UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
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 | 87-0543981 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [ ]
Indicate by check mark 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 | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
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 1, 20182024, was 10,462,433.11,863,758.
Group, Inc.
FORM 10-Q
For the Quarterly Period Ended December 31, 2017
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PART I. FIFINANCIAL INFORMATION
NANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) December 31, | September 30, | |||||||
2023 | 2023 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 3,730,885 | $ | 4,057,195 | ||||
Accounts receivable, net of allowance for credit losses of $298,969 and $178,095, respectively | 5,658,004 | 4,536,916 | ||||||
Prepaid expense and deposits | 499,943 | 610,440 | ||||||
Inventory, net of reserves of $3,772 and $3,772, respectively | 970,329 | 1,286,194 | ||||||
Total current assets | 10,859,161 | 10,490,745 | ||||||
Property and equipment, net of accumulated depreciation of $1,942,870 and $1,920,850, respectively | 97,393 | 115,808 | ||||||
Monitoring equipment, net of accumulated depreciation of $6,863,281 and $6,348,695, respectively | 5,146,124 | 5,187,092 | ||||||
Intangible assets, net of accumulated amortization of $18,138,039 and $17,430,846, respectively | 14,063,959 | 14,157,294 | ||||||
Goodwill | 8,061,509 | 7,851,466 | ||||||
Other assets | 2,382,312 | 2,442,154 | ||||||
Total assets | $ | 40,610,458 | $ | 40,244,559 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,276,912 | $ | 2,796,712 | ||||
Accrued liabilities | 2,664,755 | 2,571,839 | ||||||
Current portion of long-term debt | 228,317 | 308,417 | ||||||
Total current liabilities | 6,169,984 | 5,676,968 | ||||||
Long-term debt, net of current portion | 42,797,352 | 42,801,165 | ||||||
Long-term liabilities | 238,865 | 259,359 | ||||||
Total liabilities | 49,206,201 | 48,737,492 | ||||||
Commitments and contingencies (Note 23) | ||||||||
Stockholders’ equity (deficit): | ||||||||
Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,863,758 and 11,863,758 shares outstanding, respectively | 1,186 | 1,186 | ||||||
Preferred stock, $0.0001 par value: 20,000,000 shares authorized; 0 shares outstanding | - | - | ||||||
Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | - | - | ||||||
Paid in capital | 302,600,546 | 302,597,115 | ||||||
Accumulated deficit | (309,609,936 | ) | (309,610,397 | ) | ||||
Accumulated other comprehensive loss | (1,587,539 | ) | (1,480,837 | ) | ||||
Total equity (deficit) | (8,595,743 | ) | (8,492,933 | ) | ||||
Total liabilities and stockholders’ equity (deficit) | $ | 40,610,458 | $ | 40,244,559 | ||||
| Assets | December 31, 2017 (unaudited) | September 30, 2017 |
| Current assets: | ||
| Cash | $1,755,437 | $2,027,321 |
| Accounts receivable, net of allowance for doubtful accounts of $3,432,985 and $3,268,095, respectively | 5,526,000 | 5,438,564 |
| Note receivable, current portion | 234,733 | 234,733 |
| Prepaid expenses and other | 4,219,135 | 854,122 |
| Inventory, net of reserves of $26,934, respectively | 172,347 | 261,810 |
| Total current assets | 11,907,652 | 8,816,550 |
| Property and equipment, net of accumulated depreciation of $1,862,347 and $1,778,634, respectively | 883,039 | 903,100 |
| Monitoring equipment, net of accumulated amortization of $4,767,061 and $4,906,925, respectively | 3,460,685 | 3,493,012 |
| Intangible assets, net of accumulated amortization of $10,444,569 and $9,839,032, respectively | 24,410,468 | 24,718,655 |
| Goodwill | 8,275,308 | 8,226,714 |
| Other assets | 785,195 | 2,989,101 |
| Total assets | $49,722,347 | $49,147,132 |
| Liabilities and Stockholders’ Equity | ||
| Current liabilities: | ||
| Accounts payable | 2,529,632 | 2,769,835 |
| Accrued liabilities | 8,021,419 | 6,650,291 |
| Current portion of long-term debt, net of discount of $130,067 and $185,811, respectively | 30,322,191 | 30,270,531 |
| Total current liabilities | 40,873,242 | 39,690,657 |
| Long-term debt, net of current portion | 3,466,468 | 3,480,717 |
| Total liabilities | 44,339,710 | 43,171,374 |
| Stockholders’ equity: | ||
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 10,462,433 and 10,480,984 shares outstanding, respectively | 1,046 | 1,048 |
| Additional paid-in capital | 300,978,608 | 300,717,861 |
| Accumulated deficit | (295,109,920) | (294,067,329) |
| Accumulated other comprehensive loss | (487,097) | (675,822) |
| Total equity | 5,382,637 | 5,975,758 |
| Total liabilities and stockholders’ equity | $49,722,347 | $49,147,132 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSSINCOME (LOSS)
(Unaudited)
Three Months Ended December 31, | ||||||||
2023 | 2022 | |||||||
Revenue: | ||||||||
Monitoring and other related services | $ | 8,674,485 | $ | 8,289,782 | ||||
Product sales and other | 292,487 | 565,909 | ||||||
Total revenue | 8,966,972 | 8,855,691 | ||||||
Cost of revenue: | ||||||||
Monitoring, products and other related services | 3,973,989 | 3,901,994 | ||||||
Depreciation & amortization included in cost of revenue | 789,463 | 773,019 | ||||||
Total cost of revenue | 4,763,452 | 4,675,013 | ||||||
Gross profit | 4,203,520 | 4,180,678 | ||||||
Operating expense: | ||||||||
General & administrative | 2,757,887 | 2,754,521 | ||||||
Selling & marketing | 706,531 | 729,470 | ||||||
Research & development | 682,463 | 589,805 | ||||||
Depreciation & amortization | 239,760 | 247,710 | ||||||
Total operating expense | 4,386,641 | 4,321,506 | ||||||
Operating income (loss) | (183,121 | ) | (140,828 | ) | ||||
Other income (expense): | ||||||||
Interest income | 48,162 | 76,222 | ||||||
Interest expense | (486,084 | ) | (495,772 | ) | ||||
Currency exchange rate gain | 538,945 | 483,151 | ||||||
Total other income (expense) | 101,023 | 63,601 | ||||||
Income (loss) before income taxes | (82,098 | ) | (77,227 | ) | ||||
Income tax expense (benefit) | (82,559 | ) | (113,611 | ) | ||||
Net income attributable to common stockholders | 461 | 36,384 | ||||||
Foreign currency translation adjustments | (106,702 | ) | 152,246 | |||||
Comprehensive income (loss) | $ | (106,241 | ) | $ | 188,630 | |||
Net income per share – basic | ||||||||
Net income per common share | $ | 0.00 | $ | 0.00 | ||||
Weighted average common shares outstanding | 11,863,758 | 11,863,758 | ||||||
Net income per share – diluted | ||||||||
Net income per common share | $ | 0.00 | $ | 0.00 | ||||
Weighted average common shares outstanding | 11,863,758 | 11,863,758 | ||||||
Three Months Ended December 31, | ||
2017 | 2016 | |
| Revenues: | ||
| Monitoring services | $7,350,805 | $7,265,013 |
| Other | 139,889 | 406,477 |
| Total revenues | 7,490,694 | 7,671,490 |
| Cost of revenues: | ||
| Monitoring, products and other related services | 2,542,007 | 3,607,276 |
| Depreciation & amortization included in cost of revenues | 477,142 | 445,493 |
| Impairment of monitoring equipment and parts | - | 74,787 |
| Total cost of revenues | 3,019,149 | 4,127,556 |
| Gross profit | 4,471,545 | 3,543,934 |
| Operating expenses: | ||
| General & administrative | 3,657,738 | 3,175,054 |
| Restructuring costs | - | 566,330 |
| Selling & marketing | 409,737 | 589,768 |
| Research & development | 163,946 | 488,178 |
| Depreciation & amortization | 564,740 | 575,111 |
| Total operating expenses | 4,796,161 | 5,394,441 |
Loss from operations | (324,616) | (1,850,507) |
| Other income (expense): | ||
| Interest expense, net | (673,827) | (647,103) |
| Currency exchange rate loss | (55,072) | (116,442) |
| Other income/expense, net | 10,924 | 293 |
| Total other income (expense) | (717,975) | (763,252) |
| Net loss attributable to common shareholders | (1,042,591) | (2,613,759) |
| Foreign currency translation adjustments | 188,725 | (493,572) |
| Comprehensive loss | $(853,866) | $(3,107,331) |
| Net loss per common share, basic and diluted | $(0.10) | $(0.25) |
| Weighted average common shares outstanding, basic and diluted | 10,476,346 | 10,333,516 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
Balance September 30, 2023 | 11,863,758 | $ | 1,186 | $ | 302,597,115 | $ | (309,610,397 | ) | $ | (1,480,837 | ) | $ | (8,492,933 | ) | ||||||||||
Stock-based compensation | - | - | 3,431 | - | - | 3,431 | ||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (106,702 | ) | (106,702 | ) | ||||||||||||||||
Net income | - | - | - | 461 | - | 461 | ||||||||||||||||||
Balance December 31, 2023 | 11,863,758 | $ | 1,186 | $ | 302,600,546 | $ | (309,609,936 | ) | $ | (1,587,539 | ) | $ | (8,595,743 | ) | ||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
Balance September 30, 2022 | 11,863,758 | $ | 1,186 | $ | 302,437,593 | $ | (306,218,889 | ) | $ | (1,274,617 | ) | $ | (5,054,727 | ) | ||||||||||
Stock-based compensation | - | - | 61,750 | - | - | 61,750 | ||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 152,246 | 152,246 | ||||||||||||||||||
Net income | - | - | - | 36,384 | - | 36,384 | ||||||||||||||||||
Balance December 31, 2022 | 11,863,758 | $ | 1,186 | $ | 302,499,343 | $ | (306,182,505 | ) | $ | (1,122,371 | ) | $ | (4,804,347 | ) | ||||||||||
Three Months Ended December 31, | ||
2017 | 2016 | |
| Cash flows from operating activities: | ||
| Net loss | $(1,042,591) | $(2,613,759) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation and amortization | 1,041,882 | 1,020,604 |
| Impairment of monitoring equipment and parts | - | 74,787 |
| Bad debt expense | 186,910 | 359,551 |
| Accretion of debt discount | 55,744 | 55,743 |
| Stock based compensation | 787,590 | 225,374 |
| Loss on monitoring equipment included in cost of sales | 95,817 | - |
| Other | (36,454) | - |
| Change in assets and liabilities: | ||
| Accounts receivable, net | (354,633) | 660,834 |
| Inventories | 69,836 | 57,700 |
| Prepaid expenses and other assets | (1,009,813) | 149,428 |
| Accounts payable | (238,490) | 684,987 |
| Accrued expenses | 772,412 | 1,461,547 |
| Net cash provided by operating activities | 328,210 | 2,136,796 |
| Cash flow from investing activities: | ||
| Purchase of property and equipment | (28,685) | (12,762) |
| Capitalized software | (254,899) | (570,093) |
| Purchase of monitoring equipment and parts | (311,142) | (818,600) |
| Net cash used in investing activities | (594,726) | (1,401,455) |
| Cash flow from financing activities: | ||
| Principal payments on notes payable | (17,289) | (17,266) |
| Net cash used in financing activities | (17,289) | (17,266) |
| Effect of exchange rate changes on cash | 11,921 | (1,606) |
| Net increase (decrease) in cash | (271,884) | 716,469 |
| Cash, beginning of period | 2,027,321 | 1,769,921 |
| Cash, end of period | $1,755,437 | $2,486,390 |
| Cash paid for interest | $10,708 | $4,587 |
| Supplemental schedule of non-cash investing and financing activities: | ||
| Non-cash transfer of inventory to monitoring equipment | $81,893 | $62,193 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP,GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 461 | $ | 36,384 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,029,223 | 1,020,729 | ||||||
Bad debt expense | 120,703 | 39,041 | ||||||
Sales allowance | (3,065 | ) | - | |||||
Stock based compensation | 3,431 | 61,750 | ||||||
Loss on monitoring equipment included in cost of revenue | 98,673 | 66,644 | ||||||
Amortization of debt issuance costs | 35,413 | 48,762 | ||||||
Amortization of monitoring center assets included in cost of revenue | 134,317 | 133,304 | ||||||
Foreign currency exchange (gain) loss | (538,945 | ) | (483,151 | ) | ||||
Change in assets and liabilities: | ||||||||
Accounts receivable, net | (1,238,726 | ) | 469,642 | |||||
Inventories | 315,648 | 306,038 | ||||||
Prepaid expense, deposits and other assets | 63,261 | (192,380 | ) | |||||
Accounts payable | 480,200 | 536,982 | ||||||
Accrued liabilities | 141,731 | 284,678 | ||||||
Net cash provided by operating activities | 642,325 | 2,328,423 | ||||||
Cash flow from investing activities: | ||||||||
Purchase of property and equipment | - | (6,120 | ) | |||||
Capitalized software | (369,524 | ) | (159,089 | ) | ||||
Purchase of monitoring equipment and parts | (486,991 | ) | (2,023,407 | ) | ||||
Net cash used in investing activities | (856,515 | ) | (2,188,616 | ) | ||||
Cash flow from financing activities: | ||||||||
Principal payments on long-term debt | (124,338 | ) | (126,316 | ) | ||||
Net cash used in financing activities | (124,338 | ) | (126,316 | ) | ||||
Effect of exchange rate changes on cash | 12,218 | 218,745 | ||||||
Net increase (decrease) in cash | (326,310 | ) | 232,236 | |||||
Cash, beginning of period | 4,057,195 | 5,311,104 | ||||||
Cash, end of period | $ | 3,730,885 | $ | 5,543,340 | ||||
Cash paid for interest | $ | 29,720 | $ | 46,056 | ||||
Cash paid for taxes | $ | 239 | $ | 72,213 | ||||
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,As of December 31, 20172023 and 2016September 30, 2023, the Company had an accumulated deficit of $295,109,920$309,609,936 and $291,955,262,$309,610,397, respectively. The Company incurred ahad net lossincome of $1,042,592$461 and $2,613,759$36,384 for the three months ended December 31, 20172023 and 2016,2022, respectively. TheOn April 27, 2023, the Company may continueannounced a three-year extension of its $42.9 million debt to incur losses and require additional financial resources.July 1, 2027 (See Note 19). The Company also has debtsix notes payable maturing inbetween January 2, 2024, and February 17, 2025, related to the next 12 months.construction of two monitoring centers for a contract, with outstanding balances due for the six notes totaling $252,020, net of deferred financing fees at December 31, 2023 (See Note 19). The Company’s successful development and transitionability to attainingreturn to profitable operations is dependent upon achievinggenerating a level of revenuesrevenue adequate to support its cost structure. Management has evaluated the significance of these negative conditions, as well as the recent change in the maturity date, and has determined that the Company can meet its operating obligations for a reasonable period of time.period. The Company expects to fund operations using cash on hand and through operational cash flows and the restructuring of its existing debt agreement. Management of the Company believes that the availability of financing from these sources is adequate to fund operations through the upcoming twelve months.
(2) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Track Group, Inc. and its subsidiaries.active wholly-owned 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
The Company evaluates all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“
New Accounting Standards or Updates Adopted in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard in the first quarter of fiscal year 2018. The Company’s adoption of ASU 2015-11 did not have a material impact on its Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidanceImpairment. ASU 2017-04 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 itsthe 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 beASU 2017-04 became effective for accelerated filing companies for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.2019 and all other entities should adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022. 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. Management doesThe adoption of this accounting standard in the first quarter of fiscal 2024 did not anticipate that this adoption will have a significant impact on itsour consolidated financial position, resultsstatements.
In AugustJune 2016, the FASB issued ASU 2016-15 - Statement2016-13, Measurement of Cash Flows (Topic 230) classificationCredit Losses on Financial Instruments, which adds a current expected credit loss (“CECL”) impairment model to 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 certain cash receipts and cash payments to conform the presentation inbeginning of the statementperiod of cash flowsadoption. ASU 2016-13 became effective for certain transactions, including cash distributions from equity method investments, among others.fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which became effective for fiscal years beginning after December 15, 2022. The adoption of this accounting standard in the new standard is required in 2019. Management doesfirst quarter of fiscal 2024 did not anticipate that this adoption will have a significant impact on itsour consolidated financial position, results of operations,statements.
Recent Accounting Standards or cash flows.
In February 2016,October 2023, the FASB issued ASU No. 2016-02, Leases2023-06, Disclosure Improvements: Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative. The ASU incorporates several disclosure and presentation requirements currently residing in the SEC Regulations S-X and S-K. The amendments will be applied prospectively and are effective when the SEC removes the related requirements from Regulations S-X or S-K. Any amendments the SEC does not remove by June 30, 2027 will not be effective. As we are currently subject to these SEC requirements, this ASU is not expected to have a material impact on our consolidated financial statements or related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 841). For lessees, the amendments in this update require that for280): Improvements to Reportable Segment Disclosures, which requires all leases not consideredpublic entities 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.provide enhanced disclosures about significant segment expenses. The amendments in this updateASU are to be applied retrospectively and are effective for our annual periods beginning after December 15, 2018financial statements starting in fiscal 2025 and interim periods within those annual periods. Management doesstarting in fiscal 2026, with early adoption permitted. We are currently evaluating the impact of this accounting standard, but do not anticipate that this adoption willexpect it to have a significantmaterial impact on itsour consolidated financial position, results of operations, or cash flows.
In May 2014,December 2023, the FASB issued ASU No. 2014-09, “
No other new accounting pronouncements issued or effective as of our revenue streams and our revenue recognition policy.
Three months ended December 31, 2016 Previously Reported | Net Change | Three months ended December 31, 2016 (Revised) | |
| Cost of revenues: | |||
| Monitoring, products & other related services | $2,933,622 | $673,654 | $3,607,276 |
| General & administrative expenses | 3,768,099 | (593,045) | 3,175,054 |
| Selling & marketing | 627,749 | (37,981) | 589,768 |
| Research & development | 530,806 | (42,628) | 488,178 |
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair value that is independent of other groups of assets. The Company recorded $0 and $74,787 of impairment expenses related to monitoring equipment for the three months ended December 31, 2017 and 2016, respectively.
(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“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 sellersthe seller contingent upon the 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 the 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 U.S. GAAP and other comprehensive income (loss). Other comprehensive income (loss) considers the effects of additional economic events, such as foreign currency translation adjustments, thatwhich are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the prevailing exchange rate at December 31, 2017.
(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 commonDiluted net income (loss) per common share (“
Diluted EPS”) is computed by dividing net income (loss) attributable to commonCommon share equivalents consist of shares issuable upon the exercise of options to purchase shares of the Company’s common stock, $0.0001 par value per share (“Common Stock”) (“options”) and warrants.warrants to purchase Common Stock (“warrants”). As of December 31, 20172023 and 2016,2022, there were 570,4670 and 526,901160,881 of outstanding common share equivalents respectively, that were not included in the computation of Diluted EPS for the three months ended December 31, 20172023 and 2016,2022, respectively, as their effect would be anti-dilutive.
At December 31, 2023 and 2022, all stock options and warrants had exercise prices that were above the market price of $0.23 and $0.35, respectively and have been excluded from the diluted earnings per share calculations.
The common stock equivalents outstanding as of December 31, 20172023 and 20162022 consisted of the following:
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Issuable common stock options and warrants | - | 160,881 | ||||||
Total common stock equivalents | - | 160,881 | ||||||
(8) REVENUE RECOGNITION
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 deferred revenue.
December 31, | December 31, | |
2017 | 2016 | |
| Exercisable common stock options and warrants | 570,467 | 526,901 |
| Total common stock equivalents | 570,467 | 526,901 |
The carrying amounts reported inbalance of accounts receivable at December 31, 2023 of $5,658,004 includes an unbilled balance of $513,921, and the balance sheetsof accounts receivable at September 30, 2023 of $4,536,916 included an unbilled balance of $490,848, and the balance of accounts receivable at September 30, 2022 of $6,236,555 included an unbilled balance of $777,514. Accounts receivable, which is made up of trade receivables for prepaid expensesmonitoring and other current assets approximate their fair market valuerelated services, are carried at original invoice amount less allowances for credits and for any potential uncollectible amounts due to credit losses. We make estimates of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the short-term maturityage of these instruments.the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our Condensed Consolidated Statements of Operations. As of December 31, 2017,2023, September 30, 2023, and September 30, 2017,2022 the Company had an allowance for doubtful accounts of $278,969, $155,029, and $102,570 respectively. For the three months ended December 31, 2023 and December 31, 2022, the Company wrote-off accounts receivables of $14 and $107, respectively. For December 31, 2023, September 30, 2023, and September 30, 2022 the reserve for credit memos was $20,000, $23,065, and $0 respectively. The balances of the deferred revenue at December 31, 2023, September 30, 2023, and September 30, 2022 are $50,000, $431, and $3,299 respectively, and were included in accrued liabilities on the Condensed Consolidated Balance Sheets. The Company recognized $150,431 and $3,012 of deferred revenue in the three months ended December 31, 2023 and 2022, respectively.
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 transactions associated with the sale of devices and replacement parts comprise a single performance obligation. We satisfy the performance obligation when the Company has transferred control of the product to the customer and they receive substantially all of the benefits. Transfer of control passes to customers upon shipment or upon receipt depending on the country of the sale and the agreement with the customer. The transaction price is determined based upon the invoiced sales price and payment terms for the transaction depends on the agreement with the customer and payment is generally required within 60 days or less of shipment. The Company recognizes revenue from other services as the customer receives services and the Company has the right to payment. When purchasing products (such as ReliAlert™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with us. The Company recognizes revenue from monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
Multiple Element Arrangements. The majority of our revenue transactions do not have multiple elements. However, on occasion, the Company may enter 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. There were no multiple element arrangements for the fiscal quarters ended December 31, 2023 and 2022.
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, 2023 | Three Months Ended December 31, 2022 | |||||||||||||||
Total Revenue | % of Total Revenue | Total Revenue | % of Total Revenue | |||||||||||||
United States | $ | 6,457,328 | 72 | % | $ | 6,102,350 | 69 | % | ||||||||
Latin America | 2,332,787 | 26 | % | 2,282,372 | 26 | % | ||||||||||
Other | 176,857 | 2 | % | 470,969 | 5 | % | ||||||||||
Total | $ | 8,966,972 | 100 | % | $ | 8,855,691 | 100 | % | ||||||||
The above table includes total revenue for the Company, of which monitoring and other related services is the majority (approximately 97% and 94% for the three months ended December 31, 2023 and 2022, respectively) of the Company’s revenue. Latin America includes Bahamas, Chile, Puerto Rico, Brazil, Panama and the U.S. Virgin Islands. Other includes Canada and Saudi Arabia.
(9) PREPAID EXPENSE AND DEPOSITS
As of December 31, 2023 and September 30, 2023, the outstanding balance of prepaid expense and other expensesdeposits was $4,219,135$499,943 and $854,122,$610,440, respectively. The $4,219,135 as of December 31, 2017 isThese balances are comprised largely of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. The increase in prepaid and other expenses at December 31, 2017 was primarily due to a cash collateralized performance bond for an international customer of $2,860,358, which is scheduled to be repaid in the third fiscal quarter and has been re-classified as a short-term asset in the three-month period ended December 31, 2017, as well as increases in prepaid taxes, vendor deposits and insurance.
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the first-in, first-in/first-out (“
Inventory primarily consists of finished goods that are to be shipped to customerscompleted circuit boards and other parts used for minor repairs of ReliAlert
December 31, 2023 | September 30, 2023 | |||||||
Monitoring equipment component boards inventory | $ | 974,101 | $ | 1,289,966 | ||||
Reserve for damaged or obsolete inventory | (3,772 | ) | (3,772 | ) | ||||
Total inventory, net of reserves | $ | 970,329 | $ | 1,286,194 | ||||
The Company uses a third-party fulfillment service provider. As a result of this service, the Company’s employees do not actively assemble new products or repair a significant amount of 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.
December 31, | September 30, | |
2017 | 2017 | |
| Finished goods inventory | $199,281 | $288,744 |
| Reserve for damaged or obsolete inventory | (26,934) | (26,934) |
| Total inventory, net of reserves | $172,347 | $261,810 |
(11) PROPERTY AND EQUIPMENT
Property and equipment atconsisted of the following as of December 31, 20172023 and September 30, 2017, respectively:
December 31, 2017 | September 30, 2017 | |
| Equipment, software and tooling | $1,045,090 | $1,028,081 |
| Automobiles | 40,048 | 52,230 |
| Leasehold improvements | 1,351,025 | 1,307,802 |
| Furniture and fixtures | 309,223 | 293,621 |
| Total property and equipment before accumulated depreciation | 2,745,386 | 2,681,734 |
| Accumulated depreciation | (1,862,347) | (1,778,634) |
| Property and equipment, net of accumulated depreciation | $883,039 | $903,100 |
December 31, 2023 | September 30, 2023 | |||||||
Equipment, software and tooling | $ | 1,429,570 | $ | 1,427,522 | ||||
Automobiles | 4,573 | 4,460 | ||||||
Leasehold improvements | 382,752 | 382,122 | ||||||
Furniture and fixtures | 223,368 | 222,554 | ||||||
Total property and equipment before accumulated depreciation | 2,040,263 | 2,036,658 | ||||||
Accumulated depreciation | (1,942,870 | ) | (1,920,850 | ) | ||||
Property and equipment, net of accumulated depreciation | $ | 97,393 | $ | 115,808 | ||||
Property and equipment depreciation expense for the three months ended December 31, 20172023 and 20162022 was $114,417$18,989 and $50,291,$23,595, respectively. Depreciation expense for property and equipment is recognized in operating expense on the Condensed Consolidated Statements of Operations.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is amortizeddepreciated using the straight-line method over an estimated useful life of between one and three years for customer tablets and three to five years.years for monitoring devices. Monitoring equipment as of December 31, 20172023 and September 30, 2017 was2023 is as follows:
December 31, 2017 | September 30, 2017 | |
| Monitoring equipment | $8,227,746 | $8,399,937 |
| Less: accumulated amortization | (4,767,061) | (4,906,925) |
| Monitoring equipment, net of accumulated depreciation | $3,460,685 | $3,493,012 |
December 31, 2023 | September 30, 2023 | |||||||
Monitoring equipment | $ | 12,009,405 | $ | 11,535,787 | ||||
Less: accumulated depreciation | (6,863,281 | ) | (6,348,695 | ) | ||||
Monitoring equipment, net of accumulated depreciation | $ | 5,146,124 | $ | 5,187,092 | ||||
Depreciation of monitoring equipment for the three months ended December 31, 20172023 and 20162022 was $353,027$382,453 and $332,993,$342,068, respectively. These expenses wereDepreciation expense for monitoring devices is recognized in cost of revenues.
(13) INTANGIBLE ASSETS
The following table summarizes the activity of intangible assets at December 31, 20172023 and September 30, 2017, respectively:
December 31, 2017 | September 30, 2017 | |
| Other intangible assets: | ||
| Patent & royalty agreements | 21,170,565 | 21,170,565 |
| Developed technology | 11,410,921 | 11,116,738 |
| Customer relationships | 1,860,000 | 1,860,000 |
| Trade name | 335,350 | 332,183 |
| Website | 78,201 | 78,201 |
| Total intangible assets | 34,855,037 | 34,557,687 |
| Accumulated amortization | (10,444,569) | (9,839,032) |
| Intangible assets, net | $24,410,468 | $24,718,655 |
December 31, 2023 | September 30, 2022 | |||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Patent & royalty agreements | $ | 21,120,565 | $ | (14,691,173 | ) | $ | 6,429,392 | $ | 21,120,565 | $ | (14,358,431 | ) | $ | 6,762,134 | ||||||||||
Developed technology | 10,941,260 | (3,306,693 | ) | 7,634,567 | 10,328,125 | (2,933,499 | ) | 7,394,626 | ||||||||||||||||
Trade name | 140,173 | (140,173 | ) | - | 139,450 | (138,916 | ) | 534 | ||||||||||||||||
Total intangible assets | $ | 32,201,998 | $ | (18,138,039 | ) | $ | 14,063,959 | $ | 31,588,140 | $ | (17,430,846 | ) | $ | 14,157,294 | ||||||||||
The intangible assets summarized above were purchased or developed on various dates from January 2010July 2011 through December 2017. The assets have useful lives ranging from three to twenty years. Amortization31, 2023. Total amortization expense for the three months ended December 31, 20172023 and 20162022 was $574,438$627,781 and $637,320,$655,066, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwillGoodwill at December 31, 2017:
Three Months Ended December 31, 2023 | Year Ended September 30, 2023 | |||||||
Balance - beginning of period | $ | 7,851,466 | $ | 8,061,002 | ||||
Effect of foreign currency translation on goodwill | 210,043 | (209,536 | ) | |||||
Balance - end of period | $ | 8,061,509 | $ | 7,851,466 | ||||
Goodwill is recognized in connection with acquisition transactions in accordance with ASC 805. The Company performs an impairment test for goodwill annually or more frequently if indicators of potential impairment exist. No impairment of goodwill was recognized through December 31, 2017. 2023.
(15) OTHER ASSETS
As of December 31, 20172023 and September 30, 2017,2023, the outstanding balance of other assets was $785,195$2,382,312 and $2,989,101,$2,442,154, respectively. AOther assets at December 31, 2023 are comprised largely of cash collateralizedused as collateral for Performance Bonds as well as contractually required monitoring center and other equipment, right of use assets, lease deposits and other long-term assets. The Company anticipates these performance bondbonds will be reimbursed to the Company upon completion of its contracts with the customer. See Note 23.
The Company was contractually obligated to construct and equip two monitoring centers for an international customer, as well as supply equipment for the customer’s satellite locations, which have been owned by the customer since construction was completed. The monitoring center equipment is expectedamortized using the straight-line method over the contract period between 32 and 40 months. Monitoring center equipment as of December 31, 2023 and September 30, 2023 was as follows:
December 31, 2023 | September 30, 2023 | |||||||
Monitoring center equipment | $ | 1,660,012 | $ | 1,619,278 | ||||
Less: accumulated amortization | (1,252,164 | ) | (1,088,825 | ) | ||||
Monitoring center equipment, net of accumulated amortization | $ | 407,848 | $ | 530,453 | ||||
The Santiago and Puerto Montt monitoring centers amortization is recorded in Monitoring, products and other related service costs on the Condensed Consolidated Statements of Operations. Amortization of costs related to be repaid in the third fiscal quarter has been re-classified as a current asset inSantiago and Puerto Montt monitoring centers for the three-month periodthree months ended December 31, 2017.
(16) LEASES
Leases as Lessor
Monitoring Equipment and Other Related Services
The Company leases monitoring equipment and provides monitoring services to its customers with contract terms varying from month-to-month to several years and each daily contract price varies. Devices supplied to customers are not serial number unique and a single device may be used by multiple customers over its useful life. If a leased device is returned for repair, it will likely be replaced with a different device from a different customer or possibly a new device.
The Company’s tracking devices are considered operating leases under ASC 842 as transfer of control of the asset does not occur at the end of the lease, a single device is not specific to a customer and devices may be used by multiple customers throughout their life cycle. Due to the movement of devices from customer to customer, relatively few long-term contracts, the measurement of the equipment life and the present value of the equipment’s fair values would not be a measurement to qualify the devices as sales-type leases.
Operating lease and monitoring revenue associated with the Company’s monitoring equipment for the three months ended December 31, 2023 and 2022, respectively, are shown in the table below:
Three Months Ended December 31, | ||||||||
2023 | 2022 | |||||||
Monitoring equipment operating revenue | $ | 7,317,614 | $ | 6,977,443 | ||||
The Company cannot accurately estimate 5-years of future minimum lease receipts for its devices leased to customers because none of its customers make any contractual commitment regarding the number of active devices utilized in any given year and those quantities of active devices vary significantly for every customer each and every day.
Leases as Lessee
The following table shows right of use assets and lease liabilities for real estate and equipment, with the associated financial statement line items as of December 31, 2023 and September 30, 2023.
December 31, 2023 | September 30, 2023 | |||||||||||||||
Operating lease asset | Operating lease liability | Operating lease asset | Operating lease liability | |||||||||||||
Other assets | $ | 400,259 | $ | 403,205 | $ | - | ||||||||||
Accrued liabilities | 161,394 | - | 143,846 | |||||||||||||
Long-term liabilities | 238,865 | - | 259,359 | |||||||||||||
The following table summarizes the supplemental cash flow information for the three months ended December 31, 2023 and 2022:
December 31, 2023 | December 31, 2022 | |||||||
Cash paid for noncancelable operating leases included in operating cash flows | $ | 69,940 | $ | 69,992 | ||||
Right of use assets obtained in exchange for operating lease liabilities | $ | 43,974 | $ | 5,459 | ||||
The future minimum lease payments under noncancelable operating leases with terms greater than one year as of December 31, 2023 are:
Operating Leases | ||||
From January 2024 to December 2024 | $ | 174,191 | ||
From January 2025 to December 2025 | 92,933 | |||
From January 2026 to December 2026 | 94,719 | |||
From January 2027 to December 2027 | 63,898 | |||
From January 2028 to December 2028 | 482 | |||
Undiscounted cash flow | 426,223 | |||
Less: imputed interest | (25,964 | ) | ||
Total | $ | 400,259 | ||
Reconciliation to lease liabilities: | ||||
Lease liabilities - current | $ | 161,394 | ||
Lease liabilities - long-term | 238,865 | |||
Total lease liabilities | $ | 400,259 | ||
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of December 31, 2023 were 3.07 years and 4%, 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.
(17) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of December 31, 20172023 and September 30, 2017:
December 31, 2017 | September 30, 2017 | |
| Accrued payroll, taxes and employee benefits | $1,573,440 | $943,066 |
| Accrued consulting | 8,954 | 11,631 |
| Accrued taxes - foreign and domestic | 573,322 | 529,926 |
| Accrued settlement costs | 50,000 | 200,000 |
| Accrued board of directors fees | 275,000 | 125,000 |
| Accrued other expenses | 151,804 | 178,092 |
| Accrued legal costs | 57,394 | 116,824 |
| Accrued cellular costs | 25,000 | 81,100 |
| Accrued manufacturing costs | 100,000 | 137,884 |
| Accrued bond guarantee | 304,270 | 23,548 |
| Accrued interest | 4,902,235 | 4,303,220 |
| Total accrued liabilities | $8,021,419 | $6,650,291 |
Employee -related | Other costs | Total | |
| Liability at September 30, 2016 | $- | $- | $- |
| Accrued expenses | 448,330 | 118,000 | $566,330 |
| Payments | - | - | - |
| Liability at December 31, 2016 | $448,330 | $118,000 | $566,330 |
December 31, 2023 | September 30, 2023 | |||||||
Accrued payroll, taxes and employee benefits | $ | 1,111,082 | $ | 1,116,036 | ||||
Deferred revenue | 50,000 | 431 | ||||||
Accrued taxes - foreign and domestic | 187,058 | 260,697 | ||||||
Accrued other expense | 84,711 | 108,476 | ||||||
Accrued legal and other professional costs | 63,751 | 80,210 | ||||||
Accrued costs of revenue | 128,186 | 410,726 | ||||||
Right of use liability | 161,394 | 143,846 | ||||||
Accrued interest | 878,573 | 451,417 | ||||||
Total accrued liabilities | $ | 2,664,755 | $ | 2,571,839 | ||||
(18) RELATED PARTIES
ETS Limited is currently the beneficial owner of 4,706,579 shares of the Company's Common Stock (the “Track Group Shares”) held by ADS Securities LLC (“ADS”) under an agreement dated September 28, 2017, pursuant to which ADS transferred all the Track Group Shares to ETS Limited in exchange for all the outstanding shares of ETS Limited. A Director of ETS Limited was elected to the Company's current Board of Directors (the “Board”) on February 7, 2018 and is still serving on the Board in his current capacity as a senior executive at ADS.
(19) DEBT OBLIGATIONS
Debt obligations, net of debt issuance costs, as of December 31, 2023 and September 30, 2023, consisted of the following:
December 31, 2023 | September 30, 2023 | |||||||
The unsecured loan (the “Amended Facility Agreement”) from Conrent Invest S.A. (“Conrent”) whereby, as of March 1, 2021, the Company had borrowed $42,864,000, bearing interest at a rate of 4% per annum, payable in arrears annually beginning July 1, 2021, with all principal and accrued and unpaid interest due on July 1, 2024. On April 26, 2023, the Company and Conrent entered into an amendment to the facility agreement, which extended the maturity date from July 1, 2024 to July 1, 2027. Interest payments are scheduled to be made on June 30 and December 31 each year. Unamortized issuance costs at December 31, 2023 are $90,351. As of December 31, 2023, $42,864,000 of principal and $876,331 of interest was owed to Conrent. The Company has not paid Conrent any interest for the three months ended December 31, 2023. | $ | 42,773,649 | $ | 42,743,599 | ||||
The unsecured Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of 6.56% per annum, with a maturity date of February 6, 2024. | 4,727 | 11,435 | ||||||
The unsecured Note Payable Agreement with Banco Santander, net of unamortized issuance costs $3,099, bearing interest at a rate of 5.04% per annum, with a maturity date of May 11, 2024. | 50,099 | 77,670 | ||||||
The unsecured Note Payable Agreement with Banco Estado, net of unamortized issuance costs of $506, bearing interest at a rate of 3.50% per annum, with a maturity date of January 2, 2024. | 9,469 | 36,773 | ||||||
The unsecured Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of 6.61% per annum, with a maturity date of March 4, 2024. | 15,048 | 29,118 | ||||||
The unsecured Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $29, bearing interest at a rate of 2.54% per annum, with a maturity date of March 4, 2024. | 9,482 | 18,440 | ||||||
The unsecured Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $9,124, bearing interest at a rate of 3.12% per annum, with a maturity date of February 17, 2025. | 163,195 | 192,547 | ||||||
Total debt obligations | 43,025,669 | 43,109,582 | ||||||
Less: current portion | (228,317 | ) | (308,417 | ) | ||||
Long-term debt, less current portion | $ | 42,797,352 | $ | 42,801,165 | ||||
On September 25, 2015,December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement which extended the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”), capitalized the accrued and unpaid interest increasing the outstanding principal amount and reduced the interest rate of the Amended Facility from 8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the “Amendment”). The Amendment: (i) extended the maturity date from July 1, 2024, to July 1, 2027 (the “Maturity Date”); (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date and (iii) removed section 7.3 “Change of Control” of the Amended Facility Agreement. In return, the Company agreed to pay certain fees to Conrent. As of December 31, 2023, $42,864,000 of principal and $876,331 of interest was owed to Conrent.
On January 6, 2021, the Company borrowed 70,443,375 Chilean Pesos (“CLP”) ($101,186USD) from HP Financial Services Chile Limitada (the “HP Note 1”). To facilitate the HP Note 1, the Company entered into a loan agreementNote Payable Agreement with HP Financial Services Chile Limitada as the lender. The HP Note 1 was used to purchase PABX (private automatic branch exchange phone equipment) for the construction of the Gendarmeria de Chile monitoring centers in Santiago and Puerto Montt, Chile (the “Sapinda Loan AgreementSantiago Monitoring Center”) and “Puerto Montt Monitoring Center”, respectively). The HP Note 1 bears an interest rate of 6.56% per annum, payable monthly with Sapinda Asia Limited (“Sapinda”),principal beginning February 2021, and a related party, to providematurity date of February 6, 2024.
On January 12, 2021, the Company borrowed 347,198,500CLP ($482,965USD), net of 2,801,500CLP fees ($3,897USD), from Banco Santander (the “Banco Santander Note”). To facilitate the Banco Santander Note, the Company entered into a Note Payable Agreement with Banco Santander as the lender. The Banco Santander Note was used for the construction of the Santiago Monitoring Center and remodeling a $5.0 million line of credit that accruestemporary monitoring center. The Banco Santander Note bears interest at a rate of 3%5.04% per annum, for undrawn funds,payable monthly with principal beginning February 2021, and 8% per annum for borrowed funds. Pursuant toa maturity of May 11, 2024. The Company also paid 19,607,843CLP ($27,275USD) in broker fees which are amortized over the terms and conditionslife of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “Maturity Date”), when all borrowed funds, plus all accrued but unpaid interest will become due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.
On March 13, 2017 (the “
On February 4, 2021, the Company borrowed 149,794,432CLP ($205,330USD) from HP Financial Services Chile Limitada (the “
On February 5, 2021, the Company borrowed 99,808,328CLP ($136,564USD), net of 210,485CLP fees ($286USD), from Banco de Chile (the “Banco de Chile Note 1”). To facilitate the Banco de Chile Note, the Company entered into a Note Payable Agreement with Banco de Chile as the lender. The Banco de Chile Note was used to exchange newly issued shares of preferred stockpurchase HVAC equipment for the entire Debt subject to approval bySantiago Monitoring Center. The Banco de Chile Note bears interest at a rate of 2.54% per annum, payable monthly with principal beginning March 2021, and a maturity date of March 4, 2024.
On February 15, 2021, the investors who purchased securitiesCompany borrowed 500,000,000CLP ($678,214USD) from Conrent to finance the DebtBanco de Chile (the “
December 31, 2017 | September 30, 2017 | |
| Unsecured facility agreement with an entity whereby, as of June 30, 2015, the Company may borrow up to $30.4 million bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on July 31, 2018. A $1.2 million origination fee was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of December 31, 2017, the remaining debt discount was $130,067. We did not pay interest on this loan during the three months ended December 31, 2017. | $30,269,933 | $30,214,189 |
| 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 G2 acquisition. | 105,593 | 123,393 |
| Capital lease with effective interest rate of 12%. Lease matures August 15, 2019. | 13,489 | 14,022 |
| Total debt obligations | 33,788,659 | 33,751,248 |
| Less current portion | (30,322,191) | (30,270,531) |
| Long-term debt, net of current portion | $3,466,468 | $3,480,717 |
The following table summarizes our future maturities of debt obligations, net of the amortization of debt discounts as of December 31, 2017:
| Fiscal Year | Total |
| 2018 | $30,452,258 |
| 2019 | 43,842 |
| 2020 | 3,422,626 |
| 2021 | - |
| 2022 | - |
| Debt discount | (130,067) |
| Total | $33,788,659 |
Twelve months ended December 31: | Total | |||
2024 | $ | 239,772 | ||
2025 | 25,006 | |||
2026 | - | |||
2027 | 42,864,000 | |||
Total | 43,128,778 | |||
Issuance costs | (103,109 | ) | ||
Debt obligations, net of unamortized issuance costs | $ | 43,025,669 | ||
Dec. 31, 2017 | Sept. 30, 2017 | |
| Related party loan with an interest rate of 3% and 8% per annum for undrawn and borrowed funds, respectively. Principal and interest due September 30, 2020. | $3,399,644 | $3,399,644 |
| Total related-party debt obligations | $3,399,644 | $3,399,644 |
(20) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share. During the three months ended December 31, 2017, no shares of common stock were issued to Board of Director members for their services earned in the first quarter of 2018. The Company has deferred the issuance of shares of common stockCommon Stock and warrants since the fourth quarter of 2017, and $275,000 for unpaid Board of Director fees has been accrued at December 31, 2017.
No dividends were paid during the three months ended December 31, 2023 or 2022, respectively.
Common Stock Issuances
There were no issuances of Common Stock in the three months ended December 31, 2023.
Series A Convertible Preferred Stock
On October 12, 2017, the BoardCompany filed a Certificate of Directors approvedDesignation of the grantRelative Rights and Preferences (“Certificate of 241,935Designation”) with the Delaware Division of Corporations, designating 1,200,000 shares of common stock valued at $300,000, as compensation for services rendered to the Company, which have not yet been issued. In addition, the Company issued 30,797 warrants to a member of the Company’s BoardPreferred Stock as Series A Preferred (“Series A Preferred”). Shares of Directors in exchange for 18,551Series 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 stockCommon Stock into which Series A Preferred is convertible shall, upon issuance, have all of the director previously received for services provided duringsame voting rights as other issued and outstanding shares of our Common Stock.
The Series A Preferred has no separate dividend rights; however, whenever the periodBoard declares a dividend on the Company’s Common Stock, if ever, each holder of October 2016record of a share of Series A Preferred shall be entitled to June 2017,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 tenshares were thereby cancelledof the Company’s Common Stock, subject to adjustments as set forth in the three month period endedCertificate of Designation, at any time beginning five hundred and forty days after the date of issuance.
As of December 31, 2017.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholdersstockholders on March 21, 2011, the shareholdersApril 13, 2022, our stockholders approved the 20122022 Omnibus Equity CompensationIncentive Plan (the “
The Board suspended further awards under the 2012 Plan as of June 30, 2020. Any awards outstanding under the 2012 Plan will remain subject to the 2012 Plan.
There were no issuances of restricted shares in the grant date.
The Company recorded expense of $3,431 and $61,750 for the three months ended December 31, 2023 and 2022, respectively, related to the 2022 Plan. As of December 31, 2017,2023, there were 215,000 shares of our Common Stock reserved for future issuance under the 2022 Plan and 27,218 shares of common stock were availableour Common Stock reserved for future grantsissuance under the 2012 Plan.
All Options and Warrants
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. During the three months ended December 31, 2017 and 2016, the Company granted 30,797 and 154,410, respectively, options and warrants to purchase shares of common stock under the 2012 Plan. Excluding the incremental stock-based compensation mentioned above, theThe Company recorded no expense of $638,502 and $200,374 for the three months ended December 31, 20172023 and 2016,2022, respectively, related to the issuance and vesting of outstanding stock options and warrants.
Three Months Ended December 31 | ||
2017 | 2016 | |
| Expected stock price volatility | 120% | 119% |
| Risk-free interest rate | 1.92% | 0.60% |
| Expected life of options/warrants | 5 years | 2 Years |
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.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, 20172023, is presented below:
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding as of September 30, 2023 | 4,688 | $ | 1.24 | 0.25 | $ | - | ||||||||||
Granted | - | - | - | - | ||||||||||||
Expired/Cancelled | (4,688 | ) | 1.24 | - | - | |||||||||||
Exercised | - | - | - | - | ||||||||||||
Outstanding as of December 31, 2023 | - | $ | - | - | $ | - | ||||||||||
Exercisable as of December 31, 2023 | - | $ | - | - | $ | - | ||||||||||
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |
| Outstanding as of September 30, 2017 | 600,842 | $8.51 | 4.90 years | $- |
| Granted | 30,797 | $4.87 | ||
| Expired/Cancelled | (1,172) | $(19.29) | ||
| Exercised | - | $- | ||
| Outstanding as of December 31, 2017 | 630,467 | 1.78 | 4.63 | $- |
| Exercisable as of December 31, 2017 | 570,467 | 1.84 | 4.67 | $- |
(22) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company’sour future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
In computing income tax, we recognize an income tax provision in tax jurisdictions in which we have pre-tax income for the period and are expecting to generate pre-tax book income during the fiscal year.
(23) COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of nearly all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior).
On March 24, 2017, SecureAlert Inc. (a predecessor entity to Track Group, Inc. or the Company) filed a complaint before the Federal Administrative Tribunal, asserting the failure byCommonwealth 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 then Public Security Department,Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to recover allegedly fraudulent transfers and presently,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 produced documentation supporting its position in an agencyinformal document exchange with the Commonwealth on July 6, 2020. At this time, the case remains stayed by Court order. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Jeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the National Security CommissionState of California, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the DepartmentCompany. The Company disputes Abed’s claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Track Group Chile SpA. v. Republic of Chile.On January 24, 2022, Track Group Chile SpA., a wholly-owned subsidiary of the Interior, and SecureAlert, Inc., presently Company (“Track Group, Inc.Chile”) initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile related to its contract with the Chilean National Prisoner Service, the Company’s customer in the Republic of Chile (the “Customer”). The judicial action followed the issuance by the Customer on December 19, 2021 of the first of two letters fining Track Chile approximately USD $1.5 million for delays in completing two offender monitoring centers caused principally by the COVID-19 global pandemic. Track Chile also was granted an injunction preventing the Chilean government from drawing down on the performance bond (the “Performance Bond”) posted by Track Chile on July 2, 2020 with an expiration date of July 1, 2024 (the “Expiration Date”). On January 17, 2024, a Chilean appellate court overturned the injunction. The Company’s claim amountChilean counsel is upwards of $6.0 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, based on its determination that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decisionconsidering Track Chile’s options in light of the Federal Administrative Tribunal. Counsel estimates the Tribunal should have a ruling on or before June 30, 2018. If the Company’s appealappellate court’s decision. The Company is successful, the case willconfident that resolution of these issues can be sent backreached prior to the Federal Administrative Tribunal for a resolution onExpiration Date and remains confident in its position regarding the merits of the case.
Michael Matthews v. Track Group, Inc., et al. On December 13, 2022, Plaintiff Michael Matthews filed a complaint in the Circuit Court of Cook County, Illinois, amended on July 23, 2023, against the Company and other defendants alleging wrongful arrest and incarceration and a deprivation of his rights following his purportedly erroneous violation of home monitoring program requirements. On January 10, 2024, the court dismissed the Plaintiff’s second amended complaint with leave to replead by January 30, 2024. Plaintiff filed a third amended complaint on January 30, 2024, however, subsequently filed a motion to voluntarily dismiss the case on January 31, 2024.
Kevin Barnes v. Track Group, Inc., et. al. On December 28, 2023, the Company was served with a second amended complaint filed in the Circuit Court of Cook County, Illinois naming the Company and alleging strict liability and negligence against the Company and other defendants related to alleged injuries sustained by Barnes from an electronic monitoring device. The Company disputes Barnes’ claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Performance Bonds
As of December 31, 2023, the Company has one performance bond in connection with a foreign customer totaling $1,695,741, the Performance Bond, of which $1,186,991 is held in an interest-bearing account on behalf of the bank and is recorded in Other Assets on the Consolidated Balance Sheets. The amount held on the Performance Bond will be released following the Expiration Date, all contract extensions have been exhausted, and the consent of the Customer, but in no event before July 2024 and more likely in 2025; provided, however, as disclosed above in Track Group Chile SpA.
The amounts held on two additional performance bonds posted by Track Chile were released in the second quarter of 2023 and the Company received $1,041,797, including interest.
The Company pays interest on the full amount of the Performance Bond to the financial institution providing the guarantee at 2.8% interest per annum for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim, under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal may be scheduledPerformance Bond expiring in late February, 2018.July 2024. The Company expectsrecorded interest expense for the court to make a decision within three months ended December 31, 2023 and 2022 of the hearing date.
(24) SUBSEQUENT EVENTS
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events through the filing date and noted that, other than as disclosed above, no additional subsequent events have occurred that are reasonably likely to have an impact on the financial statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”, or this “Report”) contains information that constitutes “forward-looking statements”“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”“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.“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 ofusing words or phrases such as “believes,“believes” “expects,, “expects” “intends,, “intends” “anticipates,, “anticipates” “should,, “should” “plans,, “plans” “estimates,, “estimates” “projects,, “projects” “potential,, “potential”, and “will,“will” among others. Forward-looking statements include, but are not limited to, statements contained in Management’sManagement’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”“Risk Factors” in our most recent Annual Report on Form 10-K, and those described from time to time in our reports filed with the SEC.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management’sManagement’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, 2017,2023, 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 “
General
Our core business is based on the manufacture and leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.SU.S. and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (“
Devices - Our devices consist principally of the ReliAlertTMproduct line, which is supplemented by the ShadowReliAlert® 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.
ReliAlert®XC4 is our flagship GPS device, which is activated through services provided by ouramong the safest and most reliable monitoring centers. The ReliAlert
ReliAlert®XC3 - Advanced features enable agencies to effectively track offender movements and communicate directly with 24/7/365offenders in real-time, through a patented, on-board two/three-way voice communication with the offenders. Both devices are FCC, CEtechnology. This device includes an enhanced GPS antenna and PTCRB certifiedGPS module for higher sensitivity GPS, enhanced voice audio quality, increased battery performance of 50+ hours, 3G cellular capabilities, improved tamper sensory and protected by numerous patents and trademarks.
Monitoring Center Services.
Data Analytics Services.
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 offersbusiness. Although we still manufacture patented tracking technology, we see the physical goods as only a highly complexsmall 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 reporting mechanism that combines modern statistical methods, developed using computer scienceanalytics and used by intelligence agencies that separate noteworthy events from normal events, rank offender cases accordingassessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience along with knowledgeable salespeople who can convey the value of our products and services greatly enhances our ability to their need for supervision,attract and relate decision-relevant metricsretain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to benchmarkseffectively 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 real-time.
Critical Accounting Policies
From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining ourthe 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, 2017
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 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 the 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. ASU 2017-04 became effective for accelerated filing companies for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and all other entities should adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022. 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 adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which adds a current expected credit loss (“CECL”) impairment model to 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 became effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which became effective for fiscal years beginning after December 15, 2022. The adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses.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.
Currently, 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, 2017,2023, Compared to Three Months Ended December 31, 2016
Revenue
For the three months ended December 31, 2017,2023, the Company recognized total revenue from operations of $7,490,694$8,966,972 compared to $7,671,490$8,855,691 for the three months ended December 31, 2016, a decrease2022, an increase of $180,796$111,281, or 2%approximately 1%. The decreaseincrease in revenuemonitoring revenues is driven principally by an increase in people assigned to monitoring for clients in Illinois and Canada. This increase was principally the result of (i) a loss of a Caribbean customer whose contract ended in November 2016, partially offset by (ii) an increase in total growth of our North American monitoring operations driven byrevenue decreases for clients in IndianaPuerto Rico and Virginia,Chile who experienced decreases in the number of people assigned to monitoring. These increases and (iii) growthreductions from all of offender monitoring in Chile.
Product sales and other revenue for the three months ended December 31, 20172023 decreased to $139,889$292,487 from $406,477$565,909 in the same period in 20162022, a decrease of $273,422 or approximately 48%. The decrease in product and other revenue was largely due to lower international product sales, of consumable items.principally in Saudi Arabia, partially offset by product sales to a new customer in Brazil. We will continue to largely focus on recurring subscription basedsubscription-based opportunities as opposed to equipment sales.
The industry in which the Company operates, as well as many other industries (automotive, consumer products and medical devices), have been impacted by the global semiconductor shortage. The availability of semiconductor parts has continued to improve in Fiscal 2024; however, long lead times remain with certain parts.
Cost of Revenue
During the three months ended December 31, 2017,2023, cost of revenue totaled $3,019,149$4,763,452 compared to cost of revenue during the three months ended December 31, 20162022 of $4,127,556, a decrease$4,675,013, an increase of $1,108,407$88,439 or 27%2%.
Depreciation and amortization included in cost of revenue for the three months ended December 31, 20172023 and 20162022 totaled $477,142$789,463 and $445,493, respectively.$773,019, respectively, an increase of $16,444. These costs represent the depreciation of TrackerPAL™
Gross Profit and partsMargin
During the three months ended December 31, 2023, gross profit totaled $4,203,520, resulting in a gross margin of approximately 47%. During the three months ended December 31, 2022, gross profit totaled $4,180,678, resulting in a gross margin of approximately 47%. The increase in absolute gross profit of $22,842 is due to an increase in revenue of $111,281, lower communication costs and lower hardware purchase costs, partially offset by higher device repair costs and nominally higher depreciation and amortization costs.
General and Administrative Expense
During the three months ended December 31, 2023, general and administrative expense totaled $2,757,887 compared to $2,754,521 for the three months ended December 31, 20172022. The nominal increase of $3,366 in general and 2016 were $0administrative cost resulted largely from an increase in bad debt expense, partially offset by a decrease in insurance costs.
Selling and $74,787, respectively. These costs relate to disposal of obsolete inventory, monitoring equipment and parts for enhancements to our various devices and monitoring platform.
During the three months ended December 31, 2017, gross profit2023, selling and marketing expense totaled $4,471,545, representing an increase of $927,611 or 26%$706,531 compared to the same period last year and resulting in a gross margin of 60% compared to $3,543,934 or a gross margin of 46% during$729,470 for the three months ended December 31, 2016.2022. The increase in gross
Research and gross profit margin would have been 51%.
During the three months ended December 31, 2017, general2023, research and administrativedevelopment expense totaled $3,657,738$682,463 compared to $3,175,054$589,805 for the three months ended December 31, 2016.2022. The increase of $482,684$92,658 or 15% in generalapproximately 16% was largely due to increased payroll and administrative costs resulted largely from an increase in stock-based compensationrelated tax expense of $562,216, higher legal and professional fees of $147,903 and higher wages and benefit costs of $137,161,$140,225, partially offset by lower bad debt expensea decrease in outside services of $172,642, lower recruiting costs of $63,303, lower repair$20,536.
Depreciation and maintenance costs of $52,776, lower rent expense of $36,125 and lower outside labor expenses of $28,283.
During the three months ended December 31, 2016, we recorded $566,3302023, depreciation and amortization expense totaled $239,760 compared to $247,710 for the three months ended December 31, 2022, a decrease of costs related$7,950 or approximately 3%, largely due to the relocation of our headquarters from Salt Lake City, Utah to our existing Chicagoland office. These costs include the transfer of our own monitoring center activities to a highly-specialized third party, severance pay related to a reduction of approximately 65 monitoring center employees, as well as other support employeesfully amortized intangible assets and moving costs. All costs related to the relocation were paid in the fiscal year ended September 30, 2017. See Note 17 to the Condensed Consolidated Financial Statements.
Total Operating Expense
During the three months ended December 31, 2017, selling and marketing2023, total operating expense decreasedincreased to $409,737$4,386,641 compared to $589,768$4,321,506 for the three months ended December 31, 2016. The reduction in expenses2022, an increase of $180,031,$65,135 or approximately 31% decrease2%. The increase is principally due to the result of lower outside service costs of $84,438, lower travel related expenses of $41,489 and lower wages and benefits of $31,546.
Operating Income (Loss)
During the three months ended December 31, 2017, research and development expense totaled $163,9462023, operating loss was $183,121 compared to $488,178$140,828 for the three months ended December 31, 2016, a decrease2022. The increase of $324,232 or approximately 66%. The decrease
Other Income (Expense)
For the three months ended December 31, 2017 and $570,093 was capitalized in the three months ended December 31, 2016. A portion2023, other income (expense) totaled income of these expenses would have been recognized as research and development expense, absent the significant enhancements to the technology.
Net Income Attributable to Common Stockholders
The Company had net income attributable to common stockholders of $461 for the three months ended December 31, 2016, a decrease in net expense of $45,277 or approximately 6%.
Liquidity and Capital Resources
The company believes that its existing cash and its future cash flow from operations will be sufficient to finance ourmeet the cash requirements of its existing business solely from cash flows from operating activities. During prior periods,for the foreseeable future.
On December 21, 2020, Conrent and the Company supplemented cash flowssigned an amendment to finance the businessAmended Facility Agreement which extended the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”), capitalized the accrued and unpaid interest, increasing the outstanding principal amount and reduced the interest rate of the Amended Facility from borrowings under a credit facility, a revolving line8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the “Amendment”). The Amendment: (i) extended the maturity date from July 1, 2024, to July 1, 2027 (the “Maturity Date”); (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date; and (iii) removed section 7.3 “Change of credit from oneControl” of our shareholders, receiptthe Amended Facility Agreement. In return, the Company agreed to pay total fees of certain disgorgement funds, and from the sale and issuance of debt securities.EUR 225,000 in five annual installments to Conrent. As of December 31, 2017, excluding2023, $42,864,000 of principal and $876,331 of interest $3.4 million was owed to Sapinda underConrent.
On January 6, 2021, the
On January 12, 2021, the Company borrowed 347,198,500CLP ($482,965USD), net of 2,801,500CLP fees ($3,897USD), from Banco Santander. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco Santander as lender. The loan was owedused to Conrent under
On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of 2,000,700CLP fees ($2,734USD), from Banco Estado. To facilitate the Loan, Agreement. the Company entered into a Note Payable Agreement with Banco Estado as lender. The loan was used for the construction of the Gendarmeria de Chile monitoring center in Santiago and computer equipment for Gendarmeria branch offices. The loan bears an interest rate of 3.50% per annum, initially having a 6-month grace period with the first payment including the 6 months of interest plus 1 month of principal on August 2, 2021, then monthly interest with principal and a maturity date of January 2, 2024. The Company also paid 14,124,294CLP ($19,304USD) in broker fees which are amortized over the life of the loan.
On February 4, 2021, the Company borrowed 149,794,432CLP ($205,330USD) from HP Financial Services Chile Limitada. To facilitate the Loan, the Company entered into a Note Payable Agreement with HP Financial Services Chile Limitada as lender. The loan was used to purchase computer equipment for the Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears interest at a rate of 6.61% per annum, payable monthly with principal beginning March 2021 and a maturity of March 4, 2024.
On February 5, 2021, the Company borrowed of 99,808,328CLP ($136,564USD), net of 210,485CLP fees ($286USD), from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan was used to purchase HVAC equipment for Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest rate of 2.54% per annum, payable monthly with principal beginning March 2021 and a maturity date of March 4, 2024.
On February 15, 2021, the Company borrowed 500,000,000CLP ($678,214USD) from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan was used as working capital and to complete the construction of the Gendarmeria monitoring center in Puerto Montt, Chile. The loan bears interest at a rate of 3.12% per annum, payable monthly with principal beginning March 2021 and a maturity of February 17, 2025. The Company also paid 28,248,588CLP ($38,317USD) in broker fees which are amortized over the life of the loan.
No borrowings or sales of equity securities occurred during the three months ended December 31, 2017.
Net Cash Flows fromProvided by Operating Activities.
During the
three months ended December 31,Net Cash Flows fromUsed in Investing Activities.
The Company used $594,726$856,515 of cash from investing activities during the three months ended December 31, 2023, compared to $2,188,616 of cash used for investing activities during the
Net Cash Flows fromUsed in Financing Activities.
The Company used $17,289$124,338 of cash forfrom financing activities during the
Liquidity, Working Capital and 2016, respectively. TheManagement’s Plan
As of December 31, 2023, the Company may continuehad unrestricted cash of $3,730,885, compared to incur losses until it is able to achieve a levelunrestricted cash of revenues adequate to support its cost structure. In addition, although no assurances can be given, in the event that management is able to successfully restructure the debt owed under the Conrent Loan Agreement, management has evaluated the significance$4,057,195 as of all conditions and determined that it will have adequate cash flow from operations to meet its operating obligations and provide for itsSeptember 30, 2023. As of December 31, 2023, we had working capital requirements for the upcoming twelve months. However, in the event we are unableof $4,689,177, compared to successfully restructure the debt under the Conrent Loan Agreement, our available cash resources together with cash flow from operations will be inadequate to satisfy out working capital requirements.
On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility, which extended the maturity date of the Amended Facility to July 1, 2024, capitalized the accrued and unpaid interest, increasing the outstanding principal amount, and reduced the interest rate of the Amended Facility from 8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the “Amendment”). The Amendment: (i) extended the maturity date from July 1, 2024 to the Maturity Date; (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date; and (iii) removed section 7.3 “Change of Control” of the Amended Facility Agreement. In return, the Company agreed to pay certain fees to Conrent. As of December 31, 2023, $42,864,000 of principal and $876,331 of interest was owed to Conrent.
During the fiscal year ended September 30, 2021, the Company borrowed approximately $1.95 million through six notes payable to fund the construction of monitoring centers in Chile required by our new contract. These six notes mature between January 2024 to February 2025 and the principal repayments on our historical operationsthese six notes have all commenced. No additional funds were borrowed during the three months ended December 31, 2023 or profitability.during the years ended September 30, 2023 or 2022.
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, except as described below.
Payments due in less than 1 year | Payments due in 1 – 3 years | Payments due in 3 – 5 years | Total | |
| Operating leases | $329,252 | $479,023 | $58,808 | $867,083 |
The Company footprint extends to several countries outside the United States, and we intend to continue to examine international opportunities. As a result, our revenuesrevenue 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 $2,561,305$1,515,051 and $2,795,781$1,525,021 in foreign currency revenue from sources outside of the United States for the three months ended December 31, 20172023 and 2016,2022, respectively. Our foreign currency revenue is made up of sales in Chile. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange gain of $55,072 and $116,442$538,945 in the three months ended December 31, 20172023 and 2016, respectively.a gain of $483,151 in the three months ended December 31, 2022. 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 which have been magnified by global matters, inflation, and the government policies established to address those issues. 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 useperiodically enter into small, simple forward foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes.to mitigate the risk of repatriating funds converted from foreign currency into U.S. dollars. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement additional strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
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, 20172023, 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, 2017.
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 ourthe quarter ended December 31, 20172023, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ER INFORMATION
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of nearly all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior).
On March 24, 2017, SecureAlert Inc. (a predecessor entity to Track Group, Inc. or the Company) filed a complaint before the Federal Administrative Tribunal, asserting the failure byCommonwealth 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 then Public Security Department,Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to recover allegedly fraudulent transfers and presently,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 produced documentation supporting its position in an agencyinformal document exchange with the Commonwealth on July 6, 2020. At this time, the case remains stayed by Court order. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Jeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the National Security CommissionState of California, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the DepartmentCompany. The Company disputes Abed’s claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Track Group Chile SpA. v. Republic of Chile.On January 24, 2022, Track Group Chile SpA., a wholly-owned subsidiary of the Interior, and SecureAlert, Inc., presently Company (“Track Group, Inc.Chile”) initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile related to its contract with the Chilean National Prisoner Service, the Company’s customer in the Republic of Chile (the “Customer”). The judicial action followed the issuance by the Customer on December 19, 2021 of the first of two letters fining Track Chile approximately USD $1.5 million for delays in completing two offender monitoring centers caused principally by the COVID-19 global pandemic. Track Chile also was granted an injunction preventing the Chilean government from drawing down on the performance bond (the “Performance Bond”) posted by Track Chile on July 2, 2020 with an expiration date of July 1, 2024 (the “Expiration Date”). On January 17, 2024, a Chilean appellate court overturned the injunction. The Company’s claim amountChilean counsel is upwards of $6.0 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, based on its determination that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decisionconsidering Track Chile’s options in light of the Federal Administrative Tribunal. Counsel estimates the Tribunal should have a ruling on or before June 30, 2018. If the Company’s appealappellate court’s decision. The Company is successful, the case willconfident that resolution of these issues can be sent backreached prior to the Federal Administrative Tribunal for a resolution onExpiration Date and remains confident in its position regarding the merits of the case.
Michael Matthews v. Track Group, Chile SpA.
Kevin Barnes v. Track Group, Inc., et. al. On December 28, 2023, the defendants. Plaintiff is requesting damages of no less than $2.0 million. The Company’s Answer and Appearance wereCompany was served with a second amended complaint filed August 13, 2017. We are currently in the discovery period.
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, 2017,2023, filed on December 19, 2017.20, 2023. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report.Report and other reports we file with the SEC. Should any of these risks materialize or deteriorate further, our business, financial condition and future prospects could be negatively impacted. As of February
None.
None.
Not applicable.
None.
TableItem 6. Exhibits
(a) Exhibits Required by Item 601 of Contents
Exhibit Number | Title of Document | |
31(ii) | ||
| Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). | ||
32 | ||
| Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). | ||
101.INS | Inline XBRL | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL | |
NATURES
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.
Track Group, Inc. | |||
Date: February 8, | By: | /s/ Derek Cassell | |
Derek Cassell, Chief Executive Officer Officer)(Principal Executive | |||
Date: February 8, | By: | /s/ Peter K. Poli | |
Peter K. Poli, Chief Financial Officer (Principal Financial and Accounting Officer) | |||