Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ___________ to
____________
Commission file number: 0-23153
Track Group, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
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87-0543981
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(State or other jurisdiction of incorporation or
organization)
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|
(I.R.S. Employer Identification Number)
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200 E. 5th Avenue Suite 100, Naperville, IL 60563
(Address of principal executive offices) (Zip
Code)
(877) 260-2010
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
None
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 every Interactive Data File required to be submitted
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 such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer [ ]
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Accelerated
filer [
]
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Non-accelerated filer [X]
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Smaller reporting company [X]
|
|
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Emerging growth company [ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [
]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [
] No [X]
The number of shares outstanding of the registrant’s common
stock as of February 11, 2020 was 11,414,150.
Track Group,
Inc.
FORM 10-Q
For the Quarterly Period Ended December 31, 2019
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PART
I. FINANCIAL
INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
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(Unaudited)
December 31,
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September
30,
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Assets
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2019
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2019
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Current assets:
|
|
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Cash
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$8,493,550
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$6,896,711
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Accounts
receivable, net of allowance for doubtful accounts of $2,556,393
and $2,454,281, respectively
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5,321,396
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6,763,236
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Prepaid
expense, deposits and right of use assets
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1,692,887
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1,339,465
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Inventory,
net of reserves of $62,147 and $26,934, respectively
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442,570
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274,501
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Total
current assets
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15,950,403
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15,273,913
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Property
and equipment, net of accumulated depreciation of $2,316,172 and
$2,248,913, respectively
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636,619
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675,037
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Monitoring
equipment, net of accumulated amortization of $6,325,027 and
$6,322,768, respectively
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2,568,379
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2,624,900
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Intangible
assets, net of accumulated amortization of $14,729,536 and
$14,157,090, respectively
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21,829,868
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21,955,679
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Goodwill
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8,227,025
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8,187,911
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Deferred
tax asset
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526,833
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540,563
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Other
assets
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451,696
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124,187
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Total
assets
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$50,190,823
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$49,382,190
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Liabilities and Stockholders’ Equity (Deficit)
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Current liabilities:
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Accounts
payable
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2,616,049
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2,628,003
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Accrued
liabilities
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14,607,777
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13,828,696
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Current
portion of long-term debt
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33,818,587
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33,827,689
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Total
current liabilities
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51,042,413
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50,284,388
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Long-term
liabilities
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327,644
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-
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Total
liabilities
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51,370,057
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50,284,388
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Commitments and contingencies (Note 22)
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-
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-
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Stockholders’ equity (deficit):
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Common
stock, $0.0001 par value: 30,000,000 shares authorized;
11,414,150 and 11,401,650 shares outstanding,
respectively
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1,141
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1,140
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Series
A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares
authorized; 0 shares outstanding
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-
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-
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Paid
in capital
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302,270,242
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302,250,556
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Accumulated
deficit
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(302,384,917)
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(302,152,292)
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Accumulated
other comprehensive loss
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(1,065,700)
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(1,001,602)
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Total
equity (deficit)
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(1,179,234)
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(902,198)
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Total
liabilities and stockholders’ equity (deficit)
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$50,190,823
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$49,382,190
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(Unaudited)
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Three Months Ended
December 31,
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2019
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2018
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Revenue:
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Monitoring
and other related services
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$8,268,423
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$8,060,328
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Product
sales and other
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152,408
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151,207
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Total
revenue
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8,420,831
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8,211,535
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Cost of revenue:
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Monitoring,
products and other related services
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3,266,909
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3,100,193
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Depreciation
& amortization included in cost of revenue
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487,442
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478,289
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Total
cost of revenue
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3,754,351
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3,578,482
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Gross profit
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4,666,480
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4,633,053
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Operating expense:
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General
& administrative
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3,011,854
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3,422,272
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Selling
& marketing
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541,549
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503,930
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Research
& development
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296,155
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248,865
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Depreciation
& amortization
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515,939
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514,981
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Total
operating expense
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4,365,497
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4,690,048
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Operating income (loss)
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300,983
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(56,995)
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Other income (expense):
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Interest
expense, net
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(602,533)
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(601,239)
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Currency exchange
gain (loss)
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143,308
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(932,677)
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Total other expense
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(459,225)
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(1,533,916)
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Loss before income taxes
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(158,242)
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(1,590,911)
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Income tax expense
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74,383
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144,007
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Net loss attributable to common stockholders
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(232,625)
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(1,734,918)
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Foreign
currency translation adjustments
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(64,098)
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96,673
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Comprehensive loss
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$(296,723)
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$(1,638,245)
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Net
loss per common share, basic and diluted
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$(0.02)
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$(0.16)
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Weighted
average common shares outstanding, basic and diluted
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11,411,704
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11,101,650
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The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY/(DEFICIT)
(Unaudited)
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Common stock
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Paid-in
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Accumulated
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Comprehensive
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Shares
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Amount
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Capital
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Deficit
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Loss
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Total
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Balance September 30, 2019
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11,401,650
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$1,140
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$302,250,556
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$(302,152,292)
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$(1,001,602)
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$(902,198)
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Share-based
compensation
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-
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-
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19,687
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-
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-
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19,687
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Issuance
of Common Stock to employees for services
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12,500
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1
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(1)
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-
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Foreign
currency translation adjustments
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-
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-
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-
|
-
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(64,098)
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(64,098)
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Net
loss
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-
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-
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-
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(232,625)
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-
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(232,625)
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Balance December 31, 2019
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11,414,150
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1,141
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302,270,242
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(302,384,917)
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(1,065,700)
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(1,179,234)
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Common stock
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Paid-in
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Accumulated
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Comprehensive
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Shares
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Amount
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Capital
|
Deficit
|
Loss
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Total
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|
|
|
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Balance September 30, 2018
|
11,401,650
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$1,140
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$302,102,866
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$(299,495,370)
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$(970,270)
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$1,638,366
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ASC
606 modified retrospective adjustment
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-
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-
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-
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(92,969)
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-
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(92,969)
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Share-based
compensation
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-
|
-
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83,218
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-
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-
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83,218
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Foreign
currency translation adjustments
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-
|
-
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-
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-
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96,673
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96,673
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Net
loss
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-
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-
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-
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(1,734,918)
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-
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(1,734,918)
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Balance December 31, 2018
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11,401,650
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1,140
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302,186,084
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(301,323,257)
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(873,597)
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(9,630)
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The accompanying notes are an integral
part of these condensed consolidated
statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
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Three Months
Ended
December 31,
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|
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2019
|
2018
|
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Cash flows from operating activities:
|
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Net
loss
|
$(232,625)
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$(1,734,918)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
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Depreciation
and amortization
|
1,003,381
|
993,270
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Bad
debt expense
|
109,161
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90,400
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Stock
based compensation
|
19,687
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83,218
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Loss
on monitoring equipment included in cost of revenue
|
134,047
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104,079
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Foreign
currency exchange loss
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(143,308)
|
932,677
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Change
in assets and liabilities:
|
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Accounts
receivable, net
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1,155,606
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(380,133)
|
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Prepaid
expense, deposits and right of use assets
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(179,203)
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(106,071)
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Accounts
payable
|
(9,101)
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(153,690)
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Accrued
liabilities
|
793,323
|
1,309,601
|
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Net
cash provided by operating activities
|
2,650,968
|
1,138,433
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(54,581)
|
(141,595)
|
|
Capitalized
software
|
(341,622)
|
(275,623)
|
|
Purchase
of monitoring equipment and parts
|
(606,225)
|
(133,981)
|
|
Net
cash used in investing activities
|
(1,002,428)
|
(551,199)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Principal
payments on long-term debt
|
(9,552)
|
(9,357)
|
|
Net
cash used in financing activities
|
(9,552)
|
(9,357)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(42,149)
|
(158,888)
|
|
|
|
|
|
Net increase in cash
|
1,596,839
|
418,989
|
|
Cash, beginning of period
|
6,896,711
|
5,446,557
|
|
Cash, end of period
|
$8,493,550
|
$5,865,546
|
|
Cash
paid for interest
|
$6,856
|
$8,858
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Non-cash
transfer of inventory to monitoring equipment
|
$230,105
|
$128,044
|
The
accompanying notes are an integral part of these condensed
consolidated statements.
TRACK
GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated
financial information of Track Group, Inc. and subsidiaries
(collectively, the “Company” or “Track Group”) has been prepared in accordance with the
Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission
(“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information
contains all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the Company’s
financial position as of December 31, 2019, and results of its
operations for the three months ended December 31, 2019. 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, 2019, filed with the SEC on January 10,
2020. The results of operations for the three months ended
December 31, 2019 may not be indicative of the results for the
fiscal year ending September 30, 2020.
As
of December 31, 2019, and 2018, the Company had an accumulated
deficit of $302,384,917 and $301,323,257, respectively. The Company
incurred a net loss of $232,625 and $1,734,918 for the three months
ended December 31, 2019 and 2018, respectively. The Company may
continue to incur losses and require additional financial
resources. The Company also has debt maturing in September 2020 and
July 2021. See Note 23. The Company’s transition to
profitable operations is dependent upon generating a level of
revenue adequate to support its cost structure, which it has almost
achieved and resolving the balance sheet. Management has evaluated
the significance of these 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
and through operational cash flows through the upcoming twelve
months.
(2) PRINCIPLES OF CONSOLIDATION
The
consolidated financial statements include the accounts of Track
Group, Inc. and its active subsidiaries, Track Group Analytics
Limited, Track Group Americas, Inc., Track Group International
LTD., and Track Group - Chile SpA. All significant inter-company
transactions have been eliminated in consolidation.
(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.
Recently Adopted Accounting Standards
In February 2016, FASB issued Accounting Standards
Update (“ASU”) No. 2016-02, “Leases (Topic
842)”.
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. The Company adopted ASU
2016-02 on October 1, 2019. See Note 15 for the impact the adoption
had on our consolidated financil position, results of operations
and cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
“Intangibles – Goodwill
and Other: Simplifying the Test for Goodwill
Impairment”. The new
guidance simplifies the subsequent measurement of goodwill by
removing the second step of the two-step impairment test. The
amendment requires an entity to perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The new
guidance will be effective for annual periods or any interim
goodwill impairment tests in fiscal years beginning after December
15, 2019. The amendment should be applied on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company will adopt ASU 2017-04 in fiscal year 2021. Management
does not anticipate that this adoption will have a significant
impact on its consolidated financial position, results of
operations, or cash flows.
In June
2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial
Instruments”. ASU 2016-13 adds a current expected
credit loss (“CECL”) impairment model to U.S.
GAAP that is based on expected losses rather than incurred losses.
Modified retrospective adoption is required with any
cumulative-effect adjustment recorded to retained earnings as of
the beginning of the period of adoption. ASU 2016-13 is effective
for fiscal years beginning after December 15, 2019, including
interim periods within the year of adoption. Early adoption is
permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company
will adopt ASU 2016-13 in fiscal year 2021. The Company does not
expect the application of the CECL impairment model to have a
significant impact on our allowance for uncollectible amounts for
accounts receivable.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The
Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset
may not be recoverable and in the case of goodwill, at least
annually. The Company evaluates whether events and circumstances
have occurred which indicate possible impairment as of each balance
sheet date. If the carrying amount of an asset exceeds its fair
value, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there is an identifiable fair value that is
independent of other groups of assets.
(5) BUSINESS COMBINATIONS
The
Company accounts for its business acquisitions under the
acquisition method of accounting as indicated in ASC 805, Business
Combinations, which requires the acquiring entity in a business
combination to recognize the fair value of all assets acquired,
liabilities assumed, and any non-controlling interest in the
acquiree, and establishes the acquisition date as the fair value
measurement point. Accordingly, the Company recognizes assets
acquired and liabilities assumed in business combinations,
including contingent assets and liabilities and non-controlling
interest in the acquiree, based on fair value estimates as of the
date of acquisition. In accordance with ASC 805, the Company
recognizes and measures goodwill as of the acquisition date, as the
excess of the fair value of the consideration paid over the fair
value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant
to ASC No. 805-10-25, if the initial accounting for a business
combination is incomplete by the end of the reporting period in
which the combination occurs, but during the allowed measurement
period not to exceed one year from the acquisition date, the
Company retrospectively adjusts the provisional amounts recognized
at the acquisition date, by means of adjusting the amount
recognized for goodwill.
Contingent Consideration
In
certain acquisitions, the Company has agreed to pay additional
amounts to sellers contingent upon achievement by the acquired
businesses of certain future goals, which may include revenue
milestones, new customer accounts, and earnings targets. The
Company records contingent consideration based on its estimated
fair value as of the date of the acquisition. The Company evaluates
and adjusts the value of contingent consideration, if necessary, at
each reporting period based on the progress toward and likely
achievement of certain targets on which issuance of the contingent
consideration is based. Any differences between the
acquisition-date fair value and the changes in fair value of the
contingent consideration subsequent to the acquisition date are
recognized in current period earnings until the arrangement is
settled. If there is uncertainty surrounding the value of
contingent consideration, then the Company’s policy is to
wait until the end of the measurement period before making an
adjustment.
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive
income (loss) includes net income (loss) as currently reported
under 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 at the prevailing
exchange rate at December 31, 2019.
(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share
(“Basic EPS”) is computed by dividing net income (loss)
available to common stockholders 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 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
common stock options and warrants. As of December 31, 2019,
and 2018, there were 685,259 and 681,926 outstanding common share
equivalents, respectively, that were not included in the
computation of Diluted EPS for the three months ended December 31,
2019 and 2018, respectively, as their effect would be
anti-dilutive. The common stock equivalents outstanding as of
December 31, 2019 and December 31, 2018 consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Exercisable
common stock options and warrants
|
685,259
|
681,926
|
|
Total
common stock equivalents
|
685,259
|
681,926
|
At
December 31, 2019 and 2018, all stock option and warrant exercise
prices were above the market price of $0.49 and $0.51,
respectively, and thus have not been included in the basic earnings
per share calculation.
(8) REVENUE RECOGNITION
On
October 1, 2018, the Company adopted ASC 606 using the
modified retrospective method, whereby the adoption did not impact
any prior periods.
Monitoring and Other Related
Services. Monitoring services
include two components: (i) lease contracts pursuant to which the
Company provides monitoring services and lease devices to
distributors or end users and the Company retains 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 the Company’s monitoring services.
Sales of devices and leased GPS devices are required to use the
Company’s monitoring service and both the GPS leased devices
and monitoring services are accounted for as a single performance
obligation. Monitoring revenue is recognized ratably over
time, as the customer simultaneously receives and consumes the
benefit of these services as they are performed. Payment due or
received from the customers prior to rendering the associated
services are recorded as a contract liability. The balance of the
contract liabilities at December 31, 2019 and September 30, 2019
are $316,158 and $389,229, respectively, and are included in
accrued liabilities on the Consolidated Balance Sheets. The Company
recognized $73,071 of deferred revenue in the three months ended
December 31, 2019.
Product Sales and
Other. The Company sells devices and replacement parts to
customers under certain contracts, as well as law enforcement
software licenses and maintenance, and analytical software. Revenue
from the sale of devices and parts is recognized upon their
transfer of control to the customer, which is generally upon
delivery. Delivery is considered complete at either the time of
shipment or arrival at destination, based on the agreed upon terms
within the contract. Payment terms are generally 30 days from
invoice date.
Multiple Element
Arrangements. The majority of
our revenue transactions do not have multiple elements. However, on
occasion, the Company may enter into revenue transactions that have
multiple elements. These may include different combinations of
products or services that are included in a single billable
rate. These products or services are delivered over time as
the customer utilizes our services. In cases where
obligations in a contract are distinct and thus require separation
into multiple performance obligations, revenue recognition guidance
requires that contract consideration be allocated to each distinct
performance obligation based on its relative standalone selling
price. The value allocated to each performance obligation is then
recognized as revenue when the revenue recognition criteria for
each distinct promise or bundle of promises has been
met.
The
standalone selling price for each performance obligation is an
amount that depicts the amount of consideration to which the entity
expects to be entitled in exchange for transferring the good or
service. When there is only one performance obligation associated
with a contract, the entire sale value is attributed to that
obligation. When a contract contains multiple performance
obligations the transaction value is first allocated using the
observable price, which is generally a list price net of applicable
discount or the price used to sell in similar circumstances. In
circumstances when a selling price is not directly observable, the
Company will estimate the standalone selling price using
information available to us.
The
following table presents the Company’s revenue by geography,
based on management’s assessment of available
data:
|
|
Three
months ended December 31, 2019
|
Three
months ended December 31, 2018
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
United
States
|
$5,567,858
|
66%
|
$5,061,559
|
62%
|
|
Latin
America
|
2,737,593
|
33%
|
3,107,553
|
38%
|
|
Other
|
115,380
|
1%
|
42,423
|
0%
|
|
Total
|
$8,420,831
|
100%
|
$8,211,535
|
100%
|
The
above table includes total revenue for the Company, of which
monitoring and other related services is the majority
(approximately 98%) of the Company’s revenue. Latin America
includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin
Islands. Other includes Canada, Saudi Arabia, United Kingdom, South
Africa and Vietnam.
(9) PREPAID EXPENSE, DEPOSITS AND RIGHT OF USE
ASSETS
As
of December 31, 2019, and September 30, 2019, the outstanding
balance of prepaid expense, deposits and right of use assets was
$1,692,887 and $1,339,465, respectively. These balances are
comprised largely of a performance bond deposit, tax deposits,
right of use lease assets, vendor deposits and other prepaid
supplier expense.
(10) INVENTORY
Inventory
is valued at the lower of the cost or net realizable
value. Cost is determined using the standard costing method.
Net realizable value is determined based on the item selling
price. Inventory is periodically reviewed in order to identify
obsolete or damaged items or impaired values.
Inventory
consists of finished goods that are to be shipped to customers
and parts used for minor repairs of ReliAlert™, Shadow, and
other tracking devices. Completed and shipped ReliAlert™ and
other tracking devices are reflected in Monitoring
Equipment. As of December 31, 2019, and September 30, 2019,
inventory consisted of the following:
|
|
December 31,
2019
|
September 30,
2019
|
|
Finished
goods inventory
|
$504,717
|
301,435
|
|
Reserve
for damaged or obsolete inventory
|
(62,147)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$442,570
|
274,501
|
The Company uses a third-party fulfillment service
provider. As a result of this service, the Company’s
employees do not actively assemble new product or repair damaged
inventory or monitoring equipment shipped directly from suppliers.
Purchases of monitoring equipment are
recognized directly. Management believes this process reduces
maintenance and fulfillment costs associated with inventory and
monitoring equipment. Management reviews inventory regularly to
identify damaged or obsolete inventory and reserves for potential
losses. The Company recorded charges of $35,123 and $0 during the
three months ended December 31, 2019 and 2018, respectively, for
devices that were obsolete, lost or damaged. Obsolete, lost and
damaged inventory items are included in Monitoring, products &
other related services in the Condensed Consolidated Statement of
Operations
(11) PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of December 31, 2019
and September 30, 2019, respectively:
|
|
December 31,
2019
|
September 30,
2019
|
|
Equipment,
software and tooling
|
$1,264,375
|
$1,210,583
|
|
Automobiles
|
5,433
|
5,574
|
|
Leasehold
improvements
|
1,368,519
|
1,393,976
|
|
Furniture
and fixtures
|
314,464
|
313,817
|
|
Total
property and equipment before accumulated depreciation
|
2,952,791
|
2,923,950
|
|
Accumulated
depreciation
|
(2,316,172)
|
(2,248,913)
|
|
Property
and equipment, net of accumulated depreciation
|
$636,619
|
$675,037
|
Property
and equipment depreciation expense for the three months ended
December 31, 2019 and 2018 was $83,432 and $79,636,
respectively.
(12) MONITORING EQUIPMENT
The
Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is amortized using the straight-line method over an
estimated useful life of between one and three years. Monitoring
equipment as of December 31, 2019 and September 30, 2019 was as
follows:
|
|
December 31,
2019
|
September 30,
2019
|
|
Monitoring
equipment
|
$8,893,406
|
$8,947,668
|
|
Less:
accumulated amortization
|
(6,325,027)
|
(6,322,768)
|
|
Monitoring
equipment, net of accumulated amortization
|
$2,568,379
|
$2,624,900
|
Amortization
of monitoring equipment for the three months ended December 31,
2019 and 2018 was $360,630 and $354,626, respectively. Amortization
expense for monitoring devices is recognized in cost of revenue.
During the three months ended December 31, 2019 and December 31,
2018, the Company recorded charges of $98,924 and $104,079,
respectively, for devices that were lost, stolen or damaged. Lost,
stolen and damaged items are included in Monitoring, products &
other related services in the Condensed Consolidated Statement of
Operations.
(13) INTANGIBLE ASSETS
The
following table summarizes intangible assets at December 31, 2019
and September 30, 2019, respectively:
|
Intangible
assets:
|
December 31,
2019
|
September 30,
2019
|
|
Patent
& royalty agreements
|
$21,170,565
|
$21,170,565
|
|
Developed
technology
|
13,131,519
|
12,685,281
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
319,119
|
318,722
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
36,559,404
|
36,112,769
|
|
Accumulated
amortization
|
(14,729,536)
|
(14,157,090)
|
|
Intangible
assets, net
|
$21,829,868
|
$21,955,679
|
The
intangible assets summarized above were purchased or developed on
various dates from January 2010 through December 31, 2019. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the three months ended December 31, 2019
and 2018 was $559,319 and $559,008, respectively.
(14) GOODWILL
The
following table summarizes the activity of goodwill at December 31,
2019 and September 30, 2019, respectively:
|
|
December 31,
|
September 30,
|
|
|
2019
|
2019
|
|
Balance
- beginning of
period
|
$8,187,911
|
$8,076,759
|
|
Effect
of foreign currency translation on goodwill
|
39,114
|
111,152
|
|
Balance
- end of period
|
$8,227,025
|
$8,187,911
|
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, 2019.
(15) LEASES
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified
lease accounting for lessees to create transparency and
comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing
arrangements. The Company adopted the new lease standard utilizing
the modified retrospective transaction method, under which amounts
in prior periods were not restated. For contracts existing at the
time of the adoption, the Company elected not to reassess (a)
whether any are or contain leases, (b) lease classification, and
(c) initial direct costs. Upon adoption on October 1, 2019, the
Company recorded $597,289 right of use assets and lease
liabilities. The adoption of the new standard did not impact the
Company’s Statements of Operations or Statements of Cash
Flows.
The
following table shows right of use assets and lease liabilities and
the associated financial statement line items as of December 31,
2019.
|
|
Operating
lease asset
|
Operating
lease liability
|
|
Prepaid
expense, deposits and right of use assets
|
$213,228
|
$-
|
|
Other
assets
|
327,644
|
-
|
|
Accrued
liabilities
|
-
|
213,228
|
|
Long-term
liabilities
|
-
|
327,644
|
|
|
$540,872
|
$540,872
|
The
following table summarizes the supplemental cash flow information
for the three months ended December 31, 2019:
|
|
December 31,
2019
|
|
Cash
paid for noncancelable operating leases included in operating cash
flows
|
$116,411
|
|
|
|
|
Right of use assets
obtained in exchange for operating lease liabilities:
|
$-
|
The
future minimum lease payments under noncancelable operating leases
with terms greater than one year as of December 31, 2019
are:
|
|
Operating
Leases
|
|
From January 2020
to September 2020
|
$180,259
|
|
From October 2020
to September 2021
|
233,331
|
|
From October 2021
to September 2022
|
181,598
|
|
From October 2022
to September 2023
|
4,082
|
|
Undiscounted Cash
Flow
|
599,270
|
|
Less: imputed
interest
|
(58,398)
|
|
Total
|
$540,872
|
|
Reconciliation to
lease liabilities:
|
|
|
Lease liabilities -
current
|
$213,228
|
|
Lease liabilities -
long-term
|
327,644
|
|
Total Lease
Liabilities
|
$540,872
|
The
weighted-average remaining lease term and discount rate related to
the Company’s lease liabilities as of December 31, 2019 were
2.5 years and 8%, respectively. The Company’s lease discount
rates are generally based on the estimates of its incremental
borrowing rate as the discount rates implicit in the
Company’s leases cannot be readily determined.
(16) ACCRUED LIABILITES
Accrued
liabilities consisted of the following as of December 31, 2019 and
September 30, 2019, respectively:
|
|
December 31,
2019
|
September 30,
2019
|
|
Accrued
payroll, taxes and employee benefits
|
$1,993,428
|
$1,680,634
|
|
Deferred
revenue
|
316,158
|
389,229
|
|
Deposits
payable
|
10,000
|
10,000
|
|
Accrued
taxes - foreign and domestic
|
942,946
|
1,071,532
|
|
Accrued
other expense
|
159,408
|
170,055
|
|
Accrued
legal costs
|
915,784
|
1,057,305
|
|
Accrued
costs of revenue
|
257,593
|
251,262
|
|
Accrued
bond guarantee
|
138,788
|
142,405
|
|
Right
of use liability
|
213,228
|
-
|
|
Accrued
interest
|
9,660,444
|
9,056,274
|
|
Total
accrued liabilities
|
$14,607,777
|
$13,828,696
|
(17) DEBT OBLIGATIONS
On February 24, 2019,
the Company and Conrent Invest S.A. (“Conrent”)
entered into a second amendment to their Facility Agreement (the
“Second Amended
Facility Agreement”), which Second
Amended Facility Agreement (i) extends the maturity date of the
Facility to the earlier of either April 1, 2020 or the date upon
which the outstanding principal amount is repaid by the Company,
and (ii) provides that in the event of a change of control of the
Company, Conrent shall immediately cancel the Second Amended Credit
Facility and declare the outstanding principal amount, together
with unpaid interest, immediately due and payable.
On December 4, 2019, the Company
requested that Conrent extend the maturity of the Amended Facility
Agreement from April 1, 2020 to July 1, 2021. On January 6,
2020, the investors who owned the securities from Conrent used to
finance the debt (the “Noteholders”) held a meeting to address the
Company’s request. On January 7, 2020, Conrent notified the
Company in writing that the Noteholders agreed to extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 10, 2020, the Company and Conrent entered
into an amendment to the Facility Agreement which extends the
maturity of the Facility to July 1, 2021. See Note
23.
Debt
obligations as of December 31, 2019 and September 30, 2019,
respectively, are comprised of the following:
|
|
December 31,
2019
|
September 30,
2019
|
|
|
|
|
|
Unsecured
facility agreement with Conrent whereby, as of June 30, 2015, the
Company had borrowed $30.4 million, bearing interest at a rate of
8% per annum, payable in arrears semi-annually, with all principal
and accrued and unpaid interest due on April 1, 2020. The Company
did not pay interest on this loan during the three months ended
December 31, 2019.
|
$30,400,000
|
$30,400,000
|
|
|
|
|
|
Loan
Agreement whereby the Company can borrow up to $5.0 million at 8%
interest per annum on borrowed funds maturing on September 30,
2020.
|
3,399,644
|
3,399,644
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the acquisition.
|
18,943
|
28,045
|
|
|
|
|
|
Total
debt obligations
|
33,818,587
|
33,827,689
|
|
Less
current portion
|
(33,818,587)
|
(33,827,689)
|
|
Long-term
debt, net of current portion
|
$-
|
$-
|
The
following table summarizes future maturities of debt obligations as
of December 31, 2019:
|
Twelve-month period ended December 31,
|
Total
|
|
|
|
|
2020
|
$33,818,587
|
|
2021
|
-
|
|
Thereafter
|
-
|
|
Total
|
$33,818,587
|
(18) RELATED-PARTY
According to Amendment No. 1 to ADS Securities
LLC's Schedule 13D filing, ETS Limited, a wholly-owned subsidiary
of ADS Securities LLC, owns
4,871,745 shares of the Company.
(19) 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.
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 stockholder 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, 2019, there were no shares
of preferred stock outstanding.
No
dividends were paid during the three-month period ended December
31, 2019 or 2018, respectively.
Series A Preferred Stock
On October 12, 2017,
the Company filed a Certificate of Designation of the Relative
Rights and Preferences (“Certificate
of Designation”) with the
Delaware Division of Corporations, designating 1,200,000 shares of
the Company’s preferred stock as Series A Preferred. Shares
of Series A Preferred rank senior to the Company’s common
stock, and all other classes and series of equity securities of the
Company that by their terms do not rank senior to the Series A
Preferred.
Except with respect to
transactions upon which holders of the Series A Preferred are
entitled to vote separately as a class under the terms of the
Certificate of Designation, the Series A Preferred has no voting
rights. The shares of
common stock into which the Series A Preferred is convertible
shall, upon issuance, have all of the same voting rights as other
issued and outstanding shares of our common
stock.
The
Series A Preferred has no separate dividend rights; however,
whenever the Board declares a dividend on the Company’s
common stock, if ever, each holder of record of a share of Series A
Preferred shall be entitled to receive an amount equal to such
dividend declared on one share of common stock multiplied by the
number of shares of common stock into which such share of Series A
Preferred could be converted on the Record Date.
Each share of Series A Preferred has a Liquidation Preference of
$35.00 per share, and is convertible, at the holder’s option,
into ten shares of the Company’s common stock, subject to
adjustments as set forth in the Certificate of Designation, at any
time beginning five hundred and forty days after the date of
issuance.
As of December 31, 2019, no shares of Series A Preferred were
issued and outstanding.
(20)
STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting
of stockholders on March 21, 2011, our stockholders 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 stockholders held on May 19,
2015, our stockholders approved a 713,262 share increase to the
total number of shares authorized under the 2012
Plan. Warrants for Board
members vest immediately and warrants issued to employees vest
annually over either a two or three-year period after the grant
date.
As
of December 31, 2018, the Board of Directors suspended further
awards under the 2012 Plan until further notice. The Company
recorded expense of $19,687 and $65,312 for the three months ended
December 31, 2019 and 2018, respectively, related to the vesting of
common stock awarded prior to the suspension of the 2012 Plan.
There were 27,218 shares of common stock available for issuance
under the 2012 Plan as of December 31, 2019.
All Options and Warrants
The
fair value of each stock option and warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model.
During the three months ended December 31, 2019 and 2018, the
Company granted no options and warrants to purchase shares of
common stock under the 2012 Plan. The warrants for Board members
vest immediately and expire five years from grant date and warrants
or options issued to employees vest annually over either a two to
three-year period and expire five years after the final vesting
date of the grant. The Company recorded expense of $0 and
$17,906 for the three months ended December 31, 2019 and 2018,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
All options
and warrants have vested and are exercisable at December 31, 2019
and no future issuances are expected.
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, 2019 is presented below:
|
|
Shares Under Option
|
Weighted Average
Exercise
Price
|
Weighted Average
Remaining
Contractual
Life
|
Aggregate Intrinsic
Value
|
|
Outstanding
as of September 30, 2019
|
685,259
|
$1.56
|
2.90
years
|
$-
|
|
Granted
|
-
|
$-
|
-
|
-
|
|
Expired/Cancelled
|
-
|
$-
|
-
|
-
|
|
Exercised
|
-
|
$-
|
-
|
-
|
|
Outstanding
as of December 31, 2019
|
685,259
|
$1.56
|
2.65
years
|
$-
|
|
Exercisable
as of December 31, 2019
|
685,259
|
$1.56
|
2.65
years
|
$-
|
The
intrinsic value of options and warrants outstanding and exercisable
is based on the Company’s share price of $0.49 at December
31, 2019.
(21) 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, 2019 and 2018, the Company
incurred a net loss for income tax purposes of $232,625 and
$1,734,918, respectively. The amount and ultimate realization
of the benefits from the net operating losses is dependent, in
part, upon the tax laws in effect, our 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.
(22) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is, from time to time, involved in various legal
proceedings incidental to the conduct of our business.
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 effective September 27, 2016. Mr. Merrill
sought not less than $590,577 plus interest, attorney fees and
costs. At a hearing on April 25, 2018, the court dismissed the
plaintiff’s claims related to existence of an oral look-back
agreement and a separation agreement. In an order entered July 25,
2019, the court granted the defendants’ motion to strike
plaintiff’s damages’ expert report and barred
plaintiff’s expert from testifying at trial, if any.
Plaintiff’s motion to reconsider the court’s July 25,
2019 order was denied on August 21, 2019. Subsequently, the parties
reached an immaterial mutually agreeable settlement on October 18,
2019, and as a result, the case was dismissed with prejudice on
November 1, 2019.
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. The Supreme Court took action to resolve previous,
conflicting decisions regarding the jurisdiction of such claims and
determined that such claims will be resolved by the Federal
Administrative Tribunal. Subsequently, plaintiff filed an Amparo
action before the Collegiate Court, seeking an appeal of the
Federal Administrative Court’s earlier decision against
plaintiff. The Collegiate Court issued a ruling in August 2019 that
the matter of dispute was previously resolved by a lower court in
2016. The Company disagrees with this ruling and is exploring its
options going forward. Based upon the fee arrangement the Company
has with its counsel, we anticipate the future liabilities
attributable to legal expense will be minimal.
Blaike Anderson v.
Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson
filed a complaint seeking unspecified damages in the State Court of
Marion County, Indiana, alleging liability on the part of
defendants for providing a defective ankle monitoring device and
failure to warn plaintiff regarding the condition thereof. The
Company removed the matter to federal court and subsequently filed
its answer denying Plaintiff’s allegations in August 2019.
Discovery is currently ongoing. The Company intends to vigorously
defend the case.
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and is pursuing such a ruling before the
Court.
(23) SUBSEQUENT EVENTS
As previously reported, on December 4, 2019, the
Company requested that Conrent extend the maturity of the Amended
Facility Agreement from April 1, 2020 to July 1, 2021.
On January 6, 2020, the investors who owned the securities
from Conrent used to finance the debt (the
“Noteholders”) held a meeting to address the
Company’s request. On January 7, 2020, Conrent notified the
Company in writing that the Noteholders agreed to extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 10, 2020, the Company and Conrent entered
into an amendment to the Facility Agreement which extends the
maturity of the Facility to July 1, 2021.
In
accordance with the Subsequent Events Topic of the FASB ASC 855, we
have evaluated subsequent events, through the filing date and noted
that, other than as disclosed above, no additional subsequent
events have occurred that are reasonably likely to impact the
financial statements.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
This Report contains information that constitutes
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Generally, the statements
contained in this Quarterly Report on Form 10-Q that are not purely
historical can be considered to be “forward-looking
statements”. These statements represent our
expectations, hopes, beliefs, anticipations, commitments,
intentions, and strategies regarding the future. They may be
identified by the use of words or phrases such as
“believes”, “expects”,
“intends”, “anticipates”,
“should”, “plans”, “estimates”,
“projects”, “potential”, and
“will” among others. Forward-looking statements
include, but are not limited to, statements contained in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations regarding our financial performance,
revenue, and expense levels in the future and the sufficiency of
our existing assets to fund future operations and capital spending
needs. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. These risks and uncertainties include, but are
not limited to, those described in “Risk Factors” in
our most recent Annual Report on Form 10-K, and those described
from time to time in our reports filed with the Securities and
Exchange Commission (“SEC”).
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form
10-K for the fiscal year ended September 30, 2019, and Current
Reports on Form 8-K that have been filed with the SEC through the
date of this Report. Except as otherwise indicated, as used in this
Report, the terms the “Company”,
“Track Group”, “we”, “our”, and “us” refer to Track Group, Inc., a Delaware
corporation.
General
Our core business is
based on the 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, we deploy offender-based management
services that combine patented GPS tracking technologies, fulltime
24/7/365 global monitoring capabilities, case management, and
proprietary data analytics. We offer customizable tracking
solutions that leverage real-time tracking data, best practices
monitoring, and analytics capabilities to create complete,
end-to-end tracking solutions.
Our devices consist principally of the
ReliAlertTM
product line, which is supplemented by
the Shadow product line. These devices are generally leased on
a daily rate basis and may be combined with our monitoring center
services, proprietary software and data analytics subscription to
provide an end-to-end PaaS.
ReliAlertTM and
Shadow. Our tracking
devices utilize patented technology and are securely attached
around an offender’s ankle with a tamper resistant strap that
cannot be adjusted or removed without detection, unless by a
supervising officer, and which are activated through services
provided by our monitoring centers. The
ReliAlertTM
and Shadow units are intelligent
devices with integrated computer circuitry, utilizing both GPS and
RF, and constructed from case-hardened plastics designed to
promptly notify the intervention centers of any attempt made to
breach applicable protocols, or to remove or otherwise tamper with
the device or optical strap housing. The
ReliAlertTM
platform also incorporates voice
communication technology that provides officers with 24/7/365 voice
communication with the offenders. Both devices are FCC, CE and
PTCRB certified and protected by numerous patents and
trademarks.
Monitoring Center
Services. Our
monitoring center facilities provide live 24/7/365 monitoring of
all alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, we staff our centers with highly trained,
bi-lingual individuals. These operators act as an extension of
agency resources receiving alarms, communicating and intervening
with offenders regarding violations, and interacting with
supervision staff, all pursuant to agency-established
protocols. The facilities have redundant power source, battery
back-up and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in the U.S. and Chile. In
addition, the Company has assisted in the establishment of
monitoring centers for customers and local partners in other global
locations
Data Analytics
Services. Our
TrackerPALTM
software,
TrackerPALTM
Mobile, combined with our Data
Analytic analysis tools, provide an integrated platform allowing
case managers and law enforcement officers quick access views of an
offender’s travel behavior, mapping, and inference on
patterns. Our advanced data analytics service offers a highly
complex predictive reporting mechanism that combines modern
statistical methods, developed using computer science and used by
intelligence agencies that separate noteworthy events from normal
events, rank offender cases according to their need for
supervision, and relate decision-relevant metrics to benchmarks in
real-time.
Other
Services. The Company offers
smartphone applications specifically designed for the criminal
justice market, including a domestic violence app that creates a
mobile geo-zone around a survivor and an alcohol monitoring app
linked to a police-grade breathalyzer.
Business Strategy
We are committed to helping our customers improve
offender rehabilitation and re-socialization outcomes through our
innovative hardware, software, and services. We treat our
business as a service business. Although we still manufacture
patented tracking technology, we see the physical goods as only a
small part of the integrated offender monitoring solutions we
provide. Accordingly, rather than receiving a payment just for a
piece of manufactured equipment, the Company receives a recurring
stream of revenue for ongoing device agnostic subscription
contracts. As part of our strategy, we continue to expand our
device-agnostic platform to not
only collect, but also store, analyze, assess and correlate
location data for both accountability and auditing reasons, as well
as to use for predictive analytics and assessment of effective and
emerging techniques in criminal behavior and rehabilitation.
We believe a high-quality customer
experience with knowledgeable salespersons who can convey the value
of our products and services greatly enhances our ability to
attract and retain customers. Therefore, our strategy also includes
building and expanding our own direct sales force and our
third-party distribution network to effectively reach more
customers and provide them with a world-class sales and post-sales
support experience. In addition, we are developing related-service
offerings to address adjacent market opportunities in both the
public and private sectors. We believe continual investment in
research and development (“R&D”), including smartphone applications and
other monitoring services is critical to the development and sale
of innovative technologies and integrated solutions today and in
the future.
Critical Accounting Policies
From
time to time, management reviews and evaluates certain accounting
policies that are considered to be significant in determining our
results of operations and financial position.
A description of the
Company’s critical accounting policies that affect the
preparation of the Company’s financial statements is set
forth in the Company’s Annual Report on Form 10-K for the
year ended September 30, 2019,
filed with the SEC on January 10, 2020. During the three months
ended December 31, 2019, there have been no material changes to the
Company’s critical accounting
policies.
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) "ASC Topic 842" which modified lease
acccounting for lessees to create transparency and comparability by
recording lease assets and liabilities for operating leases and
disclosing key information about leasing arrangements. See
Note 15.
The
preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expense. By their
nature, these judgments are subject to an inherent degree of
uncertainty. We assess the reasonableness of our estimates,
including those related to bad debts, inventories, right of use
assets, estimated useful lives, intangible assets, warranty
obligations, product liability, revenue, legal matters and income
taxes. We base our estimates on historical experience as well as
available current information on a regular basis. Management
uses this information to form the basis for making judgments about
the carrying value of assets and liabilities. Actual results
may differ from these estimates under different assumptions or
conditions.
Government Regulation
Our
operations are subject to various federal, state, local and
international laws and regulations. We are not involved in any
pending or, to our knowledge, threatened governmental proceedings,
which would require curtailment of our operations because of such
laws and regulations.
Results of Operations
Three Months Ended December 31, 2019 Compared to Three Months Ended
December 31, 2018
Revenue
For
the three months ended December 31, 2019, the Company recognized
revenue from operations of $8,420,831 compared to $8,211,535 for
the three months ended December 31, 2018, an increase of $209,296
or approximately 3%. The increase in revenue was principally
the result of an increase in growth driven by clients in Illinois,
Bahamas, Puerto Rico and Michigan, partially offset by lower
revenue in Chile, largely due to the strengthening
dollar.
Other
revenue for the three months ended December 31, 2019 increased to
$152,408 from $151,207 in the same period in 2018, an increase of
$1,201.
Cost of Revenue
During the three months ended December 31, 2019,
cost of revenue totaled $3,754,351 compared to cost of revenue
during the three months ended December 31, 2018 of $3,578,482, an
increase of $175,869 or approximately 5%. The increase in cost of
revenue was largely the result
of higher monitoring costs of $94,723, higher server costs of
$27,398, higher lost stolen and damage expense of $29,969 and
higher commission expense of $54,401, partially offset by lower
communication costs of $38,475.
Depreciation and amortization included in cost of
revenue for the three months ended December 31, 2019 and 2018
totaled $487,442 and $478,289, respectively. These costs represent
the depreciation of ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
certain royalty agreements. The
increase of $9,153 primarily represents an increase in device
amortization due to an increase in the number of
devices. We believe the
equipment lives on which the depreciation is based are appropriate
due to rapid changes in electronic monitoring technology and the
corresponding potential for obsolescence. Management
periodically assesses the useful life of the devices for
appropriateness. Amortization of a patent related to GPS and
satellite tracking is also included in cost of
sales.
Gross Profit and Margin
During
the three months ended December 31, 2019, gross profit totaled
$4,666,480, representing an increase of $33,427 or less than 1%
compared to the same period last year, and resulting in a gross
margin of approximately 55% compared to $4,633,053 or a gross
margin of approximately 56% during the three months ended December
31, 2018.
General and Administrative Expense
During
the three months ended December 31, 2019, general and
administrative expense totaled $3,011,854 compared to $3,422,272
for the three months ended December 31, 2018. The decrease of
$410,418 or approximately 12% in general and administrative costs
resulted largely from lower legal and professional fees of
$266,647, lower consulting and outside services of $77,510, a
decrease in stock based compensation of $63,530, lower travel and
entertainment of $60,761, partially offset by higher insurance
expense of $43,012 and higher wages and taxes of
$23,456.
Selling and Marketing Expense
During
the three months ended December 31, 2019, selling and marketing
expense increased to $541,549 compared to $503,930 for the three
months ended December 31, 2018. The increase in expense of $37,619,
or approximately 7% is principally the result of higher consulting
and outside services of $34,784, higher trade show expense of
$16,199, partially offset by lower travel and entertainment expense
of $16,984.
Research and Development Expense
During the three months ended December 31, 2019,
research and development expense totaled $296,155 compared to
$248,865 for the three months ended December 31, 2018, an increase
of $47,290 or approximately 19%. The increase resulted
largely from reallocation of $17,080 of rent expense, higher dues
and subscriptions of $13,692, higher contract labor costs of $4,296
and payroll and benefits of $4,024. In addition, we are
significantly enhancing our technology platform to improve the
efficiency of our software, firmware, user interface and
automation. As a result of these improvements, $341,622 was
capitalized as developed technology during the three months ended
December 31, 2019 and 275,623 was capitalized in the three months
ended December 31, 2018. A portion of this expense would have been
recognized as research and development expense, absent the
significant enhancements to the technology.
Depreciation and Amortization Expense
During
the three months ended December 31, 2019, depreciation and
amortization expense totaled $515,939 compared to $514,981 for the
three months ended December 31, 2018, an increase of $958 or less
than 1%.
Total Operating Expense
During
the three months ended December 31, 2019, total operating expense
decreased to $4,365,497 compared to $4,690,048 for the three months
ended December 31, 2018, a decrease of $324,551 or approximately
7%.
Operating income (loss)
During
the three months ended December 31, 2019, operating income was
$300,983 compared to a loss of $56,995 for the three months ended
December 31, 2018, an increase of $357,978. This improvement was
due to an improvement in gross profit of $33,427, and a decrease in
operating expense of $324,551.
Other Income and Expense
For the three months ended December 31, 2019,
other income (expense) totaled expense of $459,225 compared to
expense of $1,533,916 for the three months ended December 31, 2018,
a decrease in net expense of $1,074,691 or approximately
70%. The improvement in
other income (expense) is largely due to positive currency exchange
rate movements of $1,075,985 compared to the first fiscal quarter
of 2019.
Net Loss Attributable to Common Stockholders
The Company had net loss attributable to common
stockholders of $232,625 for the three months ended December 31,
2019, compared to a net loss attributable to common stockholders of
$1,734,918 for the three months ended December 31, 2018, a decrease
in net loss of $1,502,293. This decrease in net
loss is largely due to higher gross profit, lower operating expense
and positive currency exchange rate movements.
Liquidity and Capital Resources
During and prior to the
fiscal year ended September 30, 2017, we supplemented cash flows by
financing the business from borrowings under a credit facility, a
revolving line of credit from one of our stockholders, receipt of
certain disgorgement funds, and from the sale and issuance of
debt securities. Subsequently, the Company was self-funded through
net cash provided by operating activities. As of December 31, 2019,
excluding interest, approximately $3.4 million was owed to Sapinda
Asia Limited under a loan agreement (the “Sapinda
Loan Agreement”) that matures
on September 30, 2020 and $30.4 million was owed to Conrent Invest
S.A. (“Conrent”)
under a loan (the
“Conrent
Loan Agreement”). No borrowings
or sales of equity securities occurred during the three months
ended December 31, 2019 or during the year ended September 30,
2019.
On July 19, 2018, the
Company and Conrent entered into an amendment to their Facility
Agreement (the “Amended
Facility Agreement”), which Amended
Facility Agreement (i) extended the maturity date of the Facility
to the earlier of either April 1, 2019 or the date upon which the
outstanding principal amount is repaid by the Company, and (ii)
provided that in the event of a change of control of the Company,
Conrent shall immediately cancel the Amended Credit Facility and
declare the outstanding principal amount, together with unpaid
interest, immediately due and payable. On February 24, 2019,
the Company and Conrent entered into a second amendment to their
Facility Agreement (the “Second Amended
Facility Agreement”), which Second
Amended Facility Agreement (i) extends the maturity date of the
Facility to the earlier of either April 1, 2020 or the date upon
which the outstanding principal amount is repaid by the Company,
and (ii) provides that in the event of a change of control of the
Company, Conrent shall immediately cancel the Second Amended Credit
Facility and declare the outstanding principal amount, together
with unpaid interest, immediately due and payable.
On December 4, 2019, the Company
requested that Conrent extend the maturity of the Amended Facility
Agreement from April 1, 2020 to July 1, 2021. On January 6,
2020, the investors who owned the securities from Conrent used to
finance the debt (the “Noteholders”) held a meeting to address the
Company’s request. On January 7, 2020, Conrent notified the
Company in writing that the Noteholders agreed to extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 10, 2020, the Company and Conrent entered
into an amendment to the Facility Agreement which extends the
maturity of the Facility to July 1, 2021.
Net Cash Flows from Operating Activities.
During the three months ended December
31, 2019, we had cash flows
from operating activities of $2,650,968, compared to cash flows
from operating activities of $1,138,433 for the three months ended
December 31, 2018, representing
an increase of approximately 133%. The increase in cash from
operations was the result of a drop in the net loss from $1,734,918
in the quarter one year ago to $232,625. This was augmented by a
decline in accounts receivable of $1,155,606 and an increase in
accrued liabilities of $793,323, offset by an increase in prepaid
expense and other assets of $179,203.
Net Cash Flows from Investing Activities.
The Company used $1,002,428 of cash for investing
activities during the three months ended
December 31, 2019, compared to
$551,199 of cash used during the three months ended
December 31, 2018. Cash used for investing
activities was used for significant enhancements of our software
platform and purchases of monitoring and other equipment to meet
customer demand during the three months ended December 31, 2019.
Purchases of property and equipment decreased $87,014, compared to
the prior period, largely due to a decrease in leasehold
improvements.
Net Cash Flows from Financing Activities.
The Company used $9,552 of cash for financing
activities during the three months ended
December 31, 2019, compared to
$9,357 of cash used in financing activities during the
three
months ended December 31, 2018.
Liquidity, Working Capital and
Management’s Plan
As of December
31, 2019, the Company had
unrestricted cash of $8,493,550 compared to unrestricted cash of
$6,896,711 as of September 30,
2019. As of
December
31, 2019, we had a working
capital deficit of $35,092,010, compared to a working capital
deficit of $35,010,475 as of September 30, 2019. This increase
in working capital deficit of $81,535 is due to an increase in
accrued liabilities, largely due to interest payable, purchases of
monitoring equipment and capitalized software, largely offset by
cash provided by operations.
On
January 7, 2020, Conrent notified the Company in writing that the
Noteholders agreed to extend the maturity of the Facility to July
1, 2021. We currently believe that our cash on hand, in addition to
cash derived from our operating activities, will be sufficient to
sustain operations through the next twelve months. In the event we
need to obtain additional funding, the Company may obtain
additional financing from outside sources.
On March 13, 2017, the Company successfully
extended the Sapinda Loan Agreement from September 30, 2017 to
September 30, 2020. On February 24, 2019, the Company successfully
extended the Conrent Loan Agreement to the earlier of either
April 1, 2020 or the date upon which the outstanding principal
amount is repaid by the Company.
On
December 4, 2019, the Company requested that Conrent extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 6,
2020 the investors who owned the securities from Conrent used to
finance the debt (the “Noteholders”) held a meeting to
address the Company’s request. On January 7, 2020, Conrent
notified the Company in writing that the Noteholders agreed to
extend the maturity of the Amended Facility Agreement from April 1,
2020 to July 1, 2021. On January 10, 2020, the Company and Conrent
entered into an amendment to the Facility Agreement which extends
the maturity of the Facility to July 1, 2021.
Inflation
We
do not believe that inflation has had a material impact on our
historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The
Company has not entered into any transactions with unconsolidated
entities whereby the Company has financial guarantees, derivative
instruments, or other contingent arrangements that expose the
Company to material continuing risks, contingent liabilities, or
any other obligation that provides financing, liquidity, market
risk, or credit risk support to the Company.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
The
Company footprint extends to a number of countries outside the
United States, and we intend to continue to examine international
opportunities. As a result, our revenue and results of
operations are affected by fluctuations in currency exchange rates,
interest rates, transfer pricing changes, taxes and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
Foreign Currency Risks
We
had $2,852,973 and $3,149,976 in revenue from sources outside of
the United States for the three months ended December 31, 2019 and
2018, respectively. We made and received payments in a foreign
currency during the periods indicated, which resulted in a foreign
exchange income of $143,308 and foreign exchange expense of
$932,677 in the three months ended December 31, 2019 and 2018,
respectively. Fluctuations in the exchange loss or gain in any
given period are due to the strengthening or weakening of the U.S.
dollar against the Chilean Peso and Canadian dollar. Changes in
currency exchange rates affect the relative prices at which we sell
our products and purchase goods and services. Given the uncertainty
of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, product pricing, results
of operations, or financial condition. We do not use foreign
currency exchange contracts or derivative financial instruments for
hedging or speculative purposes. To the extent foreign sales become
a more significant part of our business in the future, we may seek
to implement strategies which make use of these or other
instruments in order to minimize the effects of foreign currency
exchange on our business.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) to ensure that material information relating to the
Company is made known to the officers who certify our financial
reports and to other members of senior management and the Board of
Directors. These disclosure controls and procedures are designed to
ensure that information required to be disclosed in the reports
that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and
forms.
Under
the supervision and with the participation of management, including
the principal executive officer and principal financial officer, an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2019 was
completed pursuant to Rules 13a-15(b) and 15d-15(b) under the
Exchange Act. Based on this evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective and designed
to provide reasonable assurance that the information required to be
disclosed is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms as of
December 31, 2019.
Changes in Internal Controls
We
maintain a system of internal control over financial reporting that
is designed to provide reasonable assurance that our books and
records accurately reflect our transactions and that our
established policies and procedures are followed. There was no
change in our internal control over financial reporting during our
quarter ended December 31, 2019 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in various legal
proceedings incidental to the conduct of our business.
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 effective September 27, 2016. Mr. Merrill
sought not less than $590,577 plus interest, attorney fees and
costs. At a hearing on April 25, 2018, the court dismissed the
plaintiff’s claims related to existence of an oral look-back
agreement and a separation agreement. In an order entered July 25,
2019, the court granted the defendants’ motion to strike
plaintiff’s damages’ expert report and barred
plaintiff’s expert from testifying at trial, if any.
Plaintiff’s motion to reconsider the court’s July 25,
2019 order was denied on August 21, 2019. Subsequently, the parties
reached an immaterial mutually agreeable settlement on October 18,
2019, and as a result, the case was dismissed with prejudice on
November 1, 2019.
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. The Supreme Court took action to resolve previous,
conflicting decisions regarding the jurisdiction of such claims and
determined that such claims will be resolved by the Federal
Administrative Tribunal. Subsequently, plaintiff filed an Amparo
action before the Collegiate Court, seeking an appeal of the
Federal Administrative Court’s earlier decision against
plaintiff. The Collegiate Court issued a ruling in August 2019 that
the matter of dispute was previously resolved by a lower court in
2016. The Company disagrees with this ruling and is exploring its
options going forward. Based upon the fee arrangement the Company
has with its counsel, we anticipate the future liabilities
attributable to legal expense will be minimal.
Blaike Anderson v.
Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson
filed a complaint seeking unspecified damages in the State Court of
Marion County, Indiana, alleging liability on the part of
defendants for providing a defective ankle monitoring device and
failure to warn plaintiff regarding the condition thereof. The
Company removed the matter to federal court and subsequently filed
its answer denying Plaintiff’s allegations in August 2019.
Discovery is currently ongoing. The Company intends to vigorously
defend the case.
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and is pursuing such a ruling before the
Court.
Item 1A. Risk Factors
Our results of
operations and financial condition are subject to numerous risks
and uncertainties described in our Annual Report on Form 10-K for
our fiscal year ended September 30, 2019, filed on January 10,
2020. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of February
13,
2020, there have been no
material changes to the disclosures made in the above-referenced
Form 10-K.
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior
Securities
None.
Item 4.
Mine Safety Disclosures
Not
applicable.
Item 5. Other
Information
None.
Item 6.
Exhibits
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(a)
|
Exhibits Required by Item 601 of Regulation S-K
|
|
Exhibit
Number
|
|
Title of Document
|
|
|
|
|
|
|
Certification
of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
|
|
|
|
Certification
of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
|
|
|
|
Certifications
under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
|
|
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101.INS
|
|
XBRL
INSTANCE DOCUMENT
|
|
101.SCH
|
|
XBRL
TAXONOMY EXTENSION SCHEMA
|
|
101.CAL
|
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
101.DEF
|
|
XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
101.LAB
|
|
XBRL
TAXONOMY EXTENSION LABEL LINKBASE
|
|
101.PRE
|
|
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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|
Track Group, Inc.
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||
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Date: February 13, 2020
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By:
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/s/
Derek Cassell
|
|
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Derek Cassell, Chief Executive Officer
Principal Executive Officer
|
|
|
|
|
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Date: February 13, 2020
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By:
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/s/
Peter K. Poli
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Peter K. Poli, Chief Financial Officer
(Principal Accounting Officer)
|
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-23-