NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)  BASIS OF PRESENTATION

 

The unaudited interim condensed consolidated financial information of Track Group, Inc. and subsidiaries (collectively, the “ Company ” or “ Track Group ”) has been prepared in accordance with the Instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“ SEC ”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“ GAAP ”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of December 31, 2017, and results of its operations for the three months ended December 31, 2017. These financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017 filed with the SEC on December 19, 2017. The results of operations for the three months ended December 31, 2017 may not be indicative of the results for the fiscal year ending September 30, 2018.

 

Reclassifications   –  Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income (loss) or shareholders’ equity (See Note 4).

 

Business condition - As of December 31, 2017 and 2016 the Company had an accumulated deficit of $295,109,920 and $291,955,262, respectively. The Company incurred a net loss of $1,042,592 and $2,613,759 for the three months ended December 31, 2017 and 2016, respectively. The Company may continue to incur losses and require additional financial resources. The Company also has debt maturing in the next 12 months. The Company’s successful development and transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. Management has evaluated the significance of these negative conditions and has determined that the Company can meet its operating obligations for a reasonable period of time. The Company expects to fund operations using cash on hand, through operational cash flows and the restructuring of its existing debt agreement. Management of the Company believes that the availability of financing from these sources is adequate to fund operations through the upcoming twelve months.

   

(2)  PRINCIPLES OF CONSOLIDATION

 

The condensed consolidated financial statements include the accounts of Track Group and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation. Certain prior year amounts on the consolidated statement of operations have been reclassified to conform to the current period presentation. These reclassifications have no impact on the previously reported results.

 

(3)  RECENT ACCOUNTING STANDARDS

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“ FASB ”) or other standard setting bodies, which are adopted by the Company as of the specified effective date. During the three months ended December 31, 2017, there were no new accounting pronouncements that had a material impact on the Company’s consolidated financial statements.

 

Recently adopted accounting standards

 

In July 2015, the FASB issued ASU No. 2015-11, “ Inventory (Topic 330) - Simplifying the Measurement of Inventory ” (“ ASU 2015-11 ”), which dictates that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard in the first quarter of fiscal year 2018. The Company’s adoption of ASU 2015-11 did not have a material impact on its Consolidated Financial Statements.

 

 

 

 

 

 

(4) IMMATERIAL ERROR CORRECTIONS

 

This Quarterly Report on Form 10-Q of the Company for the period ended December 31, 2017 includes the revision of the Company’s previously filed consolidated income statements for the three months ended December 31, 2016.

 

Management concluded that the general and administrative section of the Condensed Consolidated Income Statement contained an error and that for comparative purposes in fiscal year 2017 filings, these figures should be revised but that the adjustments are not material modifications. Accordingly, the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial. Furthermore, the Company has determined that correcting prior year financial statements for immaterial changes would not require previously filed reports to be amended.

 

Under general and administrative expense, we have reclassified costs related to repairs and maintenance of monitoring devices and certain other costs, including installation, communications and transportation costs that were previously recorded in general and administrative expense to cost of revenues, selling and marketing, and research and development. Net income (loss) and shareholders’ equity were not affected by the reclassification. The effect of these revisions on the Company’s results of operations for the three months ended December 31, 2016 previously reported are as follows:

 

 

(5)  IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair value that is independent of other groups of assets. The Company recorded $0 and $74,787 of impairment expenses related to monitoring equipment for the three months ended December 31, 2017 and 2016, respectively.

 

(6)  BUSINESS COMBINATIONS

 

The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree, and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

 

Acquired Assets and Assumed Liabilities

 

Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.

 

 

 

 

Contingent Consideration

 

In certain acquisitions, the Company has agreed to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain future goals, which may include revenue milestones, new customer accounts, and earnings targets. The Company records contingent consideration based on its estimated fair value as of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward and likely achievement of certain targets on which issuance of the contingent consideration is based. Any differences between the acquisition-date fair value and the changes in fair value of the contingent consideration subsequent to the acquisition date are recognized in current period earnings until the arrangement is settled. If there is uncertainty surrounding the value of contingent consideration, then the Company’s policy is to wait until the end of the measurement period before making an adjustment.

 

(7)  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) includes net income (loss) as currently reported under U.S. GAAP and other comprehensive income (loss). Other comprehensive income (loss) considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the prevailing exchange rate at December 31, 2017.

 

(8)  NET INCOME (LOSS) PER COMMON SHARE

 

Basic net income (loss) per common share (“ Basic EPS ”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.

 

Diluted net income (loss) per common share (“ Diluted EPS ”) is computed by dividing net income (loss) attributable to common shareholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.

 

Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants. As of December 31, 2017 and 2016, there were 570,467 and 526,901 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS for the three months ended December 31, 2017 and 2016, respectively, as their effect would be anti-dilutive. The common stock equivalents outstanding as of December 31, 2017 and 2016 consisted of the following:

 

 

  (9)  PREPAID EXPENSES AND OTHER

 

The carrying amounts reported in the balance sheets for prepaid expenses and other current assets approximate their fair market value based on the short-term maturity of these instruments. As of December 31, 2017, and September 30, 2017, the outstanding balance of prepaid and other expenses was $4,219,135 and $854,122, respectively. The $4,219,135 as of December 31, 2017 is comprised largely of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. The increase in prepaid and other expenses at December 31, 2017 was primarily due to a cash collateralized performance bond for an international customer of $2,860,358, which is scheduled to be repaid in the third fiscal quarter and has been re-classified as a short-term asset in the three-month period ended December 31, 2017, as well as increases in prepaid taxes, vendor deposits and insurance.

 

 

 

 

(10)  INVENTORY

 

Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the first-in, first-out (“ FIFO ”) method. Net realizable value is determined based on the estimated selling prices on the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Inventory is periodically reviewed in order to identify obsolete, damaged or impaired items.

 

Inventory consists of finished goods that are to be shipped to customers and parts used for minor repairs of ReliAlert TM , Shadow, and other tracking devices. Completed and shipped ReliAlert TM and other tracking devices are reflected in Monitoring Equipment. As of December 31, 2017 and September 30, 2017, respectively, inventory consisted of the following: 

 

 

 

Property and equipment depreciation expense for the three months ended December 31, 2017 and 2016 was $114,417 and $50,291, respectively.

 

 

Amortization of monitoring equipment for the three months ended December 31, 2017 and 2016 was $353,027 and $332,993, respectively. These expenses were recognized in cost of revenues.

 

 

 

 

 

 

The intangible assets summarized above were purchased or developed on various dates from January 2010 through December 2017. The assets have useful lives ranging from three to twenty years. Amortization expense for the three months ended December 31, 2017 and 2016 was $574,438 and $637,320, respectively.

 

 

Goodwill is recognized in connection with acquisition transactions in accordance with ASC 805. The Company performs an impairment test for goodwill annually or more frequently if indicators of potential impairment exist. No impairment of goodwill was recognized through December 31, 2017.

 

(15)  OTHER ASSETS

 

As of December 31, 2017 and September 30, 2017, the outstanding balance of other assets was $785,195 and $2,989,101, respectively. A cash collateralized performance bond for an international customer, which is expected to be repaid in the third fiscal quarter has been re-classified as a current asset in the three-month period ended December 31, 2017.

 

 

 

 

 

(17)  RESTRUCTURING

 

In the first quarter of fiscal year 2017, the Company approved a plan to restructure our business (the “ Restructuring Plan ”) to streamline operations by consolidating our headquarters from Salt Lake City, Utah into our existing Chicagoland office. The Restructuring Plan, which was completed in fiscal 2017, also included outsourcing   the Company’s monitoring center which allowed a significant head count reduction and lower future expenses, and improved the Company’s ability to align workforce costs with customer demands. During the twelve-months ended September 30, 2017, the Company recognized expenses for the Restructuring Plan of $558,833, including $435,643 of severance expense and $123,190 of lease and moving costs, all of which were paid in the fiscal year ended September 30, 2017.

 

Total restructuring charges for the three-months ended December 31, 2016 and their utilization are summarized as follows:

 

 

 

 

 

(18)  DEBT OBLIGATIONS

 

On September 25, 2015, the Company entered into a loan agreement (the “ Sapinda Loan Agreement ”) with Sapinda Asia Limited (“ Sapinda ”), a related party, to provide the Company with a $5.0 million line of credit that accrues interest at a rate of 3% per annum for undrawn funds, and 8% per annum for borrowed funds. Pursuant to the terms and conditions of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “ Maturity Date ”), when all borrowed funds, plus all accrued but unpaid interest will become due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.

 

On March 13, 2017 (the “ Execution Date ”), the Company and Sapinda entered into Amendment Number One to the   Sapinda Loan Agreement. Amendment Number One extends the maturity date of all loans made pursuant to the   Sapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminates the requirement that the Company pay Sapinda the   3%   Interest, and forgives the 3% interest due to Sapinda for all undrawn funds under the   Sapinda Loan Agreement through the Execution Date. Further, Amendment Number One provides that all failure to fund penalties (“ Lender Penalties ”) accrued under the   Sapinda Loan Agreement through the Execution Date are forgiven. Per Amendment Number One, Lender Penalties shall begin to accrue again provided Sapinda has not funded the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000 at December 31, 2017, under Section 6.3 of the   Sapinda Loan Agreement, as amended.  We did not draw on this line of credit, nor did we pay any interest during the three months ended December 31, 2017. The undrawn balance of this line of credit at December 31, 2017 was $1,600,356. Further advances under the   Sapinda Loan Agreement are not currently expected to be forthcoming.

 

On May 1, 2016, the Company entered into an unsecured Loan Agreement with Conrent Invest S.A., a public limited liability company incorporated under the laws of the Grand Duchy of Luxembourg (“ Conrent ”), acting with respect to its Compartment Safety III (the “ Conrent Loan Agreement ”). Pursuant to its terms, available borrowing capacity under the Conrent Loan Agreement was $5.0 million; however, due to the failure of the lender to satisfy certain conditions precedent to its obligation to fund, the Company has not received funds under the Conrent Loan Agreement as of December 31, 2017, and no proceeds thereunder are anticipated.

 

On October 9, 2017, the Company entered into a Debt Exchange Agreement with Conrent Invest S.A. regarding total debt and unpaid interest of approximately $34.7 million as of October 31, 2017 (the “ Debt ”) (the “ Debt Exchange ”). The Debt Exchange called for the Company to exchange newly issued shares of preferred stock for the entire Debt subject to approval by the investors who purchased securities from Conrent to finance the Debt (the “ Noteholders ”). On November 2, 2017, Conrent convened a meeting of the Noteholders to approve the Debt Exchange; however, the quorum required to approve the Debt Exchange was not achieved. Management continues to negotiate with Conrent regarding terms for the Debt Exchange acceptable to Noteholders with the objective of reaching an agreement acceptable to both Conrent and the Noteholders before the Debt matures on July 31, 2018.

 

 

 

 

Debt obligations as of December 31, 2017 and September 30, 2017, respectively, are comprised of the following: 

 

 

The following table summarizes our future maturities of debt obligations, net of the amortization of debt discounts as of December 31, 2017:

 

(19)  RELATED-PARTY TRANSACTIONS

 

  Related-Party Loan Agreement

 

On September 25, 2015, the Company entered into the Sapinda Loan Agreement with Sapinda, a related party, to provide the Company with a $5.0 million line of credit that accrues interest at a rate of 3% per annum for undrawn funds, and 8% per annum for borrowed funds. Pursuant to the terms and conditions of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “ Maturity Date ”), when all borrowed funds, plus all accrued but unpaid interest will become due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.

 

On March 13, 2017, the Company and Sapinda entered into Amendment Number One to the   Sapinda Loan Agreement. Amendment Number One extends the maturity date of all loans made pursuant to the   Sapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminates the requirement that the Company pay Sapinda the   3%   interest, and forgives the 3% interest due to Sapinda for all undrawn funds under the   Sapinda Loan Agreement through the Execution Date. Further, Amendment Number One provides that all Lender Penalties accrued under the   Sapinda Loan Agreement through the Execution Date are forgiven. Per Amendment Number One, Lender Penalties shall begin to accrue again provided Sapinda has not funded the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000 at December 31 , 2017, under Section 6.3 of the   Sapinda Loan Agreement, as amended.  We did not draw on this line of credit, nor did we pay any interest during the three months ended December 31, 2017. The undrawn balance of this line of credit at December 31, 2017 was $1,600,356. Further advances under the   Sapinda Loan Agreement are not currently expected to be forthcoming, and therefore no assurances can be given that the Company will obtain additional funds to which it is entitled under the   Sapinda Loan Agreement, or that the penalties accruing will ever be paid.

 

 

 

 

 

Each of the foregoing related-party transactions was reviewed and approved by disinterested and independent members of   the Company’s Board of Directors. 

 

(20)  PREFERRED AND COMMON STOCK

 

The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share. During the three months ended December 31, 2017, no shares of common stock were issued to Board of Director members for their services earned in the first quarter of 2018. The Company has deferred the issuance of shares of common stock and warrants since the fourth quarter of 2017, and $275,000 for unpaid Board of Director fees has been accrued at December 31, 2017.

 

The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s Board of Directors has the authority to amend the Company’s Certificate of Incorporation, without further shareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock, and to create one or more series of preferred stock. As of December 31, 2017, there were no shares of preferred stock outstanding. 

 

In November 2017, the Board of Directors approved the grant of 241,935 shares of common stock valued at $300,000, as compensation for services rendered to the Company, which have not yet been issued. In addition, the Company issued 30,797 warrants to a member of the Company’s Board of Directors in exchange for 18,551 shares of common stock the director previously received for services provided during the period of October 2016 to June 2017, which shares were thereby cancelled in the three month period ended December 31, 2017.

 

(21)  STOCK OPTIONS AND WARRANTS

 

Stock Incentive Plan

 

At the annual meeting of shareholders on March 21, 2011, the shareholders approved the 2012 Equity Compensation Plan (the “ 2012 Plan ”). The 2012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who provide services to the Company in lieu of cash. A total of 90,000 shares were initially authorized for issuance pursuant to awards granted under the 2012 Plan. At the 2015 annual meeting of shareholders held on May 19, 2015, our stockholders approved a 713,262 share increase to the total number of shares authorized under the 2012 Plan.  Warrants for Board members vest immediately and warrants issued to employees vest annually over either a two or three-year period after the grant date. 

 

As of December 31, 2017, 27,218 shares of common stock were available for future grants under the 2012 Plan.

 

  All Options and Warrants

 

On November 30, 2017, the Board of Directors unanimously approved the adjustment of the exercise price of 605,678 unexercised warrants, with original exercise prices ranging from $1.81 to $19.46, issued under the 2012 Plan to $1.24, resulting in incremental stock-based compensation of $149,088, which was expensed in the three-month period ending December 31, 2017.

 

The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. During the three months ended December 31, 2017 and 2016, the Company granted 30,797 and 154,410, respectively, options and warrants to purchase shares of common stock under the 2012 Plan. Excluding the incremental stock-based compensation mentioned above, the Company recorded expense of $638,502 and $200,374 for the three months ended December 31, 2017 and 2016, respectively, related to the issuance and vesting of outstanding stock options and warrants.

 

 

 

 

The option and warrant grants for three months ended December 31, 2017 were valued using the Black-Scholes model with the following weighted-average assumptions:

 

 

The expected life of stock options (warrants) represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options (warrants).

 

A summary of stock option (warrant) activity for the three months ended December 31, 2017 is presented below:

 

 

The intrinsic value of options and warrants outstanding and exercisable is based on the Company’s share price of $1.05 at December 31, 2017.

 

(22)  INCOME TAXES

 

The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.

 

For the three months ended December 31, 2017 and 2016, the Company incurred a net loss for income tax purposes of $1,042,591 and $2,613,759, 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.

 

In computing income tax, we recognize an income tax provision in tax jurisdictions in which we have pre-tax income for the period and are expecting to generate pre-tax book income during the fiscal year.

 

(23)  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. 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. Plaintiff’s appeal succeeded and will result in a trial occurring within the next four to eight months. We intend to defend the case vigorously.

 

Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et al.   On December 3, 2015, Candace Boggs et al. filed a complaint in the State Court of Dougherty County, Georgia, alleging breach of contract and negligence in monitoring of certain offenders in Dougherty County, Georgia, as well as a request for punitive damages in an amount sufficient to deter similar conduct in the future. Plaintiffs withdrew their complaint in February 2016, but refiled the complaint on October 12, 2016. The Company’s motion for Summary Judgment was denied on February 27, 2017 and a Notice of Appeal was filed by The Company’s counsel on April 15, 2017. We are awaiting a ruling on an oral argument that took place on December 13, 2017 regarding a new statute which exempts vendors who assist law enforcement officials. We believe the allegations are inaccurate and are defending the case vigorously. We believe the probability of incurring a material loss to be remote.

 

Track Group, Inc. v. I.C.S. of the Bahamas Co. Ltd.   On May 18, 2016, the Company filed a complaint in the District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, under the terms of a loan agreement and promissory note between the Company and I.C.S. of the Bahamas Co. Ltd (“ ICS ”). The Company’s damages of unpaid principal and interest on the Promissory Note are in the amount of $230,000.00, plus per annum interest. The Defendant’s initial Counterclaims were dismissed; however, the Court granted the Defendant leave to amend. The Amended Counter Claims were filed on June 23, 2017. The Company’s Motion to Dismiss the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period ends on March 30, 2018, the Company will proceed with a Motion for Summary Judgment. We believe we will be successful in this action for amounts owed under the loan agreement and promissory note; however, the Company may encounter problems enforcing a favorable judgment in the foreign jurisdiction where ICS resides.

 

Track Group Inc. v. I.C.S. of the Bahamas Co. Ltd.   On September 26, 2016, the Company filed a Notice of Arbitration with the International Centre for Dispute Resolution, alleging breach of contract by ICS. Under the terms of the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “ C&M Agreement ”) by and between the Company and ICS, any dispute must be resolved by binding arbitration. The Company asserts that ICS has failed to pay the Company fees owed to it under the C&M Agreement. The amount owed to the Company is approximately $1.0 million. Depositions were completed in August of 2017. The arbitration hearing took place on January 31, 2018 and we expect a ruling within 30 days. The Company is confident it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration award in the foreign jurisdiction where ICS resides.

 

John Merrill v. Track Group, Inc. and Guy Dubois.   On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment. Mr. Merrill is seeking not less than $590,577 plus interest, attorney fees and costs. Mr. Merrill’s employment with the Company was terminated effective September 27, 2016. The Company filed an Answer with Counter Claims on December 21, 2016. The Company filed a motion for Summary Judgment on January 16, 2018 and we expect a ruling within six months. We intend to defend the case vigorously and believe the allegations and claims are without merit.

 

Michael Anthony Johnson v. Community Corrections of Marion County and Track Group, Inc.   On February 28, 2017, the Company was notified that Mr. Johnson, the Plaintiff, had filed a  pro se  complaint in the United States District Court for the Southern District of Indiana, asserting violations of his rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company plans to file a motion for Summary Judgment before the end of February 2018. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.

 

SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior).   On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by Defendants to pay claimant amounts agreed to, and due under, the Pluri Annual Contract for the Rendering of Monitoring Services of Internees, through Electric Bracelets, in the Islas Marias Penitentiary Complex dated July 15, 2011, entered into by and between the Organo Administrativo Desconcentrado Prevencion y Readaptacion Social of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, based on its determination that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decision of the Federal Administrative Tribunal. Counsel estimates the Tribunal should have a ruling on or before June 30, 2018. If the Company’s appeal is successful, the case will be sent back to the Federal Administrative Tribunal for a resolution on the merits of the case.

 

 

 

 

Inversiones Tecnologicas SpA v. Track Group Chile SpA.  On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position) filed a complaint before the Civil Court of Santiago, in order to collect $1.0 million of fees for alleged services rendered with occasion of the public tender for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim, under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal may be scheduled in late February, 2018. The Company expects the court to make a decision within three months of the hearing date.

 

Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al.  On June 9, 2017, the Plaintiff, Pablo Gonzalez-Cruz, and relatives of the Plaintiff, filed a Complaint in the Court of First Instance, San Juan Superior Court, Common Wealth of Puerto Rico against the Company, and associated parties alleging the death of his daughter was a direct and immediate result of the gross negligence and guilty indifferent actions and omissions of all the defendants. Plaintiff is requesting damages of no less than $2.0 million. The Company’s Answer and Appearance were filed August 13, 2017. We are currently in the discovery period.

 

 (23)  SUBSEQUENT EVENTS

 

Effective January 1, 2018, the Company entered into a multi-year Monitoring Services Agreement with Marion County Community Corrections Agency, by and through the Marion County Community Corrections Board (collectively, “ Marion County ”), pursuant to which the Company shall provide Marion County with GPS and alcohol monitoring equipment, certain services, and software to be used for offenders ordered into the Marion County Community Corrections program by the courts. In exchange for the products and services provided by the Company, Marion County shall make periodic payments, the sum of which shall be determined based on the duration of use of individual units of equipment.

 

On January 18, 2018, the Company entered into a Monitoring Services Agreement (the “ Gendarmeria Agreement ”) with Gendarmeria de Chile, the Republic of Chile’s uniform prison service (“ Gendarmeria ”), for services the Company began offering to Gendarmeria in October 2017. The Company currently provides Gendarmeria with GPS monitoring devices, certain services, and software to be used for offenders ordered into a corrections program by the Chilean courts. In exchange for the products and services provided by the Company, Gendarmeria shall make periodic payments, the sum of which shall be determined based on installation fees and the duration of use of individual units of equipment. Pursuant to its terms, the Gendarmeria Agreement will expire in October 2018.

 

In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted that, other than as disclosed above, no additional subsequent events have occurred that are reasonably likely to impact the financial statements.

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