our business, financial condition and
results of operations.
Budgetary issues faced by government agencies could adversely
impact our future revenue.
Our revenues are primarily derived from contracts with state, local
and county government agencies in the United States and governments
of Caribbean and Latin American nations. Many of these
government agencies are experiencing budget deficits and may
continue to do so. As a result, we may experience delays in
payment on customer invoices, the amount spent by our current
clients on equipment and services that we supply may be reduced or
grow at rates slower than anticipated, and it may be more difficult
to attract additional government clients. Furthermore, the
industry has experienced a general decline in average daily lease
rates for GPS tracking devices. As a result of these factors,
our ability to maintain or increase our revenues may be negatively
affected.
Certain individuals and groups own or control a significant number
of our outstanding shares.
Certain groups or persons beneficially own a substantial number of
shares of our outstanding Common Stock or securities and debt
instruments. As a result, these persons have the ability,
acting as a group, to effectively control our affairs and business,
including the election of our directors and, subject to certain
limitations, of fundamental corporate transactions. This
concentration of ownership may also have the effect of delaying or
preventing a change of control or making other transactions more
difficult or impossible without their support. In addition, these
equity holders may have an interest in pursuing acquisitions,
divestitures, financing or other transactions that, in their
judgment, could enhance their equity investments, even though such
transactions may involve significant risk to us or our other
shareholders. Additionally, they may make investments in
businesses that directly or indirectly compete with us, or may
pursue acquisition opportunities that may be complementary to our
business and, as a result, those acquisition opportunities may not
be available to us.
We were without a chief financial officer subsequent to the end of
the fiscal year and were dependent upon the services of our senior
management team; the failure to retain members of our senior
management team could adversely affect our
operations.
We are dependent on the services, abilities and experience of our
executive officers. The permanent loss of the services of any of
these senior executives and any change in the composition of our
senior management team may have a negative impact on our ability to
execute on our business and operating strategies. In addition,
in September 2016, our chief financial officer’s employment
was terminated and his successor resigned for personal reasons as
of November 15, 2016. Mr. Guy Dubois, our current chief
executive officer, will execute the responsibilities of the
Company’s principal financial and accounting officer until a
new chief financial officer begins work on January 6, 2017. A
failure to retain senior management could negatively affect our
operations, and challenge our ability to obtain
financing.
The lack of segregation between our principal executive officer and
principal accounting and financial officer may cause
our
internal controls over
financial reporting to be ineffective.
As a result of the resignation of our Chief Financial Officer, our
Chief Executive Officer now acts as both our principal executive
officer and principal financial and accounting officer. This has
caused a lack of segregation between the duties typically assigned
to the principal executive officer and principal financial and
accounting officer and may lead to inadequate supervision within
the bookkeeping and accounting operations of the Company, which
could give rise to lack of proper internal controls over financial
reporting, which, in turn, would cause our internal controls over
financial reporting to be ineffective. If we are unable to maintain
effective internal control over financial reporting or implement
controls sufficient to provide reasonable assurance with respect to
the preparation and fair presentation of our financial statements,
we could be unable to file accurate financial reports on a timely
basis, which may have an impact on our results of operations. We
have hired a new chief financial officer who will formally join the
Company on January 6, 2017 and assume the role of principle
financial and accounting officer.
We rely on significant suppliers for key products and cellular
access. If we do not renew these agreements when they
expire we may not continue to have access to these suppliers’
products or services at favorable prices or in volumes as we have
in the past, which could adversely affect our results of operations
or financial condition.
We have entered into 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. If
any of these significant suppliers were to cease providing products
or services to us, we would be required to seek alternative
sources. No assurances can be provided that alternate sources could
be located or that the delay or additional expense associated with
locating alternative sources for these products or services would
not materially and adversely affect our business and financial
condition.
Our research, development and marketing activities are subject to
government regulations. The cost of compliance or the failure to
comply with these regulations could adversely affect our business,
results of operations and financial condition.
Our products and services are not subject to specific approvals
from any governmental agency, although our products using cellular
and GPS technologies for use in the United States or
internationally must be manufactured in compliance with applicable
rules and regulations of specific governmental agencies. There can
be no assurance that changes in the legal or regulatory framework
or other subsequent developments will not result in limitation,
suspension or revocation of regulatory approvals granted to us. Any
such events, were they to occur, could have a material adverse
effect on our business, financial condition and results of
operations. We may be required to comply with regulations for
manufacturing practices, which mandate procedures for extensive
control and documentation of product design, control and validation
of the manufacturing process and overall product quality. If we,
our management or our third-party manufacturers fail to comply with
applicable regulations regarding these manufacturing practices, we
could be subject to a number of sanctions, including fines,
injunctions, civil penalties, delays, suspensions or withdrawals of
market approval, seizures or recalls of product, operating
restrictions and, in some cases, criminal
prosecutions.
We face intense competition, including competition from entities
that are more established and may have greater financial resources
than we do, which may make it difficult for us to establish and
maintain a viable market presence.
Our current and expected markets are rapidly
changing. Although we believe our technology has advantages
over competing systems, there can be no assurance that those
advantages are significant. Many of our competitors have
products or techniques approved or in development and operate
large, well-funded research and development programs in the
field. Moreover, competitors may be in the process of
developing technology that could be developed more quickly or be
ultimately more effective than our products. There can be no
assurance that our competitors will not develop more effective or
more affordable products, or achieve earlier patent protection or
product commercialization.
We are dependent upon certain customers, the loss of which may
adversely affect our results of operations and business
condition.
During fiscal year 2016, four of our customers in aggregate
accounted for 45% of total sales. The loss of any of
these customers may have a material adverse effect on our business
(See Note 2 and
Note
13 to the Consolidated Financial Statements).
Our business plan is subject to the risks of technological
uncertainty, which may result in our products failing to be
competitive or readily accepted by our target
markets.
There
can be no assurance that our research and development efforts will
be successful. In addition, the technology which we integrate
or that we may expect to integrate with our product and service
offerings is rapidly changing and developing. We face risks
associated with the possibility that our technology may not
function as intended and the possible obsolescence of our
technology and the risks of delay in the further development of our
own technologies. Cellular coverage is not uniform throughout our
current and targeted markets. GPS technology depends upon
“line-of-sight” access to satellite signals used to
locate the user, which, under some circumstances may limit the
effectiveness of GPS
tracking.
We face risks of litigation and regulatory investigation and
actions in connection with our operations.
Lawsuits, including regulatory actions, may seek recovery of large,
indeterminate amounts or otherwise limit our operations, and their
existence and magnitude may remain unknown for substantial periods
of time. Relevant authorities in the markets in which we
operate may investigate us in the future. These investigations may
result in significant penalties in multiple jurisdictions, and we
may become involved in disputes with private parties seeking
compensation for damages resulting from the relevant violations.
Such legal liability or regulatory action could have a material
adverse effect on our business, results of operations, financial
condition, cash flows, reputation and credibility. In
addition, our business activities are subject to various
governmental regulations in countries where we operate, which
include investment approvals, export regulations, tariffs,
antitrust, anti-bribery, intellectual property, consumer and
business taxation, foreign trade, exchange controls, and
environmental and recycling requirements. These regulations limit,
and other new or amended regulations may further limit, our
business activities or increase operating costs. In addition, the
enforcement of such regulations, including the imposition of fines
or surcharges for violation of such regulations, may adversely
affect our results of operations, financial condition, cash flows,
reputation and credibility.
Our products are subject to the risks and uncertainties associated
with the protection of intellectual property and related
proprietary rights.
We believe that our success depends in part on our ability to
obtain and enforce patents, maintain trade secrets and operate
without infringing on the proprietary rights of others, both in the
United States and in other countries. Our inability to obtain
or to maintain patents on our key products could adversely affect
our business. We currently own 23 patents issued and have filed and
intend to file additional patent applications in the United States
and in key foreign jurisdictions relating to our technologies,
improvements to those technologies and for specific products we may
develop. There can be no assurance that patents will issue on
any of these applications or that, if issued, any patents will not
be challenged, invalidated or circumvented. The enforcement of
patent rights can be uncertain and involve complex legal and
factual questions. The scope and enforceability of patent
claims are not systematically predictable with absolute
accuracy. The strength of our own patent rights depends, in
part, upon the breadth and scope of protection provided by the
patent and the validity of our patents, if
any.
Our success will also depend, in part, on our ability to avoid
infringing the patent rights of others. We must also avoid any
material breach of technology licenses we may enter into with
respect to our new products and services. Existing patent and
license rights may require us to alter the designs of our products
or processes, obtain licenses or cease certain activities. If
patents have been issued to others that contain competitive or
conflicting claims and such claims are ultimately determined to be
valid and superior to our own, we may be required to obtain
licenses to those patents or to develop or obtain alternative
technology. If any licenses are required, there is no
assurance given that we will be able to obtain any necessary
licenses on commercially favorable terms, if at all. Any
breach of an existing license or failure to obtain a license to any
technology that may be necessary in order to commercialize our
products may have a material adverse impact on our business,
results of operations and financial
condition.
We also rely on trade secrets laws to protect portions of our
technology for which patent protection has not yet been pursued or
is not believed to be appropriate or obtainable. These laws
may protect us against the unlawful or unpermitted disclosure of
any information of a confidential and proprietary nature, including
but not limited to our know-how, trade secrets, methods of
operation, names and information relating to vendors or suppliers
and customer names and addresses. We seek to protect this
un-patentable and unpatented proprietary technology and processes,
in addition to other confidential and proprietary information in
part, by entering into confidentiality agreements with employees,
collaborative partners, consultants and certain
contractors. There can be no assurance that these agreements
will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and other confidential and
proprietary information will not otherwise become known or be
independently discovered or reverse-engineered by
competitors.
We conduct business internationally with a variety of sovereign
governments.
Our business is subject to a variety of regulations and political
interests that could affect the timing of payment for services and
the duration of our contracts. We face the risk of systems
interruptions and capacity constraints, possibly resulting in
adverse publicity, revenue loss and erosion of customer trust. The
satisfactory performance, reliability and availability of our
network infrastructure are critical to our reputation and our
ability to attract and retain customers and to maintain adequate
customer service levels. In addition, because our customers in
these foreign jurisdictions are sovereign governments or
governmental departments or agencies, it may be difficult for us to
enforce our agreements with them in the event of a breach of those
agreements, including, but not limited to, the failure to pay for
services rendered or to complete projects that we have
commenced.
We may experience temporary service interruptions for a variety of
reasons, including telecommunications or power failures, fire,
water damage, vandalism, computer bugs or viruses, malicious
cyber-attacks or hardware failures.
Any service interruption that results in the unavailability of our
system or reduces its capacity could result in real or perceived
public safety issues that may affect customer confidence in our
services. Historically, we have experienced temporary
interruptions of telecommunications or power outages, which were
promptly mitigated. Such instances may result in loss of
customer accounts or similar problems if they occur again in the
future. Given rapidly changing technologies, we are not
certain that we will be able to adapt the use of our services to
permit, upgrade, and expand our systems or to integrate smoothly
with new technologies. Network and information systems and
other technologies are critical to our business
activities. Network and information systems-related events,
including those caused by us, our service providers or by third
parties, such as computer hacking, cyber-attacks, computer viruses,
or other destructive or disruptive software, process breakdowns,
denial of service attacks, malicious social engineering or other
malicious activities or any combination of the foregoing could
result in a degradation or disruption of our services. These
types of events could result in a loss of customers and large
expenditures to repair or replace the damaged properties, networks
or information systems or to protect them from similar
events.
Risks Related
to Acquisitions
The success of our business depends on achieving our strategic
objectives, including acquisitions, dispositions and
restructurings.
Our acquisitions, as well as potential restructuring actions, may
not achieve expected returns and other benefits as a result of
various factors, including integration and collaboration
challenges, such as personnel and technology. In addition, we may
not achieve anticipated cost savings from restructuring actions,
which could result in lower operating margins. If we decide to sell
assets or a business, we may encounter difficulty in finding buyers
or alternative exit strategies on acceptable terms in a timely
manner, which could delay the accomplishment of our strategic
objectives. After reaching an agreement with a buyer or seller for
the acquisition or disposition of a business, we are subject to
satisfaction of pre-closing conditions as well as to necessary
regulatory and governmental approvals on acceptable terms, which
may prevent us from completing the transaction.
We may not be able to grow successfully through our recent
acquisitions or through future acquisitions, we may not
successfully manage future growth, and we may not be able to
effectively integrate businesses that we may acquire.
We plan to continue to grow organically as well as through
strategic acquisitions of other businesses. In order to
complete acquisitions, we would expect to require additional debt
and/or equity financing, which may increase our interest expense,
leverage, and increase the number of shares
outstanding. Businesses that we acquire may not perform as
expected. Future revenues, profits and cash flows of an acquired
business may not materialize due to the failure or inability to
capture expected synergies, increased competition, regulatory
issues, changes in market conditions, or other factors beyond our
control. In addition, we may not be successful in integrating these
acquisitions into our existing operations. Competition for
acquisition opportunities may escalate, increasing our cost of
making further acquisitions or causing us to refrain from making
additional acquisitions. Additional risks related to
acquisitions include, but are not limited to:
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the potential disruption of our existing business;
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entering new markets or industries in which we have limited prior
experience;
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difficulties integrating and retaining key management, sales,
research and development, production and other personnel or
diversion of management attention from ongoing business concerns to
integration matters;
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difficulties integrating or expanding information technology
systems and other business processes or administrative
infrastructures to accommodate the acquired
businesses;
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complexities associated with managing the combined businesses due
to multiple physical locations;
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risks associated with integrating financial reporting and internal
control systems; and
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whether any necessary additional debt or equity financing will be
available on terms acceptable to us, or at all, and the impact of
such financing on our operating performance and results of
operations.
|
Risks Related to International Operations
We are exposed to fluctuations in currency exchange
rates.
Our financial results are reported in U.S. dollars, but operations
are conducted internationally. Currency exchange rates have, and
may continue to have, a significant impact on our operating
results. The Company does not utilize hedging techniques to
minimize its exposure. As a result, an investment in our Common
Stock may expose shareholders to fluctuations in exchange
rates.
The dollar cost of our operations internationally could increase to
the extent of increases or decreases in the rate of inflation or
devaluation in relation to the dollar, which may harm our results
of operations.
The dollar cost of our international operations is expected to be
influenced by any increase in inflation or is not offset by the
devaluation of the local currency in relation to the dollar. As a
result, we are exposed to the risk that foreign currencies will
appreciate in relation to the dollar. We cannot predict whether the
foreign currencies will appreciate or depreciate against the dollar
in the future.
International political, economic and military instability may
impede our ability to execute our plan of
operations.
Political, economic and military conditions internationally may
affect our business. We cannot predict whether or in what manner
these problems may occur. Acts of random terrorism periodically
occur which could affect our operations or personnel. Ongoing
or revived hostilities or other factors could harm our operations
and could impede our ability to execute our plan of
operations. Moreover, in order to effectively compete in
certain foreign jurisdictions, it is frequently necessary or
required to establish joint ventures, strategic alliances or
marketing arrangements with local operators, partners or agents.
Reliance on local operators, partners or agents could expose us to
the risk of being unable to control the scope or quality of our
overseas services or products. In addition, our business
insurance may not cover losses that may occur as a result of events
associated with the security situation. Any losses or damages
incurred by us could have a material adverse effect on our business
and financial condition.
Risks Related to Our Common Stock
Our largest shareholder’s beneficial ownership is over 50%,
and is therefore able to exert control over us, which may limit
your ability to influence corporate matters.
Sapinda Asia Limited and Mr. Lars Windhorst (collectively
“
Sapinda
Asia
”) beneficially own
more than 50% of the outstanding voting securities of the
Company. As a result, Sapinda Asia will control the outcome of
any shareholders’ meeting for the foreseeable future,
including having the power to determine the composition of our
board of directors and control the outcome of the voting on any
significant corporate transactions or other matters submitted to
our shareholders for approval. The interests of Sapinda Asia may
not be aligned with or be in the best interests of other
shareholders. This concentration of voting power could also have
the effect of delaying, deterring or preventing a change of control
or other business combination that might otherwise be beneficial to
other shareholders.
Our Board of Directors may authorize the issuance of preferred
stock and designate rights and preferences that will dilute the
ownership and voting interests of existing shareholders without
their approval.
Our Articles of Incorporation authorize us to issue up to
20,000,000 shares of preferred stock, par value $0.0001. The Board
of Directors is authorized to designate, and to determine the
rights and preferences of any series or class of preferred stock.
The Board of Directors may, without shareholder approval, issue
shares of preferred stock with dividend, liquidation, conversion,
voting or other rights which are senior to the Common Stock or
which could adversely affect the voting power or other rights of
the existing holders of outstanding shares of preferred stock or
Common Stock. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the Common Stock
and reduce the likelihood that common shareholders will receive
dividend payments and payments upon liquidation. The issuance of
additional shares of preferred stock may also adversely affect an
acquisition or change in control of the Company. As of
September 30, 2016, there were no outstanding shares of preferred
stock issued or contemplated for issuance.
Sales by certain of our shareholders of a substantial number of
shares of our Common Stock in the public market could adversely
affect the market price of our Common
Stock.
A large number of outstanding shares of our Common Stock are held
by several of our principal shareholders. If any of these
principal shareholders were to decide to sell large amounts of
stock over a short period of time such sales could cause the market
price of our Common Stock to decline.
A decline in the price of our Common Stock could affect our ability
to raise additional working capital and adversely impact our
operations and would severely dilute existing or future investors
if we were to raise funds at lower prices.
A prolonged decline in the price of our Common Stock could result
in a reduction of our ability to raise capital. Because our
operations have been financed in part through the sale of equity
securities, a decline in the price of our Common Stock could be
especially detrimental to our continued operations. Any reduction
in our ability to raise equity capital in the future would force us
to reallocate funds from other planned uses and would have a
significant negative effect on our business plans and operations,
including our ability to develop new products and continue our
current operations. If our stock price declines, there can be no
assurance that we can raise additional capital or generate funds
from operations sufficient to meet our obligations. We believe
the following factors could cause the market price of our Common
Stock to continue to fluctuate widely:
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actual or anticipated variations in our interim or annual
results;
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announcements of new services, products, acquisitions or strategic
relationships within the industry;
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changes in accounting treatments or principles;
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changes in earnings estimates by securities analysts and in analyst
recommendations; and
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general political, economic, regulatory and market
conditions.
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Any failure to meet these expectations, even if minor, could
materially adversely affect the market price of our Common
Stock.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
shareholders.
Our Articles of Incorporation authorize the issuance of 30,000,000
shares of Common Stock. Our Board of Directors has the authority to
issue additional shares of Common Stock up to the authorized
capital stated in the Articles of Incorporation. The issuance of
any such shares of Common Stock will result in a reduction in value
of our outstanding Common Stock. If we do issue any such additional
shares of Common Stock, such issuance also will cause a reduction
in the proportionate ownership and voting power of all other
shareholders. Further, any such issuance may result in a change of
control of the Company.
Trading of our Common Stock may be volatile and sporadic, which
could depress the market price of our Common Stock and make it
difficult for our shareholders to resell their
shares.
There is currently a limited market for our Common Stock and the
volume of our Common Stock traded on any day may vary significantly
from one day to the other. Our Common Stock is quoted on the OTCQX.
Trading in stock quoted on the OTCQX is often thin, volatile, and
characterized by wide fluctuations in trading prices, due to many
factors that may have little to do with the issuer’s
operations, results or business prospects. The availability of
buyers and sellers represented by this volatility could lead to a
market price for our Common Stock that is unrelated to operating
performance. Moreover, the OTCQX is not a stock exchange, and
trading of securities quoted on the OTCQX is often more volatile
than the trading of securities listed on a stock exchange like
NASDAQ or NYSE:MKT.
Our headquarters is approximately 4,200 square feet of commercial
office space located at 1215 Lakeview Court, Romeoville, Illinois.
The original lease for this office space began on August 1, 2014
and expires on July 31, 2017. An amendment and expansion to the
original lease began on December 18, 2014 and expires on July 31,
2017. Combined monthly lease payments are approximately $6,000 per
month.
Our primary monitoring facility is housed in approximately 8,600
square feet of commercial office space located at 405 South Main
Street, Suite 700, Salt Lake City, Utah. Lease payments are
approximately $15,200 per month. This lease expires on August
31, 2017.
We lease commercial office space in Indianapolis, Indiana of
approximately 2,000 square feet, which began on August 1, 2014 and
terminating on July 31, 2016. Lease payments are approximately
$3,600 per month. In addition, we lease a second location with
approximately 2,000 square feet in Indianapolis, Indiana. This
lease was executed on January 1, 2014 and expires on December 31,
2018. Monthly lease payments for this facility are approximately
$3,200.
Track Group Analytics, Inc. operations are located in approximately
4,200 square feet of office space in Bedford, Nova Scotia,
Canada. The lease for this office space began on July 1, 2015
and expires on June 30, 2020. Monthly lease payments are
approximately $5,600.
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.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert,
Inc.
On March 26, 2012,
Mr. Duggan filed a complaint in the 9th Circuit Court in and for
Orange County, Florida alleging malicious prosecution, abuse of
process and negligent infliction of emotional distress against the
Company and its subsidiary. The case resulted from actions of a
former agent of the Company’s subsidiary. The Company
continues to defend itself in this matter. A trial date has been
set for January 3, 2017. The Company has not accrued any potential
loss as the probability of incurring a material loss is deemed
remote by management, after consultation with outside legal
counsel.
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. We believe we will be successful in this action to
recover the unpaid balance and interest under the loan agreement
and promissory note.
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.
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 provide the basis for counterclaims against
Mr. Merrill. We intend to defend the case vigorously and
believe the probability of incurring a material loss to be
remote.
Market Information
Our Common Stock is traded on the OTCQX under the symbol
“TRCK.” The following table sets forth the range
of high and low sales prices of our Common Stock as reported on the
OTCQX for the periods indicated.
|
Fiscal Year Ended September 30,
2016
|
High
|
Low
|
|
First Quarter ended December 31,
2015
|
$
9.50
|
$
2.00
|
|
Second
Quarter ended March 31, 2016
|
$
9.00
|
$
3.15
|
|
Third
Quarter ended June 30, 2016
|
$
6.75
|
$
2.60
|
|
Fourth
Quarter ended September 30, 2016
|
$
8.45
|
$
3.51
|
|
Fiscal Year Ended September 30,
2015
|
High
|
Low
|
|
First Quarter ended December 31,
2014
|
$
17.50
|
$
12.30
|
|
Second
Quarter ended March 31, 2015
|
$
14.99
|
$
10.05
|
|
Third
Quarter ended June 30, 2015
|
$
11.99
|
$
9.10
|
|
Fourth
Quarter ended September 30, 2015
|
$
10.50
|
$
7.10
|
Holders
As of November 21, 2016 we had 1,001 holders of record of our
Common Stock and 10,333,516 shares of Common Stock outstanding. We
also have granted options and warrants for the purchase of 504,991
shares of Common Stock.
Dividends
Since incorporation, we have not declared any cash dividends on our
Common Stock. We do not anticipate declaring cash dividends on
our Common Stock for the foreseeable future. The Series D
Preferred is entitled to dividends at the rate equal to 8% per
annum calculated on the purchase amount actually paid for the
shares or amount of debt converted. The dividend is payable in
cash or shares of Common Stock at the sole discretion of the Board
of Directors. All dividends payable on our preferred stock
outstanding have been paid by issuance of shares of common or
preferred stock. At September 30, 2016, there were no shares
of Series D Preferred issued and outstanding, as the remaining
shares of Series D Preferred were repurchased during fiscal
2014. As a result, during the fiscal years ended September 30,
2016 and 2015, we recorded zero dividend expenses, payable with
respect to our outstanding preferred stock.
Dilution
The Board of Directors determines when and under what conditions
and at what prices to issue stock. In addition, a significant
number of shares of Common Stock are reserved for issuance upon
exercise of outstanding options and warrants and achievement of
certain milestones contained in acquisition
agreements.
The issuance of any shares of Common Stock for any reason will
result in dilution of the equity and voting interests of existing
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is American
Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New
York, 11219.
Securities Authorized for Issuance under Equity Compensation
Plans
The 2012 Stock Incentive Plan
The Company’s 2012 Equity Compensation Plan, as amended (the
“
2012
Plan
”), was first
approved by our Board of Directors and shareholders at the Annual
Meeting of Shareholders held on December 21, 2011, and amended
following our Annual Meeting of Shareholders on May 19,
2015. We believe that incentives and stock-based awards focus
and align employees on the objective of creating shareholder value
and promoting the success of the Company, and that incentive
compensation plans like the 2012 Plan are an important attraction,
retention and motivation tool for participants in the
plan.
Under the 2012 Plan, up to 803,262 options or shares of Common
Stock may be awarded. As of the date of this report,
135,012 shares of Common Stock and options for the purchase of
365,743 shares of Common Stock have been awarded under the 2012
Plan.
The following table includes information as of September 30, 2016
for our equity compensation plans:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
365,743
|
$
10.35
|
668,250
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
365,743
|
$
10.35
|
668,250
|
Recent Sales of Unregistered Securities
No securities were issued without registration under the Securities
Act during the fiscal year ended September 30, 2016, nor were any
securities issued subsequent to September 30, 2016.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements within the meaning of Section 21E of the Exchange
Act and Section 27A of the Securities Act. All statements
contained in this Annual Report on Form 10-K other than statements
of historical fact are forward-looking statements. When used in
this report or elsewhere by management from time to time, the words
“believe,” “anticipate,”
“intend,” “plan,” “estimate,”
“expect,” “may,” “will,”
“should,” “seeks” and similar expressions
are forward-looking statements. Such forward-looking statements are
based on current expectations, but the absence of these words does
not necessarily mean that a statement is not forward-looking.
Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking
statements as a result of various factors. For a more detailed
discussion of such forward-looking statements and the potential
risks and uncertainties that may impact upon their accuracy, see
Item 1A., “Risk Factors” in Part I of this Form 10-K
and the “Overview” and “Liquidity and Capital
Resources” sections of this Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” These forward-looking statements reflect our
view only as of the date of this report. Except as required by law,
we undertake no obligations to update any forward-looking
statements. Accordingly, you should also carefully consider the
factors set forth in other reports or documents that we file from
time to time with the SEC.
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(“
MD&A
”) is intended to help the reader better
understand Track Group, our operations and our present business
environment. Our fiscal year ends on September 30 of each
year. Reference to fiscal year 2016 refers to the year ended
September 30, 2016. This MD&A is provided as a supplement
to, and should be read in conjunction with, our consolidated
financial statements for the fiscal years ended September 30, 2016
and 2015 and the accompanying notes thereto contained in this
report. This introduction summarizes MD&A, which includes the
following sections:
●
Overview – a general description of our business and the
markets in which we operate; our objectives; our areas of focus;
and challenges and risks of our business.
●
Results of Operations – an analysis of our consolidated
results of operations for the last two fiscal years presented in
our consolidated financial statements.
●
Liquidity and Capital Resources – an analysis of cash flows;
off-balance sheet arrangements and aggregate contractual
obligations; and the impact of inflation and changing
prices.
●
Critical Accounting Policies – a discussion of accounting
policies that require critical judgments and
estimates.
We intend for this discussion to provide the reader with
information that will assist in understanding our financial
statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting
principles affect our financial statements.
Overview
Our core business is based on the 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.
Recent Developments
Reincorporation to Delaware
On August 5, 2016
(the “
Effective
Date
”), the Company filed
the following documents to change its state of incorporation from
the State of Utah to the State of Delaware (the
“
Reincorporation
”):
(i) articles of transfer (the “
Utah Articles of
Transfer
”) with the Utah
Division of Corporations and Commercial Code, and (ii) a
certificate of conversion (the “
Delaware Certificate of
Conversion
”) and a
certificate of incorporation (the “
Delaware Certificate of
Incorporation
”) with the
Delaware Division of Corporations. In connection with the
Reincorporation, the Company also adopted new bylaws, which became
effective on the Effective Date (the “
Delaware
Bylaws
”). In addition to
the adoption of the Delaware Certificate of Incorporation and the
Delaware Bylaws, the following changes took effect as a result of
the Reincorporation on the Effective
Date:
●
the affairs of the
Company ceased to be governed by the Utah Revised Business
Corporation Act, the Company’s Amended and Restated Articles
of Incorporation under Utah law and the Company’s Amended and
Restated Bylaws under Utah law, and the affairs of the Company
became subject to the Delaware General Corporation Law, the
Delaware Certificate of Incorporation and the Delaware
Bylaws;
●
each outstanding
share of common stock of the Company as incorporated in Utah
converted into an outstanding share of common stock of the Company
as incorporated in Delaware;
●
each outstanding
option, right or warrant to acquire shares of common stock of the
Company as incorporated in Utah converted to an option, right or
warrant to acquire under the same terms and conditions an equal
number of shares of common stock of the Company as incorporated in
Delaware; and
●
the directors and
officers of the Company immediately prior to the Reincorporation
continued to serve as the directors and officers of the Company
following the Reincorporation.
Certain rights of the Company's shareholders changed on the
Effective Date as a result of the Reincorporation, which are more
fully described in the Company's Definitive Information Statement
on Schedule 14C, filed with the Securities and Exchange Commission
on July 5, 2016.
The Reincorporation did not involve any change in the business,
properties, corporate headquarters or management of the Company and
there was no change in the operations, assets, liabilities or
obligations of the Company as a result of the
Reincorporation.
Marion County Agreement
On May 5, 2016, the Company executed
an agreement with Marion County Community Corrections
(
"Agency"
), the largest county in the state of Indiana, to
provide electronic monitoring services across the full range of
sentences under the Agency's oversight. Under the terms of the
Agreement, the Company will provide solutions based on GPS and
alcohol monitoring technology to monitor over 2,300 offenders and
defendants. This includes the Company's newest tracking
device, Shadow, which is the smallest, lightest and most advanced
device. The term of the Agreement is eighteen months, and is
expected to contribute over $4.0 million in revenue over the
18-month term of the agreement.
Conrent Loan Agreement
On May 1, 2016 we 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. The Conrent Loan Agreement contains a condition
precedent, which provides that the lender is not obligated to fund
the loan until it has received total proceeds of $5.0 million from
the sale of fixed rate notes, which are to be issued by the lender
through its Compartment Safety III. As of September 30, 2016 this
condition precedent has not been satisfied. When funded, the
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 September 30, 2016, the
Company had not received the funds under the Conrent Loan
Agreement.
Increase in Authorized Common Stock.
On February 26, 2016, our Board of Directors and the holder of a
majority of our outstanding voting stock, acting by written
consent, approved an amendment to our Amended and Restated Articles
of Incorporation to increase the total number of shares of Common
Stock authorized thereunder from 15.0 million shares to 30.0
million.
Results of Operations
Continuing Operations - Fiscal Year 2016 Compared to Fiscal Year
2015
Net Revenue
During the fiscal year ended September 30, 2016, we had net
revenues of $27,193,807 compared to net revenues of $20,792,715 for
the fiscal year ended September 30, 2015, an increase of
$6,401,092, or approximately 31%. Of these revenues,
$25,684,097 and
$20,067,966
were from monitoring and other related
services during the 2016 and 2015 period, respectively, an increase
of $5,616,131 or 28%. Growth in revenue during the year ended
September 30, 2016 was principally due to
(i) the expansion and
growth of offender monitoring in Chile - both intensive probation
and standard probation programs; (ii) increases in the total
growth of our North American monitoring operations
specifically Indiana and Virginia; and (iii) increases in our data
analytics service offerings.
Product revenues decreased $288,043 from
$666,536
for the year ended
September 30, 2015, to $378,493 for the year ended September 30,
2016. The 43% decrease
in
product revenue is the result of a continued focus on recurring
subscription based sales and not product sales events. The
Company does not expect to eliminate product sales but anticipates
a continued decline of product revenue for the foreseeable future
as it continues to focus its sales efforts on a subscription based
model.
Cost of Revenue
During the year ended September 30, 2016, cost of revenue totaled
$10,533,229 compared to cost of revenue during the year ended
September 30, 2015 of $8,282,106, an increase of $2,251,123. This
increase is largely due to
increases in total
monitoring and other related services revenue recognized both
domestically and internationally and, to a lesser extent, increases
in analytics services. Increases in cost of revenue include but are
not limited to personnel costs, commissions, SIM card charges and
other incremental revenue related costs.
Although management expects the cost of revenue to continue to
increase in subsequent periods due an increase in revenue generated
by recently acquired operations, the Company expects the cost of
revenue as a percentage of total revenue to decrease in the
foreseeable future due to economies of scale of purchasing, lower
device costs and efficiencies of our proprietary software, enabling
each operator to monitor more devices resulting in lower monitoring
center costs.
Depreciation and amortization included in cost of revenue for the
fiscal years ended September 30, 2016 and 2015, totaled $2,009,437
and $1,467,410, respectively. These costs represent the
depreciation of TrackerPAL™ and ReliAlert™ devices, and
are based on a three to five-year useful life. The Company
believes this life is appropriate due to rapid changes in
electronic monitoring technology and the corresponding potential
for obsolescence. Management periodically assesses the useful
life of the devices for appropriateness. Amortization of a patent
related to GPS and satellite tracking is also included in cost of
sales.
Impairment cost for equipment and parts for the fiscal years ended
September 30, 2016 and 2015 were $80,000 and $225,523,
respectively. These costs resulted from the disposal of
obsolete inventory, monitoring equipment and parts as we continue
to make enhancements to the device.
We expect the cost of revenue, excluding impairment of equipment
and parts, as a percentage of revenue to decrease in the
foreseeable future due to (i) lower manufacturing costs, (ii)
procurement and fulfillment outsourcing, and (iii) efficiencies due
to further increases in automation of our proprietary
software.
Gross Profit and Margin
During the fiscal year ended September 30, 2016, gross profit
totaled $16,660,578, resulting in a 61% gross margin, compared to
$12,510,609, or a 60% gross margin during the fiscal year ended
September 30, 2015, an increase of
$4,149,969.
The increase in
absolute gross profit and percentage of gross profit is due to
higher overall revenue. The Company anticipates that gross profit
as a percentage of total revenue may improve in subsequent periods
as initiatives currently in development are realized and
deployed.
General and Administrative Expense
During the fiscal year ended September 30, 2016, our general and
administrative expense totaled $14,712,650, compared to $14,057,657
for the fiscal year ended September 30,
2015.
The increase of
$654,993 (5%) in general and administrative cost resulted largely
from an increase in bad debt expense and higher outside services,
partially offset by decrease in wages and benefits, and Board of
Director fees.
Selling and Marketing Expense
For the fiscal year ended September 30, 2016, our selling and
marketing expense was $2,269,233 compared to $2,183,688 for the
year ended September 30, 2015. The $85,545, or 4% increase was
principally the result of increased sales resources related to the
launch and communication of new products.
Research and Development Expense
During the fiscal year ended September 30, 2016, we incurred
research and development expense of $2,627,228 compared to those
costs recognized during fiscal year 2015 totaling
$1,562,566.
The increased
investment in research and development costs were incurred to (i)
streamline our device hardware, therefore expediting manufacturing
time, and (ii) enhance both the firmware and software of our
devices to improve the overall user experience. The Company is
currently significantly enhancing its software platform. As a
result of these improvements, $1,949,813 was capitalized as
developed technology during the year ended September 30, 2016. A
portion of these expenses would have been recognized as research
and development expense, absent the software
enhancements.
Depreciation and Amortization Expense
The Company maintains a significant portion of its tangible and
intangible assets that are amortized or depreciated. During the
fiscal year ended September 30, 2016, depreciation and amortization
included in operating expense totaled $2,709,918, compared to
$2,932,172 for the fiscal year ended September 30, 2015. This
decrease of $222,254 (8%) was largely due to fully depreciated
assets in 2016.
Other Income and Expense
Other income (expense) decreased by $5.5 million during the year
ended September 30, 2016 largely due to the $4.9 million
disgorgement profits received in 2015, an increase in interest
expense of $138,599 and lower gains on disposal of equipment in
2016.
Other income (expense) improved by $4.9 million during the year
ended September 30, 2015, as the result of a disgorgement of
profits from one of our shareholders, pursuant to Section 16(b) of
the Securities Exchange Act of 1934, as amended (the
“
Exchange
Act
”), in January and
April 2015. See Note 5, “Certain Relationships and Related
Transactions” to the audited Consolidated Financial
Statements included in this Annual Report on Form 10-K for more
information on this disgorgement pursuant to Section
16(b).
Net Loss
We had a net loss for the fiscal year ended September 30, 2016
totaling $8,495,621 or ($0.83) loss per common share, compared to a
net loss of $5,668,701 or ($0.56) per common share for the fiscal
year ended September 30, 2015. The year over year increase in
net loss is the result largely
of $4,915,236 in
disgorgement funds received in 2015, an increase in research and
development costs related to enhancing the firmware and software of
our devices of $1,064,662 in 2016 and an increase in bad debt in
2016 of $1,491,897. These amounts were offset by an increase in
revenue of $6,401,092, and a corresponding increase in cost of
goods sold of $2,251,123.
Liquidity and Capital Resources
The Company currently is unable to finance its business solely
from cash flows from operating activities. During the current and
prior 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 year ended September 30, 2016.
While the Company may be able
borrow $5.0 million for working capital, repayment of
debt, and operating purposes under an
existing unused loan
facility, there is no guarantee that the Company’s cash flows
from operations and collections of outstanding accounts receivables
will be sufficient to meet the Company’s cash requirements in
2017 (See Recent developments – Conrent Loan
Agreement).
During fiscal year 2016, we provided $907,563 in cash from
operating activities, compared to a use of cash of $915,225 in
operating activities during fiscal year 2015. The increase of cash
from operations in 2016 compared to 2015 was largely the result of
an increase in accounts payable and accrued
expenses.
The Company used $5,057,183 of cash for investing activities during
the fiscal year ended September 30, 2016, compared to $4,238,945 of
cash used during fiscal year 2015.
Cash used for investing
activities was used for significant enhancements of its software
platform and used for purchases of monitoring and other equipment
to meet demand during the twelve months ended September 30,
2016.
The Company provided $978,168 of cash for financing activities
during the fiscal year ended September 30, 2016, compared to
$986,711 of cash used in financing activities during fiscal year
2015. During the fiscal year ended September 30, 2016, we made
principal payments of $1,021,832 on notes payable and we received
cash proceeds totaling $2,000,000 from the issuance of notes
payable.
During the fiscal year ended September 30, 2015, we made principal
payments of $5,053,989 on notes and related–party notes
payable. During fiscal year 2015, we received cash proceeds
totaling $4,077,778 from the issuance of notes and related-party
notes payable.
During the fiscal year ended September 30, 2016, we incurred a net
loss of $8,495,621 and we had cash flows from operating activities
of $907,563, compared to a net loss from continuing operations of
$5,668,701 and negative cash flows from operating activities of
$915,225 for fiscal year 2015. As of September 30, 2016, our
stockholders’ equity was $8,690,616 and the accumulated
deficit totaled $289,341,503.
Inflation
We do not believe that inflation has had a material impact on our
historical operations or profitability.
Critical Accounting Policies
In Note 2, “Summary of Significant Accounting Policies”
to the audited Consolidated Financial Statements included in this
Annual Report on Form 10-K, we discuss those accounting policies
that are considered to be significant in determining the results of
operations and our financial position.
The preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. By their
nature, these estimates and judgments are subject to an inherent
degree of uncertainty. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability,
revenue, and income taxes. We base our estimates on historical
experience and other facts and circumstances that are believed to
be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual
results may differ from these estimates under different assumptions
or conditions.
With respect to inventory reserves, revenue recognition, impairment
of long-lived assets and allowance for doubtful accounts
receivable, we apply critical accounting policies discussed below
in the preparation of our financial statements.
Inventory Reserves
The nature of our business requires maintenance of sufficient
inventory on hand at all times to meet the requirements of our
customers. We record inventory and raw materials at the lower of
cost, or market, which approximates actual cost. General
inventory reserves are maintained for the possible impairment of
the inventory. Impairment may be a result of slow moving or
excess inventory, product obsolescence or changes in the valuation
of the inventory. In determining the adequacy of reserves,
management analyzes the following, among other things:
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Current inventory quantities on hand;
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Product acceptance in the marketplace;
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●
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Customer demand;
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●
|
Historical sales;
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●
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Forecast sales;
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Product obsolescence; and
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Technological innovations.
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Any modifications to these estimates of reserves are reflected in
cost of revenues within the statement of operations during the
period in which such modifications are determined necessary by
management.
Revenue Recognition
Our revenue is historically derived from two sources: (i)
monitoring services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (i) lease contracts in
which we provide monitoring services and lease devices to
distributors or end users and we retain ownership of the leased
device; and (ii) monitoring services purchased by distributors or
end users who have previously purchased monitoring devices and opt
to use our monitoring services.
We typically lease our devices under multi-year contracts with
customers that opt to use our monitoring services. However,
some of these contracts may be cancelled by either party at any
time upon 30 days’ notice. Under our standard leasing
contract, the leased device becomes billable on the date of
activation or seven to 21 days from the date the device is assigned
to the lessee, and remains billable until the device is
returned. We recognize revenue on leased devices at the end of
each month that monitoring services have been provided. In
those circumstances in which we receive payment in advance, we
record these payments as deferred revenue.
Product Sales
We may sell monitoring devices in certain situations to our
customers. In addition, we may sell equipment in connection with
the building out and setting up a monitoring center on behalf of
customers. We recognize product sales revenue when persuasive
evidence of an arrangement with the customer exists, title passes
to the customer and the customer cannot return the devices or
equipment, prices are fixed or determinable (including sales not
being made outside the normal payment terms) and collection is
reasonably assured. When purchasing products (such as TrackerPAL,
ReliAlert, Shadow or R.A.D.A.R. devices), customers may, but are
not required to, enter into one of our monitoring service
contracts. We recognize revenue on monitoring services for
customers that have previously purchased devices at the end of each
month that monitoring services have been provided.
We sell and install standalone tracking systems that do not require
our ongoing monitoring. We have experience in component
installation costs and direct labor hours related to this type of
sale and can typically reasonably estimate costs, therefore we
recognize revenue over the period in which the installation
services are performed using the percentage-of-completion method of
accounting for material installations. We typically use labor
hours or costs incurred to date as a percentage of the total
estimated labor hours or costs to fulfill the contract as the most
reliable and meaningful measure that is available for determining a
project’s progress toward completion. We evaluate our
estimated labor hours and costs and determine the estimated gross
profit or loss on each installation for each reporting
period. If it is determined that total cost estimates are
likely to exceed revenues, we accrue the estimated losses
immediately.
Multiple Element Arrangements
The majority of our revenue transactions do not have multiple
elements. However, on occasion, we enter into revenue transactions
that have multiple elements. These may include different
combinations of products or services that are included in a single
billable rate. These products or services are delivered over
time as the customer utilizes our services. For revenue
arrangements that have multiple elements, we consider whether the
delivered devices have standalone value to the customer, there is
objective and reliable evidence of the fair value of the
undelivered monitoring services, which is generally determined by
surveying the price of competitors’ comparable monitoring
services, and the customer does not have a general right of
return. Based on these criteria, we recognize revenue from the
sale of devices separately from the services provided to the
customer as the products or services are delivered.
Other Matters
We consider an arrangement with payment terms longer than our
normal terms not to be fixed or determinable, and we recognize
revenue when the fee becomes due. Normal payment terms for the
sale of products and services are due upon receipt to 30
days. We sell our devices and services directly to end users
and to distributors. Distributors do not have general rights
of return. Also, distributors have no price protection or
stock protection rights with respect to devices we sell to
them. Generally, title and risk of loss pass to the buyer upon
delivery of the devices.
We estimate our product returns based on historical experience and
maintain an allowance for estimated returns, which is recorded as a
reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as
part of net revenues. The related freight costs and supplies
directly associated with shipping products to customers are
included as a component of cost of revenues.
Impairment of Long-lived Assets
We review our long-lived assets including goodwill and intangibles
for impairment when events or changes in circumstances indicate
that the book value of an asset may not be recoverable and in the
case of goodwill, at least annually. We evaluate whether events and
circumstances have occurred which indicate possible impairment as
of each balance sheet date. We use an equity method of the related
asset or group of assets in measuring whether the assets are
recoverable. If the carrying amount of an asset exceeds its
market value, an impairment charge is recognized for the amount by
which the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there are an identifiable fair market value
that is independent of other groups of
assets.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts
receivable. In doing so, we analyze accounts receivable and
historical bad debts, customer credit-worthiness, current
macroeconomic and geopolitical trends, and changes in customer
payment patterns when evaluating the adequacy of the allowance for
doubtful accounts.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board (“
FASB
”) or other standard setting bodies, which
are adopted by us as of the specified effective date. Unless
otherwise discussed, we believe that the impact of recently issued
standards that are not yet effective will not have a material
impact on our financial position or results of operations upon
adoption.
Accounting for Stock-Based Compensation
We recognize compensation expense for stock-based awards expected
to vest on a straight-line basis over the requisite service period
of the award based on their grant date fair value. We estimate
the fair value of stock options using a Black-Scholes option
pricing model which requires us to make estimates for certain
assumptions regarding risk-free interest rate, expected life of
options, expected volatility of stock and expected dividend yield
of stock.
Our business extends to countries outside the United States, and we
intend to continue to expand our foreign operations. As a
result, our 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.
We had $9,530,240 and $7,092,497 in revenue from sources outside
the United States for the fiscal years ended September 30, 2016 and
2015, respectively. We made and received payments in a
foreign currency during the periods indicated, which resulted in a
foreign exchange loss of $151,258 and $214,402 in fiscal years 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 do not use foreign
currency exchange contracts or derivative financial instruments for
hedging or speculative purposes. To the extent foreign sales
become a more significant part of our business in the future, we
may seek to implement strategies which make use of these or other
instruments in order to minimize the effects of foreign currency
exchange on our business.
The Financial Statements and Supplementary Data required by this
Item are set forth at the pages indicated at Item 15
below.
None.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure
that material information relating to the Company is made known to
the officers who certify our financial reports and to other members
of senior management and the Board of Directors. These disclosure
controls and procedures are designed to ensure that information
required to be disclosed in the reports that are filed or submitted
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s
rules and forms.
Under the supervision and with the participation of management,
including the principal executive officer and principal financial
officer an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of September
30, 2016 was completed pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based on this evaluation,
our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective and designed to provide reasonable assurance that the
information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms as of September 30, 2016.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such
term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Our internal control over financial reporting is a
process designed under the supervision of our principal executive
officer and principal financial officer to provide reasonable
assurance regarding the reliability of financial reporting and
preparation of our financial statements for external purposes in
accordance with generally accepted accounting
principles.
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and, even when
determined to be effective, can only provide reasonable, not
absolute, assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission
(“COSO”
)
issued in May 2013 and related COSO guidance. Based on our
evaluation under this framework, our management concluded that our
internal control over financial reporting was effective as of
September 30, 2016.
This report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide
only management’s report in this Annual Report on Form
10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act)
during our fourth fiscal quarter ended September 30, 2016, that has
materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.
None.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 30, 2017.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 30, 2017.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 30, 2017.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 30, 2017.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
January 30, 2017.
(a) The following documents are filed as part of this
report:
1.
Financial
Statements
|
Report of Eide Bailly LLP
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F-2
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Operations
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F-4
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Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Loss
|
F-5
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Consolidated Statements of Cash Flows
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F-7
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Notes to the Consolidated Financial Statements
|
F-9
|
2.
Financial Statement
Schedules.
3.
Exhibits. The following
exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission:
|
Exhibit
Number
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Title of Document
|
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3(i)(1)
|
Articles
of Transfer of Track Group, Inc., a Utah corporation,
dated August 5, 2016 (previously filed on August 9 2016
as Exhibit 3(i)(3) to the Form 10-Q for the quarter ended June 30,
2016).
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3(i)(2)
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Certificate of Conversion Converting Track Group, Inc., a Utah
corporation, to Track Group, Inc., a Delaware corporation, dated
August 5, 2016 (previously filed on August 9, 2016 as Exhibit
3(i)(4) to the Form 10-Q for the quarter ended June 30,
2016).
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3(i)(3)
|
Certificate
of Incorporation of Track Group, Inc., a Delaware corporation
(previously filed on August 9, 2016 as Exhibit 3(i)(5) to the Form
10-Q for the quarter ended June 30, 2016).
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3(ii)(2)
|
ByLaws of Track Group, Inc., a Delaware corporation (previously
file on August 9, 2016 as Exhibit 3(ii)(2) to the Form 10-Q for the
quarter ended June 30, 2016).
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4.01
|
2006 Equity Incentive Award Plan (previously filed in August 2006
as an Exhibit to the Form 10- Q for the nine months ended June 30,
2006).
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4.02
|
2012 Equity Incentive Award Plan (previously filed as Exhibit to
Definitive Proxy Statement, filed October 25, 2011, and amended in
accordance with the Company’s Definitive Proxy Statement,
filed April 9, 2015).
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10.1
|
Facility Agreement between Tetra House Pte. Ltd. and SecureAlert,
Inc., dated January 3, 2014 (incorporated by reference to our
Current Report on Form 8-K, filed in January
2014).
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10.2
|
Supplemental Settlement Agreement between Satellite Tracking of
People, LLC and SecureAlert, Inc., effective March 1, 2014
(incorporated by reference to our Form 10-Q for the three months
ended March 31, 2015).
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10.3
|
Amended and Restated Facility Agreement, dated June 30, 2015, by
and between Track Group, Inc. and Conrent Invest S.A, acting on
behalf of its compartment “Safety 2” (incorporated
by reference to our Current Report on Form 8-K, filed on July
15, 2015).
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10.4
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Loan Agreement between Sapinda Asia Limited and Track Group, Inc.,
dated September 14, 2015 (incorporated by reference to our Current
Report on Form 8-K, filed on September 28, 2015).
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10.5
|
Agreement
between the Virginia Department of Corrections and the Company
dated September 21, 2015 (incorporated by reference to our Current
Report on Form 8-K, filed on October 2, 2015).
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10.6
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Executive
Employment Agreement, by and between Track Group, Inc. and John
Merrill, dated November 20, 2014 (incorporated by reference to our
Current Report on Form 8-K, filed November 25, 2014.
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10.7
|
Loan Agreement, by and between Conrent Invest S.A., acting with
respect to its Compartment Safety III, and Track Group, Inc., dated
May 1, 2016 (previously filed in August 2016 as an Exhibit to the
Form 10-Q for the nine months ended June 30, 2016).
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10.8
|
Employment Agreement, by and between Track Group, Inc. and Mark
Attarian, dated September 13, 2016 (incorporated by reference to
our Current Report on Form 8-K, filed October 1,
2016.)
|
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10.9
|
Employment agreement, by and between Track Group Inc. and Peter
Poli, dated December 12, 2016 (incorporated by reference to our
Current Report on Form 8-K, filed December 16,
2016).
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14.1
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Code of Ethics (incorporated by reference from Exhibit 14.1 to our
Annual Report on Form 10-K filed January 14, 2014).
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21
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Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21 to our Annual Report on Form 10-K filed January 14,
2014).
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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)
|
Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
|
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32
|
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) (filed herewith).
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101.INS
|
XBRL INSTANCE DOCUMENT
|
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101.SCH
|
XBRL TAXONOMY EXTENSION SCHEMA
|
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101.CAL
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
|
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101.DEF
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
|
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101.LAB
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE
|
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101.PRE
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
|
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Track Group, Inc.
By:
/s/ Guy
Dubois
Guy Dubois, (Principal Executive Officer)
Date: December 20, 2016
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
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Signature
|
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Title
|
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Date
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/s/ Guy
Dubois
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Director,
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December 20, 2016
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Guy Dubois
|
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(Principal Executive Officer, Acting Principal Financial and
Accounting Officer)
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/s/ David S.
Boone
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Director
|
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December 20, 2016
|
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David S. Boone
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/s/ Dirk K. van
Daele
|
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Director
|
|
December 20, 2016
|
|
Dirk K. van Daele
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Karen Macleod
|
|
Director
|
|
December 20, 2016
|
|
Karen Macleod
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Eric Rosenblum
|
|
Director
|
|
December 20, 2016
|
|
Eric Rosenblum
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ray Johnson
|
|
Director
|
|
December 20, 2016
|
|
Ray Johnson
|
|
|
|
|
Index to Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
Report
of Eide Bailly LLP
|
|
F-2
|
|
Consolidated
Balance Sheets as of September 30, 2016 and 2015
|
|
F-3
|
|
Consolidated
Statements of Comprehensive Loss for the fiscal years ended
September 30, 2016 and 2015
|
|
F-4
|
|
Consolidated
Statements of Stockholders' Equity for the fiscal years ended
September 30, 2016 and 2015
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the
fiscal years ended September 30, 2016 and 201
5
|
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Shareholders of Track Group, Inc.
We have audited the accompanying consolidated balance sheets of
Track Group, Inc. and Subsidiaries (collectively the Company) as of
September 30, 2016 and 2015 and the related consolidated statements
of income, comprehensive income, stockholders’ equity, and
cash flows for the years then ended. The Company’s management
is responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Track Group, Inc. as of September 30, 2016 and 2015 and
the consolidated results of its operations, and its cash flows for
the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
Eide Bailly LLP
Salt Lake City, Utah
December 20
, 2016
TRACK GROUP, INC. AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2016 AND 2015
|
Assets
|
2016
|
2015
|
|
Current assets:
|
|
|
|
Cash
|
$
1,769,921
|
$
4,903,045
|
|
Accounts
receivable, net of allowance for doubtful accounts of $2,335,508
and $4,150,000, respectively
|
6,894,095
|
6,044,931
|
|
Note
receivable, current portion
|
334,733
|
306,434
|
|
Prepaid
expenses and other
|
816,708
|
1,266,277
|
|
Inventory,
net of reserves of $98,150 and $225,900, respectively
|
521,851
|
741,514
|
|
Total
current assets
|
10,337,308
|
13,262,201
|
|
Property
and equipment, net of accumulated depreciation of $1,421,389 and
$2,822,166, respectively
|
1,226,461
|
1,697,630
|
|
Monitoring
equipment, net of accumulated amortization of $3,438,074 and
$2,225,480, respectively
|
4,358,117
|
2,784,595
|
|
Intangible
assets, net of accumulated amortization of $8,233,659 and
$5,628,308, respectively
|
25,540,650
|
25,884,087
|
|
Other
assets
|
2,900,911
|
2,619,035
|
|
Goodwill
|
7,955,876
|
7,782,903
|
|
Total
assets
|
$
52,319,323
|
$
54,030,451
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
2,771,101
|
2,363,441
|
|
Accrued
liabilities
|
3,976,192
|
2,705,403
|
|
Current
portion of long-term debt, net of discount of $222,973 and
$222,973, respectively
|
3,245,732
|
796,225
|
|
Total
current liabilities
|
9,993,025
|
5,865,069
|
|
Stock
payable - related party
|
3,289,879
|
3,501,410
|
|
Long-term
debt, net of current portion and discount of $185,811 and $408,784,
respectively
|
30,345,803
|
30,189,188
|
|
Other
long-term liabilities
|
-
|
106,671
|
|
Total
liabilities
|
43,628,707
|
39,662,338
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares authorized;
10,333,516 and 10,261,288 shares outstanding,
respectively
|
1,034
|
1,026
|
|
Additional
paid-in capital
|
298,876,399
|
297,591,034
|
|
Accumulated
deficit
|
(289,341,503
)
|
(280,845,882
)
|
|
Accumulated
other comprehensive loss
|
(845,314
)
|
(2,378,065
)
|
|
Total
equity
|
8,690,616
|
14,368,113
|
|
Total
liabilities and stockholders’ equity
|
$
52,319,323
|
$
54,030,451
|
TRACK GROUP, INC. AND SUBSIDIARIES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
2016
|
2015
|
|
Revenues:
|
|
|
|
Products
|
$
378,493
|
$
666,536
|
|
Monitoring
services
|
25,684,097
|
20,067,966
|
|
Other
|
1,131,217
|
58,213
|
|
Total
revenues
|
27,193,807
|
20,792,715
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
Products
|
559,887
|
518,155
|
|
Monitoring
and other related services
|
7,883,905
|
6,071,018
|
|
Depreciation
and amortization included in cost of revenues
|
2,009,437
|
1,467,410
|
|
Impairment
of monitoring equipment and parts (Note2)
|
80,000
|
225,523
|
|
Total
cost of revenues
|
10,533,229
|
8,282,106
|
|
|
|
|
|
Gross profit
|
16,660,578
|
12,510,609
|
|
|
|
|
|
Operating expenses:
|
|
|
|
General
& administrative
|
14,712,650
|
14,057,657
|
|
Selling
& marketing
|
2,269,233
|
2,183,688
|
|
Research
& development
|
2,627,228
|
1,562,566
|
|
Depreciation
& amortization
|
2,709,918
|
2,932,172
|
|
Loss from operations
|
(5,658,451
)
|
(8,225,474
)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Gain/loss
on disposal of equipment
|
15,655
|
339,858
|
|
Interest
income
|
114,235
|
148,795
|
|
Interest
expense
|
(2,829,003
)
|
(2,690,404
)
|
|
Currency
exchange rate loss
|
(151,258
)
|
(214,402
)
|
|
Disgorgement
funds received (note 5)
|
-
|
4,915,236
|
|
Other
income/expense, net
|
13,201
|
78,046
|
|
Net loss before tax
|
(8,495,621
)
|
(5,648,345
)
|
|
Income
Tax
|
-
|
(20,356
)
|
|
Net loss attributable to common shareholders
|
(8,495,621
)
|
(5,668,701
)
|
|
Foreign
currency translation adjustments
|
1,532,751
|
(2,106,111
)
|
|
Comprehensive loss
|
$
(6,962,870
)
|
$
(7,774,812
)
|
|
Net
loss per common share, basic and diluted
|
$
(0.83
)
|
$
(0.56
)
|
|
Weighted
average common shares outstanding, basic and diluted
|
10,285,947
|
10,159,000
|
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2015 AND 2016
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2014
|
10,093,130
|
$
1,009
|
$
295,364,173
|
$
(275,177,181
)
|
$
(271,954
)
|
$
19,916,047
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
Acquisitions
of subsidiaries
|
98,777
|
10
|
1,148,731
|
-
|
-
|
1,148,741
|
|
Services
|
28,753
|
3
|
306,574
|
-
|
-
|
306,577
|
|
Board
of director fees
|
40,628
|
4
|
438,413
|
-
|
-
|
438,417
|
|
|
|
|
|
|
|
|
|
Vesting
of stock options
|
-
|
-
|
258,731
|
-
|
-
|
258,731
|
|
|
|
|
|
|
|
|
|
Cash
paid for repurchase of Series D preferred stock
warrants
|
-
|
-
|
(10,500
)
|
-
|
-
|
(10,500
)
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock warrants for Board of Director fees
|
-
|
-
|
84,912
|
-
|
-
|
84,912
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
(2,106,111
)
|
(2,106,111
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(5,668,701
)
|
-
|
(5,668,701
)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2015
|
10,261,288
|
$
1,026
|
$
297,591,034
|
$
(280,845,882
)
|
$
(2,378,065
)
|
$
14,368,113
|
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2015 AND 2016
(continued)
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Comprehensive
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2015
|
10,261,288
|
$
1,026
|
$
297,591,034
|
$
(280,845,882
)
|
$
(2,378,065
)
|
$
14,368,113
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for:
|
|
|
|
|
|
|
|
Recognition
of milestone achievement
|
32,490
|
3
|
211,528
|
-
|
-
|
211,531
|
|
Services
|
26,674
|
3
|
259,378
|
-
|
-
|
259,381
|
|
Board
of director fees
|
13,064
|
2
|
97,167
|
-
|
-
|
97,169
|
|
|
|
|
|
|
|
|
|
Vesting
of stock options
|
-
|
-
|
300,873
|
-
|
-
|
300,873
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock warrants for Board of Director fees
|
-
|
-
|
416,419
|
-
|
-
|
416,419
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
1,532,751
|
1,532,751
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(8,495,621
)
|
-
|
(8,495,621
)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
10,333,516
|
$
1,034
|
$
298,876,399
|
$
(289,341,503
)
|
$
(845,314
)
|
$
8,690,616
|
TRACK GROUP, INC. AND SUBSIDIARIES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
2016
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
Net
Loss
|
$
(8,495,621
)
|
$
(5,668,701
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
4,719,355
|
4,399,582
|
|
Impairment
of monitoring equipment and parts
|
80,000
|
225,523
|
|
Bad
debt expense
|
1,996,348
|
504,451
|
|
Accretion
of debt discount
|
222,973
|
346,257
|
|
Stock
based compensation
|
1,353,295
|
1,662,883
|
|
Vesting
and re-pricing of stock options
|
-
|
39,929
|
|
Gain/Loss
on disposal of property and equipment
|
39,290
|
(339,858
)
|
|
Gain/Loss
on disposal of monitoring equipment included on cost of
sales
|
90,838
|
112,177
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
(2,718,115
)
|
(2,751,598
)
|
|
Notes
receivable
|
(28,299
)
|
(32,470
)
|
|
Inventories
|
258,519
|
(300,865
)
|
|
Prepaid
expenses and other assets
|
190,951
|
170,094
|
|
Accounts
payable, accrued expenses and other
|
3,198,029
|
717,371
|
|
Net
cash provided by (used in) operating activities
|
907,563
|
(915,225
)
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(105,121
)
|
(265,065
)
|
|
Capitalized
software
|
(2,090,962
)
|
(567,287
)
|
|
Purchase
of monitoring equipment and parts
|
(2,861,100
)
|
(1,201,200
)
|
|
Leasehold
improvements
|
-
|
(422,544
)
|
|
Payment
related to acquisition
|
-
|
(1,782,849
)
|
|
Net
cash used in investing activities
|
(5,057,183
)
|
(4,238,945
)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Principal
payments on related-party notes payable
|
-
|
(2,700,000
)
|
|
Proceeds
from notes payable
|
2,000,000
|
4,077,778
|
|
Principal
payments on notes payable
|
(1,021,832
)
|
(2,353,989
)
|
|
Repurchase
of Series D Convertible preferred stock and options
|
-
|
(10,500
)
|
|
Net
cash provided by (used in) financing activities
|
978,168
|
(986,711
)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
38,328
|
(57,896
)
|
|
|
|
|
|
Net decrease in cash
|
(3,133,124
)
|
(6,198,777
)
|
|
Cash, beginning of year
|
4,903,045
|
11,101,822
|
|
Cash, end of year
|
$
1,769,921
|
$
4,903,045
|
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2016 AND 2015
|
|
2016
|
2015
|
|
Cash
paid for interest
|
$
15,408
|
$
236,671
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Issuance
of warrants for accrued Board of Director fees
|
416,419
|
84,912
|
|
Issuance
of common shares for the acquisition of a subsidiary
|
-
|
531,900
|
|
Issuance
of common shares in recognition of certain milestone
achievements
|
(211,528
)
|
(668,590
)
|
|
Stock
payable recognized in connection with the acquisition of
subsidiaries
|
-
|
1,170,000
|
TRACK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Organization and Nature of Operations
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 PaaS business model. Currently, the
Company deploys offender based management services that combines
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.
(2)
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Track Group, Inc. and its subsidiaries. The Company
acquired one subsidiary during the year ended September 30, 2015
(see Note 3 “
Acquisitions
”
below). All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial
Statements
The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during
the period presented. Actual results could differ from those
estimates. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to,
allowances for doubtful accounts, certain assumptions related to
the recoverability of intangible and long-lived assets, and fair
market values of certain assets and liabilities.
Business Combinations
Business combinations are accounted for under the provisions of ASC
805-10,
Business Combinations
(ASC 805-10), which requires that the
purchase method of accounting be used for all business
combinations. Assets acquired and liabilities assumed at the date
of acquisition at their respective fair values. ASC 805-10 also
specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported apart from
goodwill. Acquisition-related expenses are recognized separately
from the business combinations and are expensed as incurred. If the
business combination provides for contingent consideration, the
contingent consideration is recorded at its probable fair value at
the acquisition date. Any changes in fair value after the
acquisition date are accounted for as measurement-period
adjustments if they pertain to additional information about facts
and circumstances that existed at the acquisition date and that we
obtained during the measurement period. Changes in fair value of
contingent consideration resulting from events after the
acquisition date, such as performance measures, are recognized in
earnings.
Goodwill represents costs in excess of purchase price over the fair
value of the assets of businesses acquired, including other
identifiable intangible assets.
Foreign Currency Translation
The Chilean Peso, New Israeli Shekel and the Canadian Dollar are
used as functional currencies of the operating subsidiaries: (i)
Track Group Chile SpA; (ii) Track Group International Ltd.; and
(iii) Track Group Analytics Limited, respectively. The balance
sheets of all subsidiaries have been converted into United States
Dollars (USD) at the exchange rate prevailing at September 30,
2016. Their respective statements of operations have been
translated into USD using the average exchange rates prevailing
during the periods of each statement. The corresponding translation
adjustments are part of accumulated other comprehensive income and
are shown as part of shareholders’ equity.
Other Intangible Assets
Other intangible assets principally consist of patents, royalty
purchase agreements, developed technology acquired, customer
relationships, trade name, capitalized software development costs,
and capitalized website development costs. The Company
accounts for other intangible assets in accordance with generally
accepted accounting principles and does not amortize intangible
assets with indefinite lives. The Company’s intangible
assets with finite useful lives are amortized over their respective
estimated useful lives, which range from three to ten
years. The Company’s intangible assets are reviewed for
impairment annually or more frequently whenever events or changes
in circumstances indicate possible
impairment.
Fair Value of Financial Statements
The carrying amounts reported in the accompanying consolidated
financial statements for accrued liabilities and debt obligations
approximate fair values because of the immediate or short-term
maturities of these financial instruments. The carrying
amounts of the Company’s debt obligations approximate fair
value as the interest rates approximate market interest
rates.
Concentration of Credit Risk
In the normal course of business, the Company provides credit terms
to its customers and requires no collateral. Accordingly, the
Company performs credit evaluations of its customers' financial
condition.
We had sales to entities, one of which represents more than ten
percent of gross revenues as follows for the years ended September
30, 2016 and 2015.
|
|
2016
|
%
|
2015
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$
7,543,116
|
28
%
|
$
3,930,167
|
19
%
|
|
|
|
|
|
|
|
Customer
B
|
$
2,013,929
|
7
%
|
$
-
|
0
%
|
|
|
|
|
|
|
|
Customer
C
|
$
1,449,500
|
5
%
|
$
1,437,033
|
7
%
|
|
|
|
|
|
|
|
Customer D
|
$
1,178,439
|
4
%
|
$
1,535,203
|
7
%
|
No other customer represented more than 10 percent of the
Company’s total revenues for the fiscal years ended September
30, 2016 or 2015. In October 2016, one of these customers, which
accounted for 5% our 2016 revenue, gave notice of non-renewal
effective on November 19, 2016 (See Note 13).
Concentration of credit risk associated with the Company’s
total and outstanding accounts receivable as of September 30, 2016
and 2015, respectively, are shown in the table below:
|
|
2016
|
%
|
2015
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$
2,476,168
|
36
%
|
$
1,127,044
|
19
%
|
|
|
|
|
|
|
|
Customer
B
|
$
899,428
|
13
%
|
$
-
|
0
%
|
|
|
|
|
|
|
|
Customer
C
|
$
1,151,859
|
17
%
|
$
900,834
|
15
%
|
|
|
|
|
|
|
| Customer D |
$
512,800
|
7
%
|
$
498,944
|
8
%
|
Based upon the expected collectability of its accounts receivable,
the Company maintains an allowance for doubtful
accounts.
Cash Equivalents
Cash equivalents consist of investments with original maturities to
the Company of three months or less. The Company has cash in
bank accounts that, at times, may exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company had $1,336,787 and $3,812,911 of cash
deposits in excess of federally insured limits as of September 30,
2016 and 2015, respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. The allowance is estimated
by management based on certain assumptions and variables, including
the customer’s financial condition, age of the
customer’s receivables and changes in payment
histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously
written off are recorded when cash is received. A trade
receivable is considered to be past due if any portion of the
receivable balance has not been received by the Company within its
normal terms. Interest income is not recorded on trade
receivables that are past due, unless that interest is
collected.
Note Receivable
Notes receivable are carried at the face amount of each note plus
respective accrued interest receivable, less received
payments. The Company does not typically carry notes
receivable in the course of its regular business, but had entered
into an agreement with one of its customers during the fiscal year
ended September 30, 2012. Payments under the note are recorded
as they are received and are immediately offset against any
outstanding accrued interest before they are applied against the
outstanding principal balance on the respective note. The note
requires monthly payments of $15,000 and matured in May
2014. The note is currently in default and accrues interest at
a rate of 17% per annum. As of September 30, 2016, the outstanding
balance of the note was $120,824 and $113,908 of accrued interest.
As of June 30, 2016, the Company no longer accrues interest on the
note.
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
selling price. Inventory is periodically reviewed in order to
identify obsolete or damaged items or impaired values. The
Company impaired its inventory by $80,000 and $225,523 during the
fiscal years ended September 30, 2016 and 2015,
respectively.
Inventory consists of finished goods that are sold to
customers and used for minor repairs of ReliAlert™, Shadow,
and other tracking devices. Completed ReliAlert™ and
other tracking devices are reflected in Monitoring
Equipment. As of September 30, 2016 and 2015, respectively,
inventory consisted of the following:
|
|
2016
|
2015
|
|
Finished
goods inventory
|
$
620,001
|
$
967,414
|
|
Reserve
for damaged or obsolete inventory
|
(98,150
)
|
(225,900
)
|
|
Total
inventory, net of reserves
|
$
521,851
|
$
741,514
|
During the year ended September 30, 2015, the Company began using a
third-party fulfillment service provider. As a result of this
service, the Company’s employees no longer assemble, repair
or process inventory or monitoring equipment being shipped directly
from suppliers. Purchases of monitoring equipment are now
recognized directly, rather than being transferred from inventory
to monitoring equipment after their purchase. Management believes
that this process will reduce maintenance and fulfillment costs
associated with inventory and monitoring equipment in future
periods.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
are determined using the straight-line method over the estimated
useful lives of the assets, typically three to seven
years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the asset or the term of the lease.
Expenditures for maintenance and repairs are expensed while
renewals and improvements are capitalized.
Property and equipment consisted of the following as of
September 30, 2016 and 2015, respectively:
|
|
2016
|
2015
|
|
Equipment,
software and tooling
|
$
1,028,173
|
$
2,823,685
|
|
Automobiles
|
87,313
|
33,466
|
|
Leasehold
improvements
|
1,279,500
|
1,351,017
|
|
Furniture
and fixtures
|
252,864
|
311,628
|
|
Total
property and equipment before accumulated depreciation
|
2,647,850
|
4,519,796
|
|
Accumulated
depreciation
|
(1,421,389
)
|
(2,822,166
)
|
|
Property
and equipment, net of accumulated depreciation
|
$
1,226,461
|
$
1,697,630
|
Property and equipment to be disposed of is reported at the lower
of the carrying amount or fair value, less the estimated costs to
sell and any gains or losses are included in the results of
operations.
In
2016, we evaluated property and equipment that has become fully
depreciated and wrote-off $1,842,321 of fully depreciated assets
that were no longer in service.
During the fiscal years ended September 30, 2016
and 2015, the Company recognized no losses on the disposal of
property and equipment.
Depreciation expense recognized for property and equipment for the
fiscal years ended September 30, 2016 and 2015 was $609,036 and
$693,635, respectively.
Monitoring Equipment
The Company began leasing monitoring equipment to agencies for
offender tracking in April 2006 under operating lease
arrangements. The monitoring equipment is depreciated using
the straight-line method over an estimated useful life of three
years. Monitoring equipment as of September 30, 2016 and 2015 is as
follows:
|
|
2016
|
2015
|
|
Monitoring
equipment
|
$
7,796,191
|
$
5,010,075
|
|
Less:
accumulated amortization
|
(3,438,074
)
|
(2,225,480
)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$
4,358,117
|
$
2,784,595
|
Amortization expense for the fiscal years ended September 30, 2016
and 2015 was $1,559,437 and $1,017,409, respectively. These
expenses were classified as a cost of revenues.
Monitoring equipment to be disposed of is reported at the lower of
the carrying amount or fair value, less the estimated costs to
sell. During the fiscal years ended September 30, 2016 and
2015, the Company disposed of leased monitoring equipment and parts
of $90,838 and $112,177, respectively.
Impairment of Long-Lived Assets and Goodwill
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.
Revenue Recognition
The Company’s revenue has historically been from two sources:
(i) monitoring services, and (ii) product sales.
Monitoring Services
Monitoring services include two components: (a) lease contracts in
which the Company provides monitoring services and leases devices
to distributors or end users and the Company retains ownership of
the leased device; and (b) monitoring services purchased by
distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring
services.
The Company typically leases its devices under multi-year contracts
with customers that opt to use the Company’s monitoring
services. However, some of these contracts may be cancelled by
either party at any time with 30 days’ notice. Under the
Company’s standard leasing contract, the leased device
becomes billable on the date of activation or 7 to 21 days from the
date the device is assigned to the lessee, and remains billable
until the device is returned to the Company. The Company
recognizes revenue on leased devices at the end of each month that
monitoring services have been provided. In those circumstances
in which the Company receives payment in advance, the Company
records these payments as deferred revenue.
Product Sales
The Company may sell its monitoring devices in certain situations
to its customers. In addition, the Company may sell equipment in
connection with the building out and setting up a monitoring center
on behalf of its customers. The Company recognizes product sales
revenue when persuasive evidence of an arrangement with the
customer exists, title passes to the customer and the customer
cannot return the devices or equipment, prices are fixed or
determinable (including sales not being made outside the normal
payment terms) and collection is reasonably assured. When
purchasing products (such as TrackerPAL® and ReliAlert™
devices) from the Company, customers may, but are not required to,
enter into monitoring service contracts with the Company. The
Company recognizes revenue on monitoring services for customers
that have previously purchased devices at the end of each month
that monitoring services have been provided.
The Company sells and installs standalone tracking systems that do
not require ongoing monitoring by the Company. The Company has
experience in component installation costs and direct labor hours
related to this type of sale and can typically reasonably estimate
costs, therefore the Company recognizes revenue over the period in
which the installation services are performed using the
percentage-of-completion method of accounting for material
installations. The Company typically uses labor hours or costs
incurred to date as a percentage of the total estimated labor hours
or costs to fulfill the contract as the most reliable and
meaningful measure that is available for determining a
project’s progress toward completion. The Company
evaluates its estimated labor hours and costs and determines the
estimated gross profit or loss on each installation for each
reporting period. If it is determined that total cost
estimates are likely to exceed revenues, the Company accrues the
estimated losses immediately. All amounts billed have been
earned.
Multiple Element Arrangements
The majority of the Company’s revenue transactions do not
have multiple elements. However, on occasion, the Company enters
into revenue transactions that have multiple elements. These may
include different combinations of products or monitoring services
that are included in a single billable rate. These products or
monitoring services are delivered over time as the customer
utilizes the Company's services. For revenue arrangements that have
multiple elements, the Company considers whether the delivered
devices have standalone value to the customer, there is objective
and reliable evidence of the fair value of the undelivered
monitoring services, which is generally determined by surveying the
price of competitors’ comparable monitoring services, and the
customer does not have a general right of return. Based on these
criteria, the Company recognizes revenue from the sale of devices
separately from the monitoring services provided to the customer as
the products or monitoring services are delivered.
Other Matters
The Company considers an arrangement with payment terms longer than
the Company’s normal terms not to be fixed or determinable,
and revenue is recognized when the fee becomes due. Normal
payment terms for the sale of monitoring services and products are
due upon receipt to 30 days. The Company sells its devices and
services directly to end users and to
distributors. Distributors do not have general rights of
return. Also, distributors have no price protection or stock
protection rights with respect to devices sold to them by the
Company. Generally, title and risk of loss pass to the buyer
upon delivery of the devices.
The Company estimates its product returns based on historical
experience and maintains an allowance for estimated returns, which
is recorded as a reduction to accounts receivable and
revenue.
Shipping and handling fees charged to customers are included as
part of net revenues. The related freight costs and supplies
directly associated with shipping products to customers are
included as a component of cost of revenues.
Geographical Information
The Company recognized revenues from international sources from its
products and monitoring services. Revenues are attributed to
the geographic areas based on the location of the customers
purchasing and leasing the products. The revenues recognized
by geographic area for the fiscal years ended September 30, 2016
and 2015, are as follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
Country
|
2016
|
2015
|
|
United
States of America
|
$
17,663,567
|
$
13,700,218
|
|
Latin
American countries
|
7,717,399
|
3,930,167
|
|
Caribbean
countries and commonwealths
|
1,546,359
|
2,972,235
|
|
Other
foreign countries
|
266,482
|
190,095
|
|
Total
|
$
27,193,807
|
$
20,792,715
|
The long-lived assets, net of accumulated depreciation and
amortization, used in the generation of revenues by geographic area
as of September 30, 2016 and 2015, were as follows:
|
|
Net
Property and Equipment
|
Net
Monitoring Equipment
|
||
|
|
2016
|
2015
|
2016
|
2015
|
|
United
States of America
|
$
284,768
|
$
501,543
|
$
2,912,328
|
$
1,747,174
|
|
Latin
American countries
|
925,039
|
1,087,629
|
1,445,789
|
1,032,804
|
|
Other
foreign countries
|
16,654
|
108,458
|
-
|
4,617
|
|
Total
|
$
1,226,461
|
$
1,697,630
|
$
4,358,117
|
$
2,784,595
|
Research and Development Costs
During the fiscal year ended September 30, 2016, we incurred
research and development expense of $2,627,228 compared to those
costs recognized during fiscal year 2015 totaling
$1,562,566. The $1,064,662 increase in research and
development cost reflect
increased research and
development costs to streamline our device hardware and enhance
both the firmware and software of our devices. The
Company is currently significantly
enhancing its software platform.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expense for the fiscal years ended
September 30, 2016 and 2015 was $19,440 and $103,506,
respectively.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards
expected to vest on a straight-line basis over the requisite
service period of the award based on their grant date fair
value. The Company estimates the fair value of stock options
using a Black-Scholes option pricing model which requires
management to make estimates for certain assumptions regarding
risk-free interest rate, expected life of options, expected
volatility of stock and expected dividend yield of
stock.
Income Taxes
The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary.
The tax effects from uncertain tax positions can be recognized in
the financial statements, provided the position is more likely than
not to be sustained on audit, based on the technical merits of the
position. The Company recognizes the financial statement benefit of
a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following
an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the
largest benefit that has a greater than 50 percent likelihood of
being realized, upon ultimate settlement with the relevant tax
authority. The Company applied the foregoing accounting standard to
all of its tax positions for which the statute of limitations
remained open as of the date of the accompanying consolidated
financial statements.
The Company’s policy is to recognize interest and penalties
related to income tax issues as components of other noninterest
expense. As of September 30, 2016 and September 30, 2015, the
Company did not record a liability for uncertain tax
positions.
Net Loss Per Common Share
Basic net loss per common share (“
Basic EPS
”) is computed by dividing net loss
available to common stockholders 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 stockholders by the sum of the
weighted-average number of common shares outstanding and the
weighted-average dilutive common share equivalents
outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an
anti-dilutive effect.
Common share equivalents consist of shares issuable upon the
exercise of options and warrants to purchase shares of the
Company's Common Stock, par value $0.0001 per share
(“
Common
Stock
”), and shares
issuable upon conversion of preferred stock. As of September
30, 2016 and 2015, there were 504,991 and 381,656 outstanding
common share equivalents, respectively, that were not included in
the computation of diluted net loss per common share as their
effect would be anti-dilutive. The Common Stock equivalents
outstanding as of September 30, 2016 and 2015 consisted of the
following:
|
|
2016
|
2015
|
|
Exercise
of outstanding Common Stock options and warrants
|
504,991
|
381,656
|
|
Exercise
and conversion of outstanding Series D preferred stock
warrants
|
-
|
-
|
|
Total
Common Stock equivalents
|
504,991
|
381,656
|
Recent Accounting Pronouncements
In
August 2016, the Financial Accounting Standards Board (
"FASB"
) issued a new standard to
conform the presentation in the statement of cash flows for certain
transactions, including cash distributions from equity method
investments, among others. The adoption of the new standard is
required in 2019.
Management is
currently evaluating the impact that this amendment will have on
its consolidated financial statements.
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 November 2015, the FASB issued Accounting Standards Update No.
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes (“
ASU 2015-17
“). Current GAAP requires an entity to
separate deferred income tax liabilities and assets into current
and noncurrent amounts in a classified statement of financial
position. To simplify the presentation of deferred income taxes,
ASU 2015-17 requires that deferred tax liabilities and assets be
classified as noncurrent in a classified statement of financial
position. The current requirement that deferred tax liabilities and
assets of a tax-paying component of an entity be offset and
presented as a single amount is not affected by the amendments in
this Update. The amendments in this update are effective for
financial statements issued for annual periods beginning after
March 15, 2016, and interim periods within those annual periods.
Earlier application is permitted for all entities as of the
beginning of an interim or annual reporting period. The
adoption of ASU 2015-17 is not expected to have a material impact
on the Company’s consolidated financial
statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the
Accounting for Measurement-Period Adjustments
(“
ASU
2015-16
“). ASU 2015-16
requires an acquirer to recognize adjustments to provisional
amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined.
ASU 2015-16 will be effective for the Company’s fiscal year
beginning March 1, 2017 and subsequent interim periods. The
adoption of ASU 2015-16 is not expected to have a material effect
on the Company’s consolidated financial
statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the
Measurement of Inventory, (“
ASU 2015-11
“). ASU 2015-11 requires that an entity
measure inventory at the lower of cost and net realizable value,
unless the entity is using the LIFO or retail inventory method. ASU
2015-11 will be effective for the Company’s fiscal year
beginning October 1, 2017 and subsequent interim periods, with
early adoption permitted. Management is currently evaluating the
impact of the pending adoption of ASU 2015-11 on the
Company’s consolidated financial
statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the
Presentation of Debt Issuance Costs, (“
ASU 2015-03
“). ASU 2015-03 requires that debt issuance
costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of
that debt liability, consistent with debt discounts. ASU 2015-03
will be effective for the fiscal year beginning January 1, 2016 and
subsequent interim periods, with earlier adoption permitted. ASU
2015-03 will be effective for the Company’s fiscal year
beginning October 1, 2016 and subsequent interim periods.
Management is currently evaluating the impact of the pending
adoption of ASU 2015-03 on the Company’s consolidated
financial statements.
(3)
Acquisitions
Track Group Analytics Limited
On November 26, 2014 (the “
Closing
Date
”), the Company
entered into a Share Purchase Agreement (the
“
TGA
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$4.6 million (the
“
TGA
Acquisition
”), of which
CAD$2.0 million 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 will be paid to the former TGA
shareholders in shares of Common Stock of which one-half of the
shares will be issued on the one-year anniversary of the Closing
Date and the balance on the two-year anniversary of the Closing
Date; and (ii) the CAD$2.0 million will be paid to the former TGA
shareholders in shares of Common Stock over a two-year period
beginning on the Closing Date, upon the achievement of certain
milestones set forth in the TGA Purchase Agreement. As of September
30, 2015, the Company had issued 38,499 shares of Common Stock in
connection to this acquisition and 63,777 shares of Common Stock to
the TGA shareholders upon achieving certain performance milestones.
For the twelve months ended September 30, 2016, the Company issued
32,490 shares of Common Stock to the TGA shareholders upon
achieving performance milestones.
During the third quarter of fiscal 2015, the Company received the
final valuation report for the TGA Acquisition. Our Consolidated
Balance Sheet at
June 30,
2015
was retrospectively
adjusted to include the effect of the measurement period
adjustments as required under ASC 805, Business Combinations
(“
ASC
805
”). The revisions
to the purchase price allocation for the acquisition resulted from
the Company’s finalization of valuation of long-term and
intangible assets with consideration of the valuation report
obtained from a third party appraisal firm. The aforementioned
adjustments resulted in a retrospective adjustment to goodwill by
$2,384,000 and other intangibles by $1,817,000. The $1.653 million
in goodwill recognized as a result of this acquisition is not
deductible for income tax purposes. The Company included in its
financial statements revenues generated by Track Group Analytics of
$178,796 for the year ended September 30, 2016.
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.
The Company has retrospectively adjusted the previously reported
fair values to reflect these amounts as
follows
(in
thousands)
:
|
|
As Initially Reported
|
Measurement Period Adjustments
|
As Retrospectively Adjusted
|
|
Assets
|
|
|
|
|
Current
assets
|
$
477
|
$
(85
)
|
$
392
|
|
Property
and equipment
|
5
|
2
|
7
|
|
Intangible
assets:
|
|
|
|
|
Patents
/ developed technology
|
-
|
975
|
975
|
|
Customer
contracts / relationships
|
-
|
807
|
807
|
|
Trade
names / trademarks
|
-
|
35
|
35
|
|
Goodwill
|
4,037
|
(2,384
)
|
1,653
|
|
Total
assets acquired
|
4,519
|
(650
)
|
3,869
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
liabilities
|
65
|
(3
)
|
62
|
|
Loans
payable
|
381
|
(7
)
|
374
|
|
Total
liabilities assumed
|
446
|
(10
)
|
436
|
|
|
|
|
|
|
Total
purchase consideration
|
$
4,073
|
$
(640
)
|
$
3,433
|
Summary of Unaudited Pro-Forma Information
The unaudited pro-forma information below for the year ended
September 30, 2015 gives effect to the acquisition described herein
as, if the acquisition had occurred on October 1, 2014. The
pro-forma financial information is not necessarily indicative of
the results of operations if the acquisition had been effective as
of this date.
|
|
2015
|
|
|
|
|
Revenues
|
$
21,137,315
|
|
Loss
from operations
|
(8,380,490
)
|
|
Net
loss attributable to the Company
|
(5,421,800
)
|
|
Basic
income per share
|
(0.53
)
|
|
Diluted
income per share
|
(0.53
)
|
|
Net
loss attributable to common shareholders
|
(5,421,800
)
|
|
Basic
income per share
|
(0.53
)
|
|
Diluted
income per share
|
$
(0.53
)
|
(4)
Accrued Expenses
Accrued expenses consisted of the following as of September 30,
2016 and 2015:
|
|
2016
|
2015
|
|
Accrued
royalties
|
$
16,977
|
$
7,077
|
|
Accrued
payroll, taxes and employee benefits
|
1,424,812
|
1,154,168
|
|
Accrued
consulting
|
123,114
|
367,906
|
|
Accrued
taxes - foreign and domestic
|
311,614
|
93,407
|
|
Accrued
settlement costs
|
35,000
|
30,000
|
|
Accrued
board of directors fees
|
96,000
|
248,830
|
|
Accrued
other expenses
|
93,553
|
69,478
|
|
Accrued
legal costs
|
14,548
|
50,000
|
|
Accrued
cellular costs
|
84
|
20,000
|
|
Accrued
outside services
|
13,768
|
32,067
|
|
Accrued
warranty and manufacturing costs
|
103,441
|
39,050
|
|
Accrued
interest
|
1,743,281
|
593,420
|
|
Total
accrued expenses
|
$
3,976,192
|
$
2,705,403
|
(5)
Certain Relationships and Related Transactions
The Company entered into certain transactions with related parties
during the fiscal years ended September 30, 2016 and 2015. These
transactions consist mainly of financing transactions and service
agreements. Transactions with related parties are reviewed and
approved by the independent and disinterested members of the Board
of Directors.
Disgorgement Funds Received
During January 2015, the Company received notice from a shareholder
stating that it was returning realized profits from trades of the
Company’s Common Stock during the year ended September 30,
2014. The shareholder also indicated that during this time, the
shareholder was subject to Section 16 of the Exchange Act because
they owned more than 10% of the shares of Company Common Stock. As
such, the shareholder complied with Section 16(b) of the Exchange
Act by returning the realized profits to the Company in the amount
of $4.7 million. The Company received these funds during January
2015.
During March 2015, the Company received notice from a shareholder
stating that it was returning realized profits from trading of the
Company’s Common Stock during fiscal year 2014. During 2014,
the shareholder was subject to Section 16 of the Exchange Act
because the shareholder owned more than 10% of the shares of the
Company's Common Stock. The shareholder, in compliance with
Section 16(b) of the Exchange Act, returned those profits to the
Company. The shareholder is also a creditor of the Company. On
April 21, 2015 the Company and the shareholder entered into an
agreement whereby $215,236, the realized profit recognized by the
shareholder, would be deducted from accumulated interest on
promissory notes between the shareholder and the Company. During
the three months ended June 30, 2015, the Company deducted the
amount from accumulated interest due to the shareholder.
See the disclosure under “
Revolving
Loan Agreement
”
for
more information.
Related-Party Loan Agreement
On September 25, 2015, the Company entered into a loan agreement
with one of the Company’s related parties, Sapinda Asia 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, 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. No funds had been requested on this line of
credit as of September 30, 2016.
Stock Payable – Related Party
In connection with the acquisitions during 2014 and 2015 described
under Note 3 above, the Company recognized a liability for stock
payable to the Sellers of the entities acquired. In conjunction
with the respective purchase agreements, shares of the
Company’s stock are payable based on the achievement of
certain milestones. Changes in the stock payable liability are
shown below:
|
|
Sept. 30,
2016
|
Sept. 30,
2015
|
|
Beginning
balance
|
$
3,501,410
|
$
3,000,000
|
|
Stock
payable resulting from the acquisition of Track Group
Analytics
|
-
|
1,170,000
|
|
Payment
of shares for achieving performance milestones
|
(211,531
)
|
(668,590
)
|
|
Ending
balance
|
$
3,289,879
|
$
3,501,410
|
Additional Related-Party Transactions and Summary of All
Related-Party Obligations
|
|
Sept. 30,
2016
|
Sept. 30,
2015
|
|
|
|
|
|
Related
party loan with an interest rate of 3% and 8% per annum for undrawn
and borrowed funds, respectively. Principal and interest due
September 30, 2017.
|
$
3,399,644
|
-
|
|
Total
related-party debt obligations
|
$
3,399,644
|
$
-
|
Each of the foregoing related-party transactions was reviewed and
approved by disinterested and independent members of the Company's
Board of Directors.
Debt obligations as of September 30, 2016 and 2015 consisted of the
following:
|
|
2016
|
2015
|
|
|
|
|
|
Unsecured
facility agreement with an entity whereby, as of June 30, 2015, the
Company may borrow up to 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 $1.2M 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 September 30, 2016, the remaining debt
discount was $408,784.
|
$
29,991,216
|
$
29,768,243
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5 million at 8% per
annum on borrowed funds maturing on September 30,
2017.
|
3,399,644
|
-
|
|
|
|
|
|
The
Company entered into an agreement whereby the Company was granted a
non-exclusive, irrevocable, perpetual and royalty-free license to
certain patents with an entity. The Company agreed to pay
$4,500,000 over two years or $187,500 per month through February
2016.
|
-
|
937,500
|
|
|
|
|
|
Non-interest
bearing notes payable to a governmental agency assumed in
conjunction with the G2 acquisition.
|
182,002
|
254,917
|
|
|
|
|
|
Capital
lease with effective interest rate of 12%. Lease matures
August 15, 2019.
|
18,673
|
24,754
|
|
|
|
|
|
Total
debt obligations
|
33,591,535
|
30,985,414
|
|
Less
current portion
|
(3,245,732
)
|
(796,225
)
|
|
Long-term
debt, net of current portion
|
$
30,345,803
|
$
30,189,189
|
The following table summarizes the Company’s future
maturities of debt and related party obligations as of September
30, 2016:
|
Fiscal Year
|
Total
|
|
2017
|
$
3,245,732
|
|
2018
|
30,269,844
|
|
2019
|
42,250
|
|
2020
|
32,797
|
|
2021
& thereafter
|
912
|
|
Debt
discount
|
(408,784
)
|
|
Total
|
$
33,182,751
|
The following table summarizes the Company’s capital lease
obligation included in the schedules of debt and debt obligations
above as of September 30, 2016:
|
Fiscal Year
|
Total
|
|
2017
|
$
4,440
|
|
2018
|
4,440
|
|
2019
|
4,440
|
|
2020
|
4,440
|
|
Thereafter
|
913
|
|
Total
minimum lease payments
|
18,673
|
|
Less:
amount representing interest
|
(3,705
)
|
|
Present
value of net minimum lease payments
|
14,968
|
|
Less:
current portion
|
(4,440
)
|
|
Obligation
under capital leases - long-term
|
$
10,528
|
As of September 30, 2016 and 2015, the Company had total capital
lease obligations of $14,968 and $18,363, the current portion being
$4,440 and $4,440, respectively. At September 30, 2016 and 2015,
accumulated amortization of assets under capital leases was $79,300
and $75,702, respectively.
(7)
Preferred Stock
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.
Series D Convertible Preferred Stock
The Company has designated 85,000 shares of its stock as Series D
preferred stock (“
Series D
Preferred
”). During
the year ended September 30, 2016 and 2015, the Company did not
issue any new shares of Series D Preferred. At September 30,
2016, there were no shares of Series D Preferred issued and
outstanding, as the remaining shares of Series D Preferred were
repurchased during fiscal 2014, when the Company exchanged the
remaining 207 shares of Series D Preferred issued and outstanding
for 16,907 shares of Common Stock, as discussed below.
Additionally, the Company repurchased 42,000 warrants to purchase
shares of Series D Preferred for $10,500 during the year ended
September 30, 2015. As a result of these transactions, there were
no shares of Series D Preferred or options to purchase Series D
Preferred shares outstanding at September 30,
2015.
Dividends.
The
Series D Preferred is entitled to dividends at the rate equal to 8%
per annum calculated on the purchase amount actually paid for the
shares or amount of debt converted. The dividend is payable in
cash or shares of Common Stock at the sole discretion of the Board
of Directors. If a dividend is paid in shares of Common Stock of
the Company, the number of shares to be issued is based on the
average per share market price of the Common Stock for the 14-day
period immediately preceding the applicable accrual date (i.e.,
March 31, June 30, September 30, or December 31, as the case may
be). Dividends are payable quarterly, no later than 30 days
following the end of the accrual period.
During the year ended September 30, 2015, the Company issued 1,249
shares of Common Stock to pay $24,012 of accrued dividends on the
Series D Preferred earned during the nine months ended 2014. No
similar transactions occurred during the year ended September 30,
2016.
Convertibility.
Each
share of Series D preferred stock may be converted into thirty (30)
shares of Common Stock, commencing 90 days after the date of issue.
During the year ended September 30, 2014, 207 shares of Series D
Preferred were converted into 16,907 shares of Common Stock. No
similar transactions occurred during the year ended September 30,
2016. As of September 30, 2016, there were no shares of Series D
Preferred outstanding.
Redemption.
On
January 16, 2014, the Company sent out notices to Series D
Preferred shareholders regarding the Company’s election under
the Amended and Restated Designation of the Rights and Preferences
to redeem 261 shares of Series D preferred stock at 120% of the
aggregate original investment of $260,007 through the payment of
cash totaling $312,008. The redemption date was February 13,
2014.
Series D Preferred Stock Warrants.
During the year ended September 30, 2015, the
Company purchased 42,000 warrants to purchase Series D Preferred
shares for $10,500 in cash. As of September 30, 2016 and 2015, zero
warrants to purchase Series D preferred stock were issued and
outstanding. During the fiscal years ended September 30, 2016 and
2015, no shares of Series D Preferred or warrants were issued or
exercised.
(8)
Common Stock
Common Stock Issuances
During the fiscal year ended September 30, 2016, the Company issued
72,228 shares of Common Stock. Of these shares, 26,674 shares
were issued for services rendered to the Company valued at
$259,380; 32,490 shares valued at $211,531 were issued in
connection with the acquisition of a subsidiary and for that
subsidiary meeting performance milestones; and 13,064 shares were
issued to pay Board of Director fees of $97,168. See Note 9 for
additional Common Stock issued under the 2012 Equity Compensation
Plan.
During the fiscal year ended September 30, 2015, the Company issued
168,158 shares of Common Stock. Of these shares, 28,753 shares
were issued for services rendered to the Company valued at
$306,577; 97,777 shares valued at $1,148,741 were issued in
connection with the acquisition of a subsidiary and for that
subsidiary meeting performance milestones; and 40,628 shares were
issued to pay Board of Director fees of $438,417. See Note 9 for
additional Common Stock issued under the 2012 Equity Compensation
Plan.
(9)
Stock Options and Warrants
Stock Incentive Plan
At the Annual Meeting of Shareholders
on December 21, 2011, the shareholders approved the 2012 Equity
Compensation Plan (the “
2012 Plan
”), and at the Annual Meeting of
Shareholders on May 19, 2015, the Company’s shareholders
approved an amendment increasing the number of shares of Common
Stock available for issuance under the 2012 Plan. The 2012
Plan provides for the grant of incentive stock options and
nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units, other stock-based awards and performance-based awards to
employees and certain non-employees who have important
relationships with the Company. A total of 803,262 shares are
authorized for issuance pursuant to awards granted under the 2012
Plan. During the fiscal years ended September 30, 2016 and
2015, there were options to purchase 146,362 and 137,166 shares of
Common Stock were issued under this 2012 Plan. During the year
ended September 30, 2016, we issued 43,278 shares of Common Stock
under this plan. Of the 43,278 shares of Common Stock issued during
2016, 23,674 shares valued at $238,080 were issued in accordance
with an employee long-term incentive plan. Over the course of the
next year, the Company will recognize approximately $164,400 in
compensation expense associated with unvested stock awards under
this employee long-term incentive plan. All shares issued under
this employee long-term incentive plan are issued from the 2012
Plan. As of September 30, 2016, 302,507 shares of Common Stock were
available for future grants under the 2012
Plan.
All Options
and Warrants
During the fiscal year ended September 30, 2016, the Company
granted 146,362 warrants to members of its Board of Directors,
valued at $402,593. As of September 30, 2016, $68,217 of
compensation expense associated with unvested stock options and
warrants issued previously to members of the Board of Directors
will be recognized over the next year.
During the fiscal year ended September 30, 2015, the Company
granted 137,166 warrants to members of its Board of Directors,
valued at $389,380. As of September 30, 2015, $266,396 of
compensation expense associated with unvested stock options and
warrants issued previously to members of the Board of Directors
will be recognized over the next year.
The following are the weighted-average assumptions used for options
granted during the fiscal years ended September 30, 2016 and 2015
using the Black-Scholes model, respectively:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
2015
|
|
Expected
stock price volatility
|
92
%
|
51
%
|
|
Risk-free
interest rate
|
0.74
%
|
0.30
%
|
|
Expected
life of options
|
2
Years
|
2
Years
|
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
The expected life of stock options and warrants represents the
period of time that the stock options or warrants are expected to
be outstanding based on the simplified method allowed under
GAAP. The expected volatility is based on the historical price
volatility of the Company’s Common Stock. In fiscal year
2014, the Company changed from a daily to weekly volatility. The
risk-free interest rate represents the U.S. Treasury bill rate for
the expected life of the related stock options and warrants. The
dividend yield represents the Company’s anticipated cash
dividends over the expected life of the stock option and
warrants.
A summary of the compensation-based options and warrants activity
for the fiscal years ended September 30, 2016 and 2015 is presented
below:
|
|
Shares
Under Option
|
Weighted
Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of September 30, 2014
|
305,251
|
$
15.71
|
1.05
years
|
$
487,402
|
|
Granted
|
137,166
|
$
11.17
|
|
|
|
Expired
|
(60,761
)
|
$
24.75
|
|
|
|
Exercised
|
-
|
$
-
|
|
|
|
Outstanding
as of September 30, 2015
|
381,656
|
$
13.28
|
1.38
years
|
$
-
|
|
Granted
|
146,362
|
$
6.15
|
|
|
|
Expired
|
(23,027
)
|
$
10.55
|
|
|
|
Exercised
|
-
|
$
-
|
|
|
|
Outstanding
as of September 30, 2016
|
504,991
|
$
10.78
|
1.15
years
|
$
182,095
|
|
Exercisable
as of September 30, 2016
|
504,991
|
$
10.78
|
1.15 years
|
$
182,095
|
The fiscal year end intrinsic values are based on a September 30,
2016 closing price of $7.20 per share.
(10) 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 fiscal years ended September 30, 2016 and 2015, the Company
incurred net losses for income tax purposes of $8,495,621 and
$5,648,369, 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.
At September 30, 2016, the Company had net carryforwards available
to offset future taxable income of approximately $152,000,000,
which will begin to expire in 2018. The utilization of the net
loss carryforwards is dependent upon the tax laws in effect at the
time the net operating loss carryforwards can be utilized. The
Internal Revenue Code contains provisions that likely could reduce
or limit the availability and utilization of these net operating
loss carryforwards. An ownership change generally affects the rate
at which NOLs and potentially other deferred tax assets are
permitted to offset future taxable income. Since the Company
maintains a full valuation allowance on all of its U.S. and state
deferred tax assets, the impact of prior year ownership
changes on the future realizability of its U.S. and state deferred
tax assets did not result in an impact to our provision for income
taxes for the year ended September 30, 2016, or on the
Company’s net deferred tax asset as of September 30,
2016.
The deferred income tax assets (liabilities) were comprised of the
following for the periods indicated:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
2015
|
|
Net
loss carryforwards
|
$
56,716,000
|
$
52,797,000
|
|
Accruals
and reserves
|
1,013,000
|
410,000
|
|
Contributions
|
24,000
|
23,000
|
|
Depreciation
|
(470,000
)
|
(326,000
)
|
|
Stock-based
compensation
|
577,000
|
714,000
|
|
Valuation
allowance
|
(57,860,000
)
|
(53,618,000
)
|
|
Total
|
$
-
|
$
-
|
Reconciliations between the benefit for income taxes at the federal
statutory income tax rate and the Company's benefit for income
taxes for the years ended September 30, 2016 and 2015 are as
follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
2015
|
|
Federal
income tax benefit at statutory rate
|
$
2,889,000
|
$
1,920,000
|
|
State
income tax benefit, net of federal income tax
effect
|
280,000
|
186,000
|
|
Change
in estimated tax rate and gain (loss) on non-deductible
expenses
|
1,073,000
|
(5,771,000
)
|
|
Change
in valuation allowance
|
(4,242,000
)
|
3,665,000
|
|
Benefit
for income taxes
|
$
-
|
$
-
|
During the fiscal year ended September 30, 2014, the Company began
recognizing revenues from international sources from its products
and monitoring services. During the fiscal year ended
September 30, 2014, the Company began recognizing a liability for
value-added taxes, which will be due upon collection. At September
30, 2016, the Company had a net receivable related to payments on
VAT tax of $137,210.
The Company’s open tax years for its federal and state income
tax returns are for the tax years ended September 30, 2012 through
September 30, 2016.
(11) 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.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert,
Inc.
On March 26,
2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and
for Orange County, Florida alleging malicious prosecution, abuse of
process and negligent infliction of emotional distress against the
Company and its subsidiary. The case resulted from actions of
a former agent of the Company’s subsidiary. The Company
continues to defend itself in this matter. A trial date has been
set for January 3, 2017. The Company has not accrued any potential
loss as the probability of incurring a material loss is deemed
remote by management, after consultation with outside legal
counsel.
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. We believe we will be successful in this action to
recover the unpaid balance and interest under the loan agreement
and promissory note.
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.
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 provide the basis for counterclaims against Mr.
Merrill. We intend to defend the case vigorously and believe
the probability of incurring a material loss to be
remote.
Operating Lease Obligations
The following table summarizes the Company’s contractual
obligations as of September 30, 2016:
|
Fiscal Year
|
Total
|
|
|
|
|
2017
|
$
389,881
|
|
2018
|
126,738
|
|
2019
|
100,960
|
|
Thereafter
|
95,907
|
|
Total
|
$
713,486
|
The total operating lease obligations of $713,486, related to
facilities operating leases. During the years ended September 30,
2016 and 2015, the Company paid $543,068 and $589,809, in lease
payment obligations, respectively.
Intellectual Property Settlement
In January 2010, the Company entered into an intellectual property
settlement agreement with an entity whereby the Company agreed to
begin paying the greater of a 6% royalty or $0.35 per activated
device of monitoring revenues, subject to certain adjustments. The
Company and other party disagreed with the methodology used to
calculate such royalty; litigation was commenced by the Company in
December 2013 to resolve the matter. During the year ended
September 30, 2013, the Company negotiated a settlement of this
litigation.
Under the terms of the
settlement, both parties restructured their relationship and
provided reciprocal licenses for all patents listed in the
settlement agreement effective January 29, 2010. In addition,
each party provided the other with a reciprocal license for future
patents awarded the respective party. The Company also agreed to
pay the entity a total of $4,500,000 in 24 equal monthly
installments of $187,500 in exchange for the granting of a
non-exclusive, irrevocable, perpetual and royalty-free license to
certain patents held by the entity.
Indemnification Agreements
The Company’s Bylaws require the Company to indemnify any
individual who is made a party to a proceeding because the
individual is or was a director or officer of the Company against
any liability or expense incurred in connection with such
proceeding to the extent allowed under the Utah Revised Business
Corporation Act (the “
UBCA
”), if the Company has properly authorized
indemnification under Section 16.10a-906 of the UBCA. Section
16-10a-906(2) of the UBCA requires that the Company determine,
before granting indemnification, that: (i) the individual’s
conduct was in good faith; (ii) the individual reasonably believed
that the individual’s conduct was in, or not opposed to, the
Company’s best interests; and (iii) in the case of any
criminal proceeding, the individual had no reasonable cause to
believe the individual’s conduct was unlawful. The
foregoing description is necessarily general and does not describe
all details regarding the indemnification of officers and directors
of the Company.
(12) Intangible
Assets
The following table summarizes the activity of intangible assets
for the years ended September 30, 2016 and 2015,
respectively:
|
2016
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
Book Value
|
|
Patent
& royalty agreements
|
7.99
|
$
21,170,565
|
$
(5,078,709
)
|
$
16,091,856
|
|
Developed
technology
|
7.50
|
9,651,074
|
(2,187,825
)
|
7,463,249
|
|
Customer
relationships
|
8.06
|
2,555,086
|
(708,494
)
|
1,846,592
|
|
Trade
name
|
9.56
|
319,383
|
(213,638
)
|
105,745
|
|
Website
|
3.00
|
78,201
|
(44,993
)
|
33,208
|
|
Total
|
|
$
33,774,309
|
$
(8,233,659
)
|
$
25,540,650
|
|
|
|
|
|
|
|
2015
|
Weighted Average Useful Life (yrs)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Book Value
|
|
Patent
& royalty agreements
|
7.99
|
$
21,170,565
|
$
(3,742,188
)
|
$
17,428,377
|
|
Developed
technology
|
8.11
|
7,442,186
|
(1,291,876
)
|
6,150,310
|
|
Customer
relationships
|
8.05
|
2,538,496
|
(387,385
)
|
2,151,111
|
|
Trade
name
|
9.55
|
310,762
|
(190,064
)
|
120,698
|
|
Website
|
3.00
|
50,386
|
(16,795
)
|
33,591
|
|
Total
|
|
$
31,512,395
|
$
(5,628,308
)
|
$
25,884,087
|
The intangible assets summarized above were purchased on various
dates from January 2010 through December 31, 2014. The assets have
useful lives ranging from three to ten years. Amortization expense
for the years ended September 30, 2016 and 2015 was $2,550,882 and
$2,688,537, respectively.
The following table summarizes the future maturities of
amortization of intangible assets as of September 30,
2016:
|
Fiscal
Year
|
Amortization
|
Patent
|
STOP
Royalty
|
|
2017
|
$
3,031,881
|
$
5,556
|
$
450,000
|
|
2018
|
3,008,694
|
5,556
|
450,000
|
|
2019
|
2,999,980
|
1,851
|
450,000
|
|
2020
|
2,908,498
|
-
|
450,000
|
|
2021
|
2,705,052
|
-
|
450,000
|
|
Thereafter
|
10,886,545
|
-
|
1,087,500
|
|
Total
|
$
25,540,650
|
$
12,963
|
$
3,337,500
|
Goodwill
– During the
year ended September 30, 2016, the Company recognized goodwill as a
result of acquisitions discussed in the Acquisitions footnote. In
accordance with accounting principles generally accepted in the
United States of America the Company does not amortize goodwill.
These principles require the Company to periodically perform tests
for goodwill impairment, at least annually, or sooner if evidence
of possible impairment arises. The Company evaluated the goodwill
for impairment as of September 30, 2016. Based on the evaluation
made, the Company concluded that no impairment of goodwill was
necessary.
Goodwill, as of September 30 consisted of the
following:
|
|
September 30,
|
|
|
|
2016
|
2015
|
|
Balance
- beginning of year
|
$
7,782,903
|
$
6,577,609
|
|
Additions
resulting from acquisitions:
|
|
|
|
Acquisition
of Track Group Analytics Limited
|
-
|
1,653,815
|
|
Effect
of foreign currency translation on goodwill
|
172,973
|
(448,521
)
|
|
Balance
- end of year
|
$
7,955,876
|
$
7,782,903
|
(13) Subsequent
Events
On October 19, 2016 the Company received a notice of non-renewal of
the Agreement for Extended Monitoring and Associated Serviced dated
November 19, 2013 between I.C.S. of the Bahamas. Ltd., and the
Company and International Surveillance Services Corp. and the
Ministry of National Security of the Government of the Bahamas. The
contract had been on a month-to-month status since November 19,
2013 and subject to a 30-day notice of termination. The contract
formally ended on November 18, 2016. The Company expects all of its
GPS monitoring equipment to be returned.
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 provide the basis for counterclaims against
Mr. Merrill. We intend to defend the case vigorously and
believe the probability of incurring a material loss to be
remote.
On December
16, 2016, the Company announced the appointment of Peter K. Poli,
as the Company’s Chief Financial Officer, effective January
6, 2017. Before joining the Company, Mr. Poli served as the Chief
Financial Officer of Grand Banks Yachts Limited from August 18,
2014 through December 31, 2015. In addition, he served as an
Executive Director of Grand Banks Yachts from March 31, 2008
through October 28, 2015. Refer
to the Company’s
Current Report on Form 8K, filed December 16, 2016 for further
details.
Management has reviewed and evaluated additional subsequent events
and transactions occurring after the balance sheet date through the
filing of this Annual Report on Form 10-K and determined that,
other than as disclosed above, no subsequent events
occurred.
F-28
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsNote 13 To The Consolidated Financial Statements)Item 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules