UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20172020
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 [ ] (Do not check if a smaller reporting company)
☒ | Smaller reporting company [X]☒ |
| | 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 2018, 2021 was 10,462,433.11,414,150.
FORM 10-Q
For the Quarterly Period Ended December 31, 20172020
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PART I. FIFINANCNIANCIALAL INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| Assets | December 31, 2017 (unaudited) | |
| 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 |
| | | |
| Assets | | |
| Current assets: | | |
| Cash | $5,862,442 | $6,762,099 |
| Accounts receivable, net of allowance for doubtful accounts of $2,624,536 and $2,654,173, respectively | 6,420,253 | 5,546,213 |
| Prepaid expense and deposits | 817,774 | 866,389 |
| Inventory, net of reserves of $6,392 and $6,483, respectively | 118,510 | 124,606 |
| Total current assets | 13,218,979 | 13,299,307 |
| Property and equipment, net of accumulated depreciation of $2,746,715 and $2,531,631, respectively | 359,317 | 378,764 |
| Monitoring equipment, net of accumulated depreciation of $5,589,903 and $6,639,883, respectively | 2,755,331 | 2,065,947 |
| Intangible assets, net of accumulated amortization of $17,019,421 and $16,390,721, respectively | 21,412,818 | 21,171,045 |
| Goodwill | 8,527,257 | 8,220,380 |
| Deferred tax asset | 425,666 | 432,721 |
| Other assets | 2,577,659 | 2,166,743 |
| Total assets | $49,277,027 | $47,734,907 |
| | | |
| Liabilities and Stockholders’ Equity (Deficit) | | |
| Current liabilities: | | |
| Accounts payable | $1,830,099 | $2,199,215 |
| Accrued liabilities | 15,372,602 | 14,958,628 |
| Current portion of long-term debt | 671,266 | 30,914,625 |
| Total current liabilities | 17,873,967 | 48,072,468 |
| Long-term debt, net | 30,572,648 | 418,575 |
| Long-term liabilities | 109,706 | 164,487 |
| Total liabilities | 48,556,321 | 48,655,530 |
| | | |
| Commitments and contingencies (Note 16 and Note 23) | | |
| | | |
| Stockholders’ equity (deficit): | | |
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,414,150 shares outstanding, respectively | 1,141 | 1,141 |
| Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | - | �� - |
| Paid in capital | 302,270,242 | 302,270,242 |
| Accumulated deficit | (300,947,439) | (302,270,933) |
| Accumulated other comprehensive loss | (603,238) | (921,073) |
| Total equity (deficit) | 720,706 | (920,623) |
| Total liabilities and stockholders’ equity (deficit) | $49,277,027 | $47,734,907 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP,GROUP, INC. AND SUBSIDIARIESSUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSINCOME (LOSS)
(Unaudited)
| | Three Months Ended December 31, |
| | | |
| 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 |
| | Three Months Ended December 31, |
| | | |
| Revenue: | | |
| Monitoring and other related services | $9,271,729 | $8,268,423 |
| Product sales and other | 130,176 | 152,408 |
| Total revenue | 9,401,905 | 8,420,831 |
| | | |
| Cost of revenue: | | |
| Monitoring, products and other related services | 3,700,426 | 3,266,909 |
| Depreciation & amortization included in cost of revenue | 488,675 | 487,442 |
| Total cost of revenue | 4,189,101 | 3,754,351 |
| | | |
| Gross profit | 5,212,804 | 4,666,480 |
| | | |
| Operating expense: | | |
| General & administrative | 2,400,735 | 3,011,854 |
| Selling & marketing | 550,457 | 541,549 |
| Research & development | 307,294 | 296,155 |
| Depreciation & amortization | 531,763 | 515,939 |
| Total operating expense | 3,790,249 | 4,365,497 |
| | | |
| Operating income | 1,422,555 | 300,983 |
| | | |
| Other income (expense): | | |
| Interest expense, net | (640,022) | (602,533) |
| Currency exchange gain | 818,626 | 143,308 |
| Other income/expense, net | 26 | - |
| Total other income (expense) | 178,630 | (459,225) |
| Income (loss) before income taxes | 1,601,185 | (158,242) |
| Income tax expense | 277,691 | 74,383 |
| Net income (loss) attributable to common stockholders | 1,323,494 | (232,625) |
| Foreign currency translation adjustments | 317,835 | (64,098) |
| Comprehensive income (loss) | $1,641,329 | $(296,723) |
| Net income (loss) per common share, basic and diluted | $0.12 | $(0.02) |
| Weighted average common shares outstanding, basic and diluted | 11,414,150 | 11,411,704 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDISUBASRIESIDIARIES CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| | Three Months Ended December 31, |
| | | |
| 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 |
| | | | | | |
| | | | | | | |
| | | | | | | |
| Balance September 30, 2020 | 11,414,150 | $1,141 | $302,270,242 | $(302,270,933) | $(921,073) | $(920,623) |
| | | | | | | |
| Foreign currency translation adjustments | - | - | - | - | 317,835 | 317,835 |
| Net income | - | - | - | 1,323,494 | - | 1,323,494 |
| Balance December 31, 2020 | 11,414,150 | $1,141 | $302,270,242 | $(300,947,439) | $(603,238) | $720,706 |
| 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 |
| | | | | | |
| | | | | | | |
| | | | | | | |
| Balance September 30, 2019 | 11,401,650 | $1,140 | $302,250,556 | $(302,152,292) | $(1,001,602) | $(902,198) |
| | | | | | | |
| Share-based compensation | - | - | 19,687 | - | - | 19,687 |
| Issuance of Common stock to employees for services | 12,500 | 1 | (1) | | | - |
| Foreign currency translation adjustments | - | - | - | - | (64,098) | (64,098) |
| Net loss | - | - | - | (232,625) | - | (232,625) |
| Balance December 31, 2019 | 11,414,150 | $1,141 | $302,270,242 | $(302,384,917) | $(1,065,700) | $(1,179,234) |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROGURP,OUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months Ended December 31, |
| | | |
| Cash flows from operating activities: | | |
| Net income (loss) | $1,323,494 | $(232,625) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Depreciation and amortization | 1,020,438 | 1,003,381 |
| Bad debt expense | (16,986) | 109,161 |
| Stock based compensation | - | 19,687 |
| Loss on monitoring equipment included in cost of revenue | 110,123 | 134,047 |
| Foreign currency exchange gain | (818,626) | (143,308) |
| Change in assets and liabilities: | | |
| Accounts receivable, net | (759,838) | 1,155,606 |
| Inventories | 4,200 | - |
| Prepaid expense and deposits | (121,864) | (179,203) |
| Accounts payable | (379,272) | (9,101) |
| Accrued liabilities | 224,333 | 793,323 |
| Net cash provided by operating activities | 582,002 | 2,650,968 |
| | | |
| Cash flows from investing activities: | | |
| Purchase of property and equipment | (81,183) | (54,581) |
| Capitalized software | (397,402) | (341,622) |
| Purchase of monitoring equipment and parts | (1,054,807) | (606,225) |
| Net cash used in investing activities | (1,533,392) | (1,002,428) |
| | | |
| Cash flows from financing activities: | | |
| Principal payments on long-term debt | - | (9,552) |
| Payment of deferred financing costs | (89,286) | - |
| Net cash used in financing activities | (89,286) | (9,552) |
| | | |
| Effect of exchange rate changes on cash | 141,019 | (42,149) |
| | | |
| Net increase (decrease) in cash | (899,657) | 1,596,839 |
| Cash, beginning of period | 6,762,099 | 6,896,711 |
| Cash, end of period | $5,862,442 | $8,493,550 |
| Cash paid for interest | $2,629 | $6,856 |
| | | |
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, 2017,2020, and results of its operations for the three months ended December 31, 2017.2020. These financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 20172020, filed with the SEC on December 19, 2017.23, 2020. The results of operations for the three months ended December 31, 20172020 may not be indicative of the results for the fiscal year ending September 30, 2018.2021.
Reclassifications– Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income (loss) or shareholders’ equity (See Note 4).
Business condition -As of December 31, 20172020 and 20162019, the Company had an accumulated deficit of $295,109,920$300,947,439 and $291,955,262,$302,384,917, respectively. The Company incurred anet income of $1,323,494 and net loss of $1,042,592 and $2,613,759$(232,625) for the three months ended December 31, 20172020 and 2016,2019, respectively. The Company may continue to incur losses and require additional financial resources. The Company also has debt maturing in the next 12 months.July 2024 and a potentially forgivable PPP loan which matures in May 2022. See Note 24. The Company’s successful development and transition to attaining profitable operations is dependent upon achievinggenerating a level of revenuesrevenue adequate to support its cost structure.structure, which it has achieved on an operating basis, although the Company needs to resolve its debt obligation which matures on July 1, 2024. Management has evaluated the significance of these negative conditions and has determined that the Company can meet its operating obligations for a reasonable period of time. The Company expects to fund operations using cash on hand 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 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.Certain prior year amounts on the consolidated statement of operations have been reclassified to conform to the current period presentation. These reclassifications have no impact on the previously reported results.
(3) RECENT ACCOUNTING STANDARDS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which are adopted by the Company as of the specified effective date. During the three months ended December 31, 2017, there were no new accounting pronouncements that had a material impact on the Company’s consolidated financial statements.
Recently adopted accounting standardsAdopted Accounting Standards
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory” (“ASU 2015-11”), which dictates that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard in the first quarter of fiscal year 2018. The Company’s adoption of ASU 2015-11 did not have a material impact on its Consolidated Financial Statements.
Recently issued accounting standards
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In August 2016, the FASB issued ASU 2016-15 - Statement of Cash Flows (Topic 230) classification of certain cash receipts and cash payments to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. The adoption of the new standard is required in 2019. Management does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In February 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 841)842)”. For lessees, the amendments in this update require that for all leases not considered to be short term, a company recognize both a lease liability and right-of-use asset on its balance sheet, representing the obligation to make payments and the right to use or control the use of a specified asset for the lease term. The amendments in this update are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company adopted ASU 2016-02 on October 1, 2019. See Note 16 for the impact the adoption had on our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment”. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance for accelerated filing companies will be effective 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 this update 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 does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” (“ASU 2014-09”) and requires entities to recognize revenue is a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company has evaluated the new standard and anticipates a change in the reporting of revenue as enhanced disclosures will be required. The Company does not anticipate a significant impact on our financial statements due to the nature of our revenue streams and our revenue recognition policy.
(4) IMMATERIAL ERROR CORRECTIONS
This Quarterly ReportIn June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Form 10-QFinancial Instruments”. ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the Company forbeginning of the period endedof adoption. ASU 2016-13 is effective for fiscal years beginning after December 31, 2017 includes the revision of the Company’s previously filed consolidated income statements15, 2019, excluding smaller reporting entities, which will be effective for the three months endedfiscal years beginning after December 31, 2016.
Management concluded that the general and administrative section of the Condensed Consolidated Income Statement contained an error and that for comparative purposes15, 2022. The Company will adopt ASU 2016-13 in fiscal year 2017 filings, these figures should be revised but that2022. The Company does not expect the adjustments are not material modifications. Accordingly,application of the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial. Furthermore, the Company has determined that correcting prior year financial statementsCECL impairment model to have a significant impact on our allowance for immaterial changes would not require previously filed reports to be amended.uncollectible amounts for accounts receivable.
Under general and administrative expense, we have reclassified costs related to repairs and maintenance of monitoring devices and certain other costs, including installation, communications and transportation costs that were previously recorded in general and administrative expense to cost of revenues, selling and marketing, and research and development. Net income (loss) and shareholders’ equity were not affected by the reclassification. The effect of these revisions on the Company’s results of operations for the three months ended December 31, 2016 previously reported are as follows:
| | Three months ended December 31, 2016 Previously Reported | | 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 |
(5)(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.
(6)(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805,“Business Combinations,Combinations”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree, and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company has agreed to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain future goals, which may include revenue milestones, new customer accounts, and earnings targets. The Company records contingent consideration based on its estimated fair value as of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward and likely achievement of certain targets on which issuance of the contingent consideration is based. Any differences between the acquisition-date fair value and the changes in fair value of the contingent consideration subsequent to the acquisition date are recognized in current period earnings until the arrangement is settled. If there is uncertainty surrounding the value of contingent consideration, then the Company’s policy is to wait until the end of the measurement period before making an adjustment.
(7)(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, that are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the prevailing exchange rate at December 31, 2017.2020.
(8)
(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) available to common shareholdersstockholders by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income (loss) attributable to common shareholdersstockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants. As of both December 31, 20172020, and 2016,2019, there were 570,467 and 526,901685,259 outstanding common share equivalents respectively, that were not included in the computation of Diluted EPS for the three months ended December 31, 20172020 and 2016,2019, respectively, as their effect would be anti-dilutive. The common stock equivalents outstanding as of December 31, 20172020 and 2016December 31, 2019 consisted of the following:
| | | |
| | | | | |
| Exercisable common stock options and warrants | 570,467 | 526,901 | 685,259 |
| Total common stock equivalents | 570,467 | 526,901 | 685,259 |
At December 31, 2020 and 2019, all stock option and warrant exercise prices were above the market price of $0.34 and $0.49, respectively, and thus have not been included in the basic earnings per share calculation.
(8) REVENUE RECOGNITION
(9) PREPAID EXPENSES AND OTHERMonitoring and Other Related Services.Monitoring services include two components: (i) lease contracts pursuant to which the Company provides monitoring services and lease devices to distributors or end users and the Company retains ownership of the leased device; and (ii) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use the Company’s monitoring services. Sales of devices and leased GPS devices are required to use the Company’s monitoring service and both the GPS leased devices and monitoring services are accounted for as a single performance obligation. Monitoring revenue is recognized ratably over time, as the customer simultaneously receives and consumes the benefit of these services as they are performed. Payment due or received from the customers prior to rendering the associated services are recorded as a contract liability. The balance of the contract liabilities at December 31, 2020 and September 30, 2020 are $99,202 and $147,921, respectively, and are included in accrued liabilities on the Consolidated Balance Sheets. The Company recognized $48,816 and $73,071 of deferred revenue in the three months ended December 31, 2020 and December 31, 2019, 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 from the sale of devices and parts is recognized upon their transfer of control to the customer, which is generally upon delivery. Delivery is considered complete at either the time of shipment or arrival at destination, based on the agreed upon terms within the contract. Payment terms are generally 30 days from invoice date.
Multiple Element Arrangements.The majority of our revenue transactions do not have multiple elements. However, on occasion, the Company may enter into revenue transactions that have multiple elements. These may include different combinations of products or services that are included in a single billable rate. These products or services are delivered over time as the customer utilizes our services. In cases where obligations in a contract are distinct and thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle of promises has been met.
The carrying amounts reportedstandalone 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 balance sheets for prepaid expenses and other current assets approximate their fair marketgood or service. When there is only one performance obligation associated with a contract, the entire sale value based onis attributed to that obligation. When a contract contains multiple performance obligations the short-term maturity of these instruments. As of December 31, 2017, and September 30, 2017,transaction value is first allocated using the outstanding balance of prepaid and other expenses was $4,219,135 and $854,122, respectively. The $4,219,135 as of December 31, 2017 is comprised largely of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. The increase in prepaid and other expenses at December 31, 2017 was primarily due to a cash collateralized performance bond for an international customer of $2,860,358,observable price, which is scheduledgenerally a list price net of applicable discount or the price used to be repaidsell in similar circumstances. In circumstances when a selling price is not directly observable, the third fiscal quarter and has been re-classified as a short-term asset inCompany will estimate the three-month period ended December 31, 2017, as well as increases in prepaid taxes, vendor deposits and insurance.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, 2020 | Three months ended December 31, 2019 |
| | | | | |
| | | | | |
| United States | $6,797,758 | 72% | $5,567,858 | 66% |
| Latin America | 2,506,412 | 27% | 2,737,593 | 33% |
| Other | 97,735 | 1% | 115,380 | 1% |
| Total | $9,401,905 | 100% | $8,420,831 | 100% |
The above table includes total revenue for the Company, of which monitoring and other related services is the majority (approximately 99%) of the Company’s revenue. Latin America includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin Islands. Other includes Canada and Saudi Arabia in the three months ended December 31, 2020 and Canada, Saudi Arabia, South Africa and Vietnam in the three months ended December 31, 2019.
(9) PREPAID EXPENSE AND DEPOSITS
As of December 31, 2020, and September 30, 2020, the outstanding balance of prepaid expense and deposits was $817,774 and $866,389, respectively. These balances are comprised largely of tax deposits, vendor deposits and other prepaid supplier expense.
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”)standard costing method.Net realizable value is determined based on the estimateditem selling prices on the ordinary course of business less reasonably predictable costs of completion, disposal and transportation.price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired items.values.
Inventory consists of finished goods that are to be shipped to customers and parts used for minor repairs of ReliAlertTMReliAlert™, Shadow, and other tracking devices. Completed and shipped ReliAlertTMReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of December 31, 20172020, and September 30, 2017, respectively,2020, inventory consisted of the following:
| | | | |
| | | | | |
| Finished goods inventory | $199,281 | $288,744 | $124,902 | $131,089 |
| Reserve for damaged or obsolete inventory | (26,934) | (6,392) | (6,483) |
| Total inventory, net of reserves | $172,347 | $261,810 | $118,510 | $124,606 |
The Company uses a third-party fulfillment service provider. As a result of this service, the Company’s employees do not actively assemble new product or repair damaged inventory or monitoring equipment shipped directly from suppliers. Purchases of monitoring equipment are recognized directly. Management believes this process reduces maintenance and fulfillment costs associated with inventory and monitoring equipment. Management reviews inventory regularly to identify damaged or obsolete inventory and reserves for potential losses. The Company recorded charges of $91 and $35,213 during the three months ended December 31, 2020 and December 31, 2019, respectively, for inventory that was obsolete, lost or damaged. Obsolete, lost and damaged inventory items are included in Monitoring, products & other related services in the Condensed Consolidated Statement of Operations.
(11) PROPERTY AND EQUIPMENT
The following table summarizes propertyProperty and equipment atconsisted of the following as of December 31, 20172020 and September 30, 2017,2020, respectively:
| | | | | |
| Equipment, software and tooling | $1,045,090 | $1,028,081 | $1,360,582 | $1,272,635 |
| Automobiles | 40,048 | 52,230 | 5,687 | 5,156 |
| Leasehold improvements | 1,351,025 | 1,307,802 | 1,386,831 | 1,290,708 |
| Furniture and fixtures | 309,223 | 293,621 | 352,932 | 341,896 |
| Total property and equipment before accumulated depreciation | 2,745,386 | 2,681,734 | 3,106,032 | 2,910,395 |
| Accumulated depreciation | (1,862,347) | (1,778,634) | (2,746,715) | (2,531,631) |
| Property and equipment, net of accumulated depreciation | $883,039 | $903,100 | $359,317 | $378,764 |
Property and equipment depreciation expense for the three months ended December 31, 20172020 and 20162019 was $114,417$112,209 and $50,291,$83,432, respectively.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is amortized using the straight-line method over an estimated useful life of between one toand five years. Monitoring equipment as of December 31, 20172020 and September 30, 20172020 was as follows:
| | | | | |
| Monitoring equipment | $8,227,746 | $8,399,937 | $8,345,234 | $8,705,830 |
| Less: accumulated amortization | (4,767,061) | (4,906,925) | |
| Less: accumulated depreciation | | (5,589,903) | (6,639,883) |
| Monitoring equipment, net of accumulated depreciation | $3,460,685 | $3,493,012 | $2,755,331 | $2,065,947 |
AmortizationDepreciation of monitoring equipment for the three months ended December 31, 20172020 and 20162019 was $353,027$337,560 and $332,993,$360,630, respectively. These expenses wereDepreciation expense for monitoring devices is recognized in cost of revenues.
$110,123 and $98,834, respectively, for devices that were lost, stolen or damaged. Lost, stolen and damaged items are included in Monitoring, products & other related services in the Condensed Consolidated Statement of Operations.
(13) INTANGIBLE ASSETS
The following table summarizes intangible assets at December 31, 20172020 and September 30, 2017,2020, respectively:
| | | | |
| Other intangible assets: | | |
| Intangible assets: | | | |
| Patent & royalty agreements | 21,170,565 | $21,170,565 |
| Developed technology | 11,410,921 | 11,116,738 | 15,003,573 | 14,134,562 |
| Customer relationships | 1,860,000 | 1,860,000 |
| Trade name | 335,350 | 332,183 | 319,900 | 318,438 |
| Website | 78,201 | 78,201 |
| Total intangible assets | 34,855,037 | 34,557,687 | 38,432,239 | 37,561,766 |
| Accumulated amortization | (10,444,569) | (9,839,032) | (17,019,421) | (16,390,721) |
| Intangible assets, net | $24,410,468 | $24,718,655 | |
| Intangible assets, net of accumulated amortization | | $21,412,818 | $21,171,045 |
The intangible assets summarized above were purchased or developed on various dates from January 2010 through December 2017.31, 2020. The assets have useful lives ranging from three to twenty years. Amortization expense for the three months ended December 31, 20172020 and 20162019 was $574,438$570,669 and $637,320,$559,319, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwill at December 31, 2017:2020 and September 30, 2020, respectively:
| Three months ended December 31,
|
| |
Balance - beginning of period | $8,226,714
|
Effect of foreign currency translation on goodwill | 48,594
|
Balance - end of period | $8,275,308
|
| | | |
| | | |
Balance - beginning of period | $8,220,380 | $8,187,911 |
| Effect of foreign currency translation on goodwill | 306,877 | 32,469 |
| Balance - end of period | $8,527,257 | $8,220,380 |
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, 2017.2020.
(15) OTHER ASSETS
As of December 31, 20172020 and September 30, 2017,2020, respectively, the outstanding balance of other assets was $785,195$2,577,659 and $2,989,101,$2,166,743, respectively. AOther assets at December 31, 2020 are comprised largely of cash collateralized performance bondPerformance Bonds (as defined in Note 23) for an international customer, which is expectedas well as right of use assets, lease deposits, insurance costs and other long-term assets. The Company anticipates these Performance Bonds will be reimbursed to be repaid in the third fiscal quarter has been re-classified as a current asset inCompany upon completion of its contracts with the three-month period ended December 31, 2017.customer.
(16) ACCRUED LIABILITESLEASES
AccruedEffective October 1, 2019, the Company adopted the new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified lease accounting for lessees to create transparency and comparability by recording lease assets and liabilities consistedfor operating leases and disclosing key information about leasing arrangements. The Company adopted the new lease standard utilizing the modified retrospective transaction method, under which amounts in prior periods were not restated. For contracts existing at the time of the adoption, the Company elected not to reassess (a) whether any are or contain leases, (b) lease classification, and (c) initial direct costs. Upon adoption on October 1, 2019, the Company recorded $597,289 right of use assets and lease liabilities. The adoption of the new standard did not impact the Company’s Statements of Operations or Statements of Cash Flows.
The following table shows right of use assets and lease liabilities and the associated financial statement line items as of December 31, 20172020 and September 30, 2017:2020.
| | | |
| | | Operating lease liability | | Operating lease liability |
| | | | | |
| Other assets | $330,899 | $- | $375,397 | $- |
| Accrued liabilities | - | 221,194 | - | 210,910 |
| Long-term liabilities | - | 109,705 | - | 164,487 |
| | | |
| 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 |
(17) RESTRUCTURING
In The following table summarizes the first quarter of fiscal year 2017, the Company approved a plan to restructure our business (the “Restructuring Plan”) to streamline operations by consolidating our headquarters from Salt Lake City, Utah into our existing Chicagoland office. The Restructuring Plan, which was completed in fiscal 2017, also included outsourcingthe Company’s monitoring center which allowed a significant head count reduction and lower future expenses, and improved the Company’s ability to align workforce costs with customer demands. During the twelve-months ended September 30, 2017, the Company recognized expensessupplemental cash flow information for the Restructuring Plan of $558,833, including $435,643 of severance expense and $123,190 of lease and moving costs, all of which were paid in the fiscal year ended September 30, 2017.
Total restructuring charges for the three-monthsthree months ended December 31, 20162020 and their utilization are summarized as follows:December 31 2019:
| | | | |
| 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 |
| | | |
| Cash paid for noncancelable operating leases included in operating cash flows | $75,890 | $116,411 |
| | | |
| Right of use assets obtained in exchange for operating lease liabilities: | $- | $- |
The future minimum lease payments under noncancelable operating leases with terms greater than one year as of December 31, 2020 are:
| |
| From January 2021 to September 2021 | $179,871 |
| From October 2021 to September 2022 | 169,122 |
| From October 2022 to September 2023 | 3,612 |
| Undiscounted cash flow | 352,605 |
| Less: imputed interest | (21,706) |
| Total | $330,899 |
| Reconciliation to lease liabilities: | |
| Lease liabilities - current | $221,194 |
| Lease liabilities - long-term | 109,705 |
| Total lease liabilities | $330,899 |
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of December 31, 2020 were 1.5 years and 8%, respectively. The Company’s lease discount rates are generally based on the estimates of its incremental borrowing rate as the discount rates implicit in the Company’s leases cannot be readily determined.
(17) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of December 31, 2020 and September 30, 2020, respectively:
| | | |
| Accrued payroll, taxes and employee benefits | $1,229,245 | $1,607,920 |
| Deferred revenue | 99,202 | 147,921 |
| Accrued taxes - foreign and domestic | 525,234 | 324,221 |
| Accrued other expense | 99,095 | 117,264 |
| Accrued legal and other professional costs | 663,547 | 725,547 |
| Accrued costs of revenue | 396,176 | 309,470 |
| Right of use liability | 221,194 | 210,910 |
| Accrued interest | 12,138,909 | 11,515,375 |
| Total accrued liabilities | $15,372,602 | $14,958,628 |
(18) DEBT OBLIGATIONSRELATED PARTIES
ETS Limited is currently the beneficial owner of 4,871,745 shares of the Company's Common Stock (“Track Group Shares”) held by ADS Securities LLC (“ADS”) under an agreement dated September 28, 2017 pursuant to which ADS transferred all of the Track Group Shares to ETS Limited in exchange for all of the outstanding shares of ETS Limited. A Director of ETS Limited was elected to the Company's Board of Directors on February 7, 2018.
On September 25, 2015,8, 2020, the Company entered intoreceived a loan agreementletter from ADS informing the Company that ADS had been assigned the right to payment under that certain Loan Facility dated September 14, 2015, by and between Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”) with Sapinda Asia Limited (“Sapinda”), a related party, to provide. On September 30, 2020, the Company with a $5.0 million line of credit that accrues interest at a rate of 3% per annum for undrawn funds, and 8% per annum for borrowed funds. Pursuant toADS settled the terms and conditions of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “Maturity Date”), when all borrowed funds, plus all accrued but unpaid interest will becomeoutstanding amount due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior tofor $2.7 million. The Company recorded a gain of approximately $0.7 million during the Maturity Date without penalties or fees.fiscal year ended September 30, 2020.
On March 13, 2017 (the “Execution Date”), the Company and Sapinda entered into Amendment Number One to theSapinda Loan Agreement. Amendment Number One extends the maturity date of all loans made pursuant to theSapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminates the requirement that the Company pay Sapinda the3%Interest, and forgives the 3% interest due to Sapinda for all undrawn funds under theSapinda Loan Agreement through the Execution Date. Further, Amendment Number One provides that all failure to fund penalties (“Lender Penalties”) accrued under theSapinda Loan Agreement through the Execution Date are forgiven. Per Amendment Number One, Lender Penalties shall begin to accrue again provided Sapinda has not funded the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000 at December 31, 2017, under Section 6.3 of theSapinda Loan Agreement, as amended. We did not draw on this line of credit, nor did we pay any interest during the three months ended December 31, 2017. The undrawn balance of this line of credit at December 31, 2017 was $1,600,356.Further advances under theSapinda Loan Agreement are not currently expected to be forthcoming.(19) DEBT OBLIGATIONS
On May 1, 2016, the Company entered into an unsecured Loan Agreement with Conrent Invest S.A., a public limited liability company incorporated under the laws of the Grand Duchy of Luxembourg (“Conrent”), acting with respect to its Compartment Safety III (the “Conrent Loan Agreement”). Pursuant to its terms, available borrowing capacity under the Conrent Loan Agreement was $5.0 million; however, due to the failure of the lender to satisfy certain conditions precedent to its obligation to fund, the Company has not received funds under the Conrent Loan AgreementDebt obligations as of December 31, 2017,2020 and no proceeds thereunder are anticipated.September 30, 2020 consisted of the following:
| | | |
| | | |
| The unsecured Amended Facility Agreement with Conrent whereby, as of June 30, 2015, the Company had borrowed $30.4 million, net of unamortized issuance costs of $89,286 at December 31, 2020, 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 1, 2024. The Company did not pay interest on this loan during the three months ended December 31, 2020. | $30,310,714 | $30,400,000 |
| | | |
Note payable with BMO Harris Bank for a Paycheck Protection Program ("PPP") loan with the U.S. Small Business Administration ("SBA"), bearing interest at a rate of 1% per annum, with a maturity of May 19, 2022. | 933,200 | 933,200 |
| | | |
| Total debt obligations | 31,243,914 | 31,333,200 |
| Less: current portion | (671,266) | (30,914,625) |
| Long-term debt, less current portion and unamortized issuance costs | $30,572,648 | $418,575 |
On October 9, 2017,September 8, 2020, the Company entered intoreceived a Debt Exchange Agreement with Conrent Invest S.A. regarding total debt and unpaid interest of approximately $34.7 million as of October 31, 2017 (the “Debt”) (the “Debt Exchange”). The Debt Exchange called forletter from ADS informing the Company that ADS had been assigned the right to exchange newly issued shares of preferred stock forpayment under that certain Loan Facility dated September 14, 2015, by and between Sapinda Asia Limited and the entire Debt subject to approval by the investors who purchased securities from Conrent to finance the DebtCompany (the “Sapinda Loan AgreementNoteholders”). On November 2, 2017, Conrent convenedSeptember 30, 2020, the Company and ADS settled the outstanding amount due under the Sapinda Loan Agreement for $2.7 million. The Company recorded a meetinggain of approximately $0.7 million which is included in Other income/expense, net on the Noteholders to approveConsolidated Statement of Operations in the Debt Exchange; however, the quorum required to approve the Debt Exchange was not achieved. Management continues to negotiate with Conrent regarding terms for the Debt Exchange acceptable to Noteholders with the objective of reaching an agreement acceptable to both Conrent and the Noteholders before the Debt matures on July 31, 2018.twelve months ended September 30, 2020.
Debt obligations asOn October 21, 2020, the Company requested, in writing, an additional extension to the maturity date of the Amended Facility Agreement. On November 25, 2020, the Noteholders held a meeting to address the Company’s request and approved a new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement which extends the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”), capitalizes the accrued and unpaid interest increasing the outstanding principal amount and reduces the interest rate of the Amended Facility from 8% to 4%. Conrent is currently working on documentation and the updated registration process to implement these changes. We currently anticipate restructuring the Amended Facility in the second fiscal quarter of 2021, with the expectation that all outstanding accrued interest will be capitalized and the interest rate will be reduced to 4%. As a result, we anticipate that we will begin amortizing deferred financing fees on July 1, 2021. As of December 31, 20172020, approximately $30.4 million of principal and September 30, 2017, respectively, are comprised$12.1 million of interest was owed to Conrent.
On May 19, 2020, the Company received net proceeds of $933,200 from a potentially forgivable loan from the SBA pursuant to the PPP enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "CARES Act") administered by the SBA (the "PPP Loan"). To facilitate the PPP Loan, the Company entered into a Note Payable Agreement with BMO Harris Bank National Association as lender (the "Lender") (the "PPP Loan Agreement"). The PPP Loan provides for working capital to the Company and will mature on May 19, 2022. However, under the CARES Act and the PPP Loan Agreement, scheduled payments of both principal and interest would have begun December 19, 2020; however, payments were deferred because the Company filed its forgiveness application. The PPP Loan will accrue interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. The CARES Act (including the guidance issued by SBA and U.S. Department of the following:
| | | |
| | | |
| Unsecured facility agreement with an entity whereby, as of June 30, 2015, the Company may borrow up to $30.4 million bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on July 31, 2018. A $1.2 million origination fee was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of December 31, 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 | |
| 2018 | $30,452,258 |
| 2019 | 43,842 |
| 2020 | 3,422,626 |
| 2021 | - |
2022
| - |
| Debt discount | (130,067) |
| Total | $33,788,659 |
(19) RELATED-PARTY TRANSACTIONS
Related-Party Loan Agreement
On September 25, 2015, the Company entered into the Sapinda Loan Agreement with Sapinda, a related party, to provide the Company with a $5.0 million line of credit that accrues interest at a rate of 3% per annum for undrawn funds, and 8% per annum for borrowed funds. Pursuant to the terms and conditions of the Sapinda Loan Agreement, available funds may be drawn down at the Company’s request at any time prior to the maturity date of September 30, 2017 (the “Maturity Date”), when all borrowed funds, plus all accrued but unpaid interest will become due and payable. The Company, however, may elect to satisfy any outstanding obligations under the Sapinda Loan Agreement prior to the Maturity Date without penalties or fees.
On March 13, 2017, the Company and Sapinda entered into Amendment Number One to theSapinda Loan Agreement. Amendment Number One extends the maturity date of all loans made pursuant to theSapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminates the requirement that the Company pay Sapinda the3%interest, and forgives the 3% interest due to Sapinda for all undrawn funds under theSapinda Loan Agreement through the Execution Date. Further, Amendment Number One provides that all Lender Penalties accrued under theSapinda Loan Agreement through the Execution Date are forgiven. Per Amendment Number One, Lender Penalties shall begin to accrue again provided Sapinda has not funded the amount of $1.5 million on or before March 31, 2017. In breach of Amendment Number One, Sapinda failed to fund the $1.5 million by March 31, 2017. The Company formally notified Sapinda of the breach by letter dated April 4, 2017. The Company is again accruing Lender Penalties, amounting to $275,000 atDecember 31, 2017, under Section 6.3 of theSapinda Loan Agreement, as amended. We did not draw on this line of credit, nor did we pay any interest during the three months ended December 31, 2017. The undrawn balance of this line of credit at December 31, 2017 was $1,600,356.Further advances under theSapinda Loan Agreement are not currently expected to be forthcoming, and therefore no assurances can be given that the Company will obtain additional funds to which it is entitled under theSapinda Loan Agreement, or that the penalties accruing will ever be paid.
Additional Related-Party Transactions and Summary of All Related-Party Obligations
| | | |
| | | |
| 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 |
Each of the foregoing related-party transactions was reviewed and approved by disinterested and independent members ofthe Company’s Board of Directors. | Twelve months ended December 31, | |
| 2021 | $671,266 |
| 2022 | 261,934 |
| 2023 | - |
| 2024 | 30,400,000 |
| Thereafter | - |
| Total | $31,333,200 |
(20) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share. During the three months ended December 31, 2017, no shares of common stock were issued to Board of Director members for their services earned in the first quarter of 2018. The Company has deferred the issuance of shares of common stock and warrants since the fourth quarter of 2017, and $275,000 for unpaid Board of Director fees has been accrued at December 31, 2017.
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s Board of Directors has the authority to amend the Company’s Certificate of Incorporation, without further shareholderstockholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock, and to create one or more series of preferred stock. As of December 31, 2017,2020, there were no shares of preferred stock outstanding.
In NovemberNo dividends were paid during the three-month period ended December 31, 2020 or 2019, respectively.
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 the Company’s preferred stock as Series A Preferred. Shares of Series A Preferred rank senior to the Company’s common stock, and all other classes and series of equity securities of the Company that by their terms do not rank senior to the Series A Preferred.
Except with respect to transactions upon which holders of the Series A Preferred are entitled to vote separately as a class under the terms of the Certificate of Designation, the Series A Preferred has no voting rights. The shares of common stock valued at $300,000, as compensation for services rendered tointo which the Company, whichSeries A Preferred is convertible shall, upon issuance, have not yet been issued. In addition, the Company issued 30,797 warrants to a memberall of the same voting rights as other issued and outstanding shares of our common stock.
The Series A Preferred has no separate dividend rights; however, whenever the Board declares a dividend on the Company’s Boardcommon stock, if ever, each holder of Directors in exchange for 18,551record of a share of Series A Preferred shall be entitled to receive an amount equal to such dividend declared on one share of common stock multiplied by the number of shares of common stock into which such share of Series A Preferred could be converted on the director previously received for services provided duringRecord Date.
Each share of Series A Preferred has a Liquidation Preference of $35.00 per share, and is convertible, at the periodholder’s option, into ten shares of October 2016the Company’s common stock, subject to June 2017, which shares were thereby cancelledadjustments 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, 2017.2020, no shares of Series A Preferred were issued and outstanding.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholdersstockholders on March 21, 2011, the shareholdersour stockholders approved the 2012 Equity Compensation Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who provide services to the Company in lieu of cash. A total of 90,000 shares were initially authorized for issuance pursuant to awards granted under the 2012 Plan. At the 2015 annual meeting of shareholdersstockholders held on May 19, 2015, our stockholders approved a 713,262 share increase to the total number of shares authorized under the 2012 Plan. Warrants for Board members vest immediately, and warrants issued to employees vest annually over either a two or three-year period after the grant date.
As of December 11, 2018, the Board of Directors suspended further awards under the 2012 Plan until further notice. The Company recorded expense of $0 and $19,687 for the three months ended December 31, 2017,2020 and 2019, respectively, related to the vesting of common stock awarded prior to the suspension of the 2012 Plan. There were 27,218 shares of common stock were available for future grants under the 2012 Plan.
All Options and Warrants
On November 30, 2017, the Board of Directors unanimously approved the adjustment of the exercise price of 605,678 unexercised warrants, with original exercise prices ranging from $1.81 to $19.46, issuedissuance under the 2012 Plan to $1.24, resulting in incremental stock-based compensationas of $149,088, which was expensed in the three-month period ending December 31, 2017.2020.
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, 20172020 and 2016,2019, the Company granted 30,797 and 154,410, respectively,no options and warrants to purchase shares of common stock under the 2012 Plan. ExcludingThe warrants for Board members vest immediately and expire five years from grant date and warrants or options issued to employees vest annually over either a two to three-year period and expire five years after the incremental stock-based compensation mentioned above,final vesting date of the grant. The Company recorded expense of $638,502 and $200,374$0 for both the three months ended December 31, 20172020 and 2016,2019, respectively, related to the issuance and vesting of outstanding stock options and warrants.
The optionAll options and warrant grants for three months endedwarrants have vested and are exercisable at December 31, 2017 were valued using the Black-Scholes model with the following weighted-average assumptions:
| | Three Months Ended December 31 |
| | | |
| Expected stock price volatility | 120% | 119% |
| Risk-free interest rate | 1.92% | 0.60% |
| Expected life of options/warrants | | |
The expected life of stock options (warrants) represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options (warrants).
A summary of stock option (warrant) activity for the three months ended December 31, 20172020 is presented below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value |
| Outstanding as of September 30, 2017 | 600,842 | $8.51 | | $- | |
| Outstanding as of September 30, 2020 | | 685,259 | $1.56 | | $- |
| 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 | $- | |
| Outstanding as of December 31, 2020 | | 685,259 | $1.56 | 1.65 | $- |
| Exercisable as of December 31, 2020 | | 685,259 | $1.56 | 1.65 | $- |
The intrinsic value of options and warrants outstanding and exercisable is based on the Company’s share price of $1.05$0.34 at December 31, 2017.2020.
(22) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the three months ended December 31, 20172020 and 2016,2019, the Company incurred a net lossincome (loss) for income tax purposes of $1,042,591$1,323,494 and $2,613,759,$(232,625), 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
Legal Matters
We are, fromFrom time to time, involved in various legal proceedings incidental toclaims are made against the conduct of our business. Historically, the outcome of all such legal proceedings has not,Company in the aggregate, hadordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties, and unfavorable outcomes could occur. In the opinion of management, the resolution of these matters, if any, will not have a material adverse effectimpact on our business,the Company’s financial condition,position or results of operations or liquidity.operations. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc.On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. On May 2, 2016, the Court resolved this case in favor of the Company by granting the Company’s motion for Summary Judgment. The Plaintiffs filed a Notice of Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. Plaintiff’s appeal succeeded and will result in a trial occurring within the next four to eight months. We intend to defend the case vigorously.
Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et al.On December 3, 2015, Candace Boggs et al. filed a complaint in the State Court of Dougherty County, Georgia, alleging breach of contract and negligence in monitoring of certain offenders in Dougherty County, Georgia, as well as a request for punitive damages in an amount sufficient to deter similar conduct in the future. Plaintiffs withdrew their complaint in February 2016, but refiled the complaint on October 12, 2016. The Company’s motion for Summary Judgment was denied on February 27, 2017 and a Notice of Appeal was filed by The Company’s counsel on April 15, 2017. We are awaiting a ruling on an oral argument that took place on December 13, 2017 regarding a new statute which exempts vendors who assist law enforcement officials. We believe the allegations are inaccurate and are defending the case vigorously. We believe the probability of incurring a material loss to be remote.
Track Group, Inc. v. I.C.S. of the Bahamas Co. Ltd.On May 18, 2016, the Company filed a complaint in the District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, under the terms of a loan agreement and promissory note between the Company and I.C.S. of the Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid principal and interest on the Promissory Note are in the amount of $230,000.00, plus per annum interest. The Defendant’s initial Counterclaims were dismissed; however, the Court granted the Defendant leave to amend. The Amended Counter Claims were filed on June 23, 2017. The Company’s Motion to Dismiss the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period ends on March 30, 2018, the Company will proceed with a Motion for Summary Judgment. We believe we will be successful in this action for amounts owed under the loan agreement and promissory note; however, the Company may encounter problems enforcing a favorable judgment in the foreign jurisdiction where ICS resides.
Track Group Inc. v. I.C.S. of the Bahamas Co. Ltd.On September 26, 2016, the Company filed a Notice of Arbitration with the International Centre for Dispute Resolution, alleging breach of contract by ICS. Under the terms of the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) by and between the Company and ICS, any dispute must be resolved by binding arbitration. The Company asserts that ICS has failed to pay the Company fees owed to it under the C&M Agreement. The amount owed to the Company is approximately $1.0 million. Depositions were completed in August of 2017. The arbitration hearing took place on January 31, 2018 and we expect a ruling within 30 days. The Company is confident it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration award in the foreign jurisdiction where ICS resides.
John Merrill v. Track Group, Inc. and Guy Dubois.On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment. Mr. Merrill is seeking not less than $590,577 plus interest, attorney fees and costs. Mr. Merrill’s employment with the Company was terminated effective September 27, 2016. The Company filed an Answer with Counter Claims on December 21, 2016. The Company filed a motion for Summary Judgment on January 16, 2018 and we expect a ruling within six months. We intend to defend the case vigorously and believe the allegations and claims are without merit.
Michael Anthony Johnson v. Community Corrections of Marion County and Track Group, Inc.On February 28, 2017, the Company was notified that Mr. Johnson, the Plaintiff, had filed a pro se complaint in the United States District Court for the Southern District of Indiana, asserting violations of his rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company plans to file a motion for Summary Judgment before the end of February 2018. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by Defendantsdefendants to pay claimant amounts agreed to, and due under, the Pluri Annual Contract for the Rendering of Monitoring Services of Internees, through Electric Bracelets, in the Islas Marias Penitentiary Complex dated July 15, 2011, entered into by and between the Organo Administrativo Desconcentrado Prevencion y Readaptacion Social (“OADPRS”) of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. On March 28, 2017,The Supreme Court took action to resolve previous, conflicting decisions regarding the Federal Administrative Tribunal rejected our claim, based on its determinationjurisdiction of such claims and determined that this case shouldsuch claims will be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the CompanySubsequently, plaintiff filed an appealAmparo action before the Collegiate Tribunals against the decisionCourt, seeking an appeal of the Federal Administrative Tribunal. Counsel estimates the Tribunal should haveCourt’s earlier decision against plaintiff. The Collegiate Court issued a ruling in August 2019 that the matter of dispute was previously resolved by a lower court in 2016. The Company disagrees with this ruling and on or before June 30, 2018. IfNovember 11, 2020 made a re-demand of the Company’s appeal is successful,OADPRS for payment due under the caseJuly 15, 2011 contract. The OADPRS has 3 months from November 11, 2020 in which to formally respond. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expense will be sent back tominimal.
Blaike Anderson v. Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson filed a complaint seeking unspecified damages in the Federal Administrative Tribunal for a resolutionState Court of Marion County, Indiana, alleging liability on the meritspart of defendants for providing a defective ankle monitoring device and failure to warn plaintiff regarding the condition thereof. The Company removed the matter to federal court and subsequently filed its answer denying Plaintiff’s allegations in August 2019. Discovery, delayed by the Covid-19 crisis, remains ongoing. The Company continues to vigorously defend the case.
Commonwealth of Puerto Rico, through its Trustees v. International Surveillance Services Corporation. On January 23, 2020, the Company was served with a summons for an Adversary Action pending against International Surveillance Services Corporation (“ISS”), a subsidiary of the Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to avoid and recover allegedly constructive fraudulent transfers and to disallow claims pursuant to United States Bankruptcy and Puerto Rican law. The allegations stem from payments made to ISS between 2014 and 2017, which the Company believes were properly made in accordance with a contract between ISS and the government of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in 2011. The Company is confident that all payments it received were earned and due under applicable law and has produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6, 2020, though the Commonwealth, through its financial advisory firm, in correspondence dated November 13, 2020, requested additional information and discussion. The Company remains confident in its current position and continues to defend the case.
Inversiones Tecnologicas SpAEli Sabag v. Track Group, Chile SpA.Inc., et al. On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position) filed a complaint beforeMarch 12, 2020, Eli Sabag commenced an arbitration with the Civil Court of Santiago, in orderInternational Centre for Dispute Resolution, Case Number 01-20-0003-6931. The arbitration claim, as it pertains to collect $1.0 million of fees for alleged services rendered with occasionthe Company, alleges breach of the public tender forShare Purchase Agreement (“SPA”) between the adjudicationCompany and Sabag. Sabag alleges that the Company breached the SPA because it failed to pay him his earn-out after it sold or leased a sufficient number of GPS Global Tracking devices to meet the earn-out milestone, or alternatively, breached the SPA by failing to act in “good faith” to allow Sabag to achieve his earn-out. Sabag further claims that the Company fraudulently induced Sabag to sell GPS Global Tracking and Surveillance System Ltd. to the Company. The Company has entered its appearance and on July 17, 2020, filed its Answer denying the allegations of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearing on the Appeal may be scheduled in late February, 2018.asserting numerous defenses. The Company expectscontinues to vigorously defend against the court to makeallegations. The Company participated in mediation discussions on December 15, 2020 with all parties. The Company has not accrued any potential loss as the probability of incurring a decision within three months of the hearing date.material loss is deemed remote by management, after consultation with outside legal counsel.
Performance Bonds
As of December 31, 2020, Company has two performance bonds in connection with a foreign customer totaling $2,593,377, (“Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al.Performance Bonds On June 9, 2017, the Plaintiff, Pablo Gonzalez-Cruz, and relatives”) of which $1,815,329 is held in an interest-bearing account on behalf of the Plaintiff, filedcustomer and is recorded in Other Assets on the Consolidated Balance Sheet. The remaining amount of $778,048 is guaranteed by a Complaint in the Court of First Instance, San Juan Superior Court, Common Wealth of Puerto Rico against the Company, and associated parties alleging the death of his daughter was a direct and immediate resultforeign financial institution on behalf of the gross negligenceCompany. The amounts held on the two Performance Bonds will be released approximately 90 days after the expiration of the Performance Bonds, as follows: $339,029 on January 18, 2022 and guilty indifferent actions and omissions of all the defendants. Plaintiff is requesting damages of no less than $2.0 million. The Company’s Answer and Appearance were filed August 13, 2017. We are currently in the discovery period.$1,476,300 on July 2, 2024.
(23)The Company pays interest on the full amount of the Performance Bonds to the financial institution providing the guarantee at 3.5% interest for the Performance Bond expiring in January 2022 and 2.8% interest for the Performance Bond expiring in July 2024. Related interest expense recorded for the three months ended December 31, 2020 of $18,462. During the three months ended December 31, 2019 the Company expensed $5,256 related to the Performance Bond which expires on January 18, 2022.
(24) SUBSEQUENT EVENTS
EffectiveWe received proceeds of approximately $933,200 from a forgivable loan from the U.S. Small Business Administration ("SBA") pursuant to the Paycheck Protection Program ("PPP") enacted by Congress under the of the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "CARES Act") administered by the SBA (the "PPP Loan").On January 1, 2018,8, 2021, the Company entered intoreceived a multi-year Monitoring Services Agreement with Marion County Community Corrections Agency, by and throughnotification from the Marion County Community Corrections Board (collectively, “Marion County”), pursuantlender that the SBA remitted funds to whichfully repay the Company shall provide Marion County with GPS and alcohol monitoring equipment, certain services, and software to be used for offenders ordered intoPPP Loan. As a result, the Marion County Community Corrections program by the courts. In exchange for the products and services provided by the Company, Marion County shall make periodic payments, the sum of which shall be determined based on the duration of use of individual units of equipment.
On January 18, 2018, the Company entered into a Monitoring Services Agreement (the “Gendarmeria Agreement”) with Gendarmeria de Chile, the Republic of Chile’s uniform prison service (“Gendarmeria”), for services the Company began offering to Gendarmeria in October 2017. The Company currently provides Gendarmeria with GPS monitoring devices, certain services, and software to be used for offenders ordered into a corrections program by the Chilean courts. In exchange for the products and services provided by the Company, Gendarmeria shall make periodic payments, the sum of which shall be determined based on installation fees and the duration of use of individual units of equipment. Pursuant to its terms, the Gendarmeria Agreement will expire in October 2018.PPP Loan was fully forgiven.
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted that, other than as disclosed above, no additional subsequent events have occurred that are reasonably likely to impact the financial statements.
Item 2. ManaManagemgeement’snt’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report contains information that constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, the statements contained in this Quarterly Report on Form 10-Q that are not purely historical can be considered to be “forward-looking statements.”statements”. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “intends,” “anticipates,” “should,” “plans,” “estimates,” “projects,” “potential,”“believes”, “expects”, “intends”, “anticipates”, “should”, “plans”, “estimates”, “projects”, “potential”, and “will,”“will” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in our most recent Annual Report on Form 10-K, and those described from time to time in our reports filed with the SEC.Securities and Exchange Commission (“SEC”).
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2020, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report. Except as otherwise indicated, as used in this Report, the terms the“the Company”,” “Track Group”,” “we”,” “our”,” and “us,” refer to Track Group, Inc., a Delaware corporation.
General
Our core business is based on the manufacture and leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (“PaaS”) business model. Currently, we deploy offender-based management services that combine patented GPS tracking technologies, fulltime 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. We offer customizable tracking solutions that leverage real-time tracking data, best practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.
Our devices consist principally of the ReliAlertTM product line, which is supplemented by the Shadow product line. These devices are generally leased on a daily rate basis and may be combined with our monitoring center services, proprietary software and data analytics subscription to provide an end-to-end PaaS.
ReliAlertTM and Shadow.Shadow. Our tracking devices utilize patented technology and are securely attached around an offender’s ankle with a tamper resistant strap that cannot be adjusted or removed without detection, unless by a supervising officer, and which isare activated through services provided by our monitoring centers. The ReliAlertTM and Shadow units are intelligent devices with integrated computer circuitry, utilizing both GPS and RF, and constructed from case-hardened plastics designed to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing. The ReliAlertTM platform also incorporates voice communication technology that provides officers with 24/7/365 voice communication with the offenders. Both devices are FCC, CE and PTCRB certified and protected by numerous patents and trademarks.
Monitoring Center Services.Services. Our monitoring center facilities provide live 24/7/365 monitoring of all alarms generated from our devices, as well as customer and technical support. Our monitoring center operators play a vital role, and as such, we staff our centers with highly-trained,highly trained, bi-lingual individuals. These operators act as an extension of agency resources receiving alarms, communicating, and intervening with offenders regarding violations, and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power source, battery back-up and triple redundancy in voice, data, and IP. The Company has established monitoring centers in the U.S. and Chile. In addition, the Company has assisted in the establishment of monitoring centers for customers and local partners in other global locationslocations.
Data Analytics Services.Services. Our TrackerPALTMsoftware, TrackerPALTMMobile, combined with our Data Analytic analysis tools, provide an integrated platform allowing case managers and law enforcement officers’officers quick access views of an offender’s travel behavior, mapping, and provide inference on patterns. Our advanced data analytics service offers a highly complex predictive reporting mechanism that combines modern statistical methods, developed using computer science and used by intelligence agencies that separate noteworthy events from normal events, rank offender cases according to their need for supervision, and relate decision-relevant metrics to benchmarks in real-time.
Other Services. The Company offers smartphone applications specifically designed for the criminal justice market, including a domestic violence app that creates a mobile geo-zone around a survivor and an alcohol monitoring app linked to a police-grade breathalyzer.
Business Strategy
Our global growthWe are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software, and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. Accordingly, rather than receiving a payment just for a piece of manufactured equipment, the Company receives a recurring stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, is towe continue to expand service offerings on a subscription basis that empower professionals in security, law enforcement, correctionsour device-agnostic platformto not only collect, but also store, analyze, assess and rehabilitation organizations worldwide with a single-sourced, real-time, end-to-end offender management solution that integrates reliable intervention technologiescorrelate location data for both accountability and auditing reasons, as well as to support re-socialization, monitoring, anduse for predictive analytics for offenders. In selective circumstances, we will also assist agencies by operating offender pay programs. To accomplish these objectives, we have and will continue to innovateassessment of effective and growemerging techniques in criminal behavior and rehabilitation.We believe a high-quality customer experience with knowledgeable salespersons who can convey the value of our portfolio of proprietary and non-proprietary real-time monitoring and intervention products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related-service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development (“R&D”), including smartphone applications. These products include GPS, RF, drug and alcohol testing for offenders, domestic violence applications and predictive analytics. Givenother monitoring services is critical to the flexibilitydevelopment and sale of our platform, our device technology, tracking, monitoring,innovative technologies and analytical capabilities, we believe that ourintegrated solutions may apply to other industry verticals that require tracking, monitoringtoday and predictive analytics such as those entities responsible for pre-trial participants or individuals on bail.in the future.
Critical Accounting Policies
From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining our results of operations and financial position.
A description of the Company’s critical accounting policies that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 20172020, filed with the SEC on December 19, 201723, 2020.During the three months ended December 31, 20172020, there have been no material changes to the Company'sCompany’s critical accounting policies.policies, except as noted below.
Effective October 1, 2019, the Company adopted the new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) "ASC Topic 842" which modified lease accounting for lessees to create transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. See Note 16.
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. 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.
COVID-19
As of February 10, 2021, the COVID-19 pandemic has adversely impacted both the Company’s revenue and costs by disrupting its operations in Chile, causing shortages within the supply chain and postponing sales opportunities as some government agencies delay new RFP (Request for Proposal) processes. Notwithstanding the challenges, the monitoring being performed by the Company’s significant customers across the globe have remained operational as have key business partners providing manufacturing and call center services. Furthermore, at this time, the Company has not experienced unusual payment interruptions from any large customers and the majority of Company employees are effectively working from home to mitigate the challenges created by COVID-19. However, the Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the development of widespread testing or a vaccine; the ability of our supply chain to meet the Company’s need for equipment; the ability to sell and provide services and solutions if shelter in place restrictions and people working from home are extended to ensure employee safety; the volatility of foreign currency exchange rates and the subsequent effect on international transactions; and any closures of clients’ offices or the courts on which they rely.
Results of Operations
Three Months Ended December 31, 2017,2020 Compared to Three Months Ended December 31, 20162019
Revenue
For the three months ended December 31, 2017,2020, the Company recognized total revenue from operations of $7,490,694$9,401,905 compared to $7,671,490$8,420,831 for the three months ended December 31, 2016, a decrease2019, an increase of $180,796$981,074 or 2%approximately 12%. The $981,074 increase in total revenue was the result of an increase in domestic monitoring revenue and other related services, partially offset by lower revenue from our international customers. For the three months ended December 31, 2020, the Company recognized revenue from monitoring and other related services of $9,271,729 compared to $8,268,423 for the three months ended December 31, 2019, an increase of $1,003,306 or approximately 12%. This growth in monitoring and other related services revenue is more predictable than product sales. Monitoring and other related service revenue, which comprises the substantial majority of total revenue, increased due to growth in North America largely by clients in Illinois, Michigan, Puerto Rico, Bahamas and Ohio, partially offset by a decrease in revenue was principallyin Chile due a reduction in the resultnumber of (i) a lossoffenders monitored caused by the impact of a Caribbean customer whose contract ended in November 2016, partially offset by (ii) an increase in total growthCOVID-19, when compared to the first fiscal quarter of our North American monitoring operations driven by clients in Indiana and Virginia, and (iii) growth of offender monitoring in Chile.2019.
OtherProduct sales and other revenue for the three months ended December 31, 20172020 decreased to $139,889$130,176 from $406,477$152,408 in the same period in 2016 largely due to lower sales2019, a decrease of consumable items. We will continue to focus on recurring subscription based opportunities as opposed to equipment sales.$22,232 or 15%.
Cost of Revenue
During the three months ended December 31, 2017,2020, cost of revenue totaled $3,019,149$4,189,101 compared to cost of revenue during the three months ended December 31, 20162019 of $4,127,556, a decrease$3,754,351, an increase of $1,108,407$434,750 or 27%approximately 12%. The decreaseincrease in cost of revenue was largely the result of decreases indevicehigher monitoring costs of $437,307,$270,353, higher commission costs of $114,982, higher server costs of $73,639 and higher freight costs of $64,605. These increases were partially offset by lower repair costs of $82,936 and lower communication costs of $286,326, lower customs costs of $189,879 and lower monitoring costs of $158,554. During the three-month period ended December 31, 2016, we incurred one-time costs of $371,144, which is reflected in monitoring, products and other related services in the condensed consolidated income statement, that did not reoccur in the three months ended December 31, 2017. Excluding these one-time costs, cost of revenue for the three-months ended December 31, 2017 would have decreased $575,206, or 15%, compared to the same period in 2016.$38,740.
Depreciation and amortization included in cost of revenue for the three months ended December 31, 20172020 and 20162019 totaled $477,142$488,675 and $445,493, respectively.$487,442, respectively, a decrease of $1,233. These costs represent the depreciation of TrackerPAL™,ReliAlert™ and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. We believe this lifethe equipment lives on which the depreciation is based are appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales.
Gross Profit and Margin
During the three months ended December 31, 2020, gross profit totaled $5,212,804 representing an increase of $546,324 or approximately 12% compared to the same period last year, resulting in a gross margin of approximately 55% compared to $4,666,480 or a gross margin of approximately 55% during the three months ended December 31, 2019.
Impairment cost for equipment and parts for the three months ended December 31, 2017 and 2016 were $0 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.
Gross Profit and Margin
During the three months ended December 31, 2017, gross profit totaled $4,471,545, representing an increase of $927,611 or 26% 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 the three months ended December 31, 2016. The increase in grossmargin is largely due to the lower costs of revenue mentioned above. Excluding the one-time costs of revenue previously mentioned, gross profit for the three-months ended December 31, 2016 would have been $3,915,078 and gross profit margin would have been 51%.
General and Administrative Expense
During the three months ended December 31, 2017,2020, general and administrative expense totaled $3,657,738$2,400,735 compared to $3,175,054$3,011,854 for the three months ended December 31, 2016.2019. The increasedecrease of $482,684$611,119 or 15%approximately 20% in general and administrative costs resulted largely from an increase in stock-based compensationlower payroll and wages of $212,869, lower bad debt expense of $562,216, higher$126,148, lower legal and professional fees of $147,903$102,778, lower travel and higher wages and benefitentertainment costs of $137,161, partially offset by$48,172, lower bad debtconsulting costs of $32,030, lower board of director expense of $172,642, lower recruiting costs of $63,303, lower repair and maintenance costs of $52,776, lower rent expense of $36,125$25,487 and lower outside labor expensesstock-based compensation of $28,283.
Restructuring Costs
During the three months ended December 31, 2016, we recorded $566,330 of costs related 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 employees 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.$19,688.
Selling and Marketing Expense
During the three months ended December 31, 2017,2020, selling and marketing expense decreasedincreased to $409,737$550,457 compared to $589,768$541,549 for the three months ended December 31, 2016.2019. The reductionincrease in expensesexpense of $180,031,$8,908, or approximately 31% decrease2% is principally the result of lowerhigher consulting and outside service costsservices of $84,438,$39,119 and higher payroll and taxes of $28,606, largely offset by COVID-19 induced lower travel related expensesand entertainment expense of $41,489$51,378, and lower wages and benefitstrade show expense of $31,546.$13,167.
Research and Development Expense
During the three months ended December 31, 2017,2020, research and development expense totaled $163,946$307,294 compared to $488,178$296,155 for the three months ended December 31, 2016, a decrease2019, an increase of $324,232$11,139 or approximately 66%4%. The decreaseincrease resulted largely from higher payroll and taxes of $35,226, partially offset by lower wages and benefitstravel expense of $203,349$15,127 and lower outside service costsrent expense of $96,078.$8,173. In addition, we are significantly enhancing our technology platform to improve the efficiency of our software, firmware, user interface and automation. As a result of these improvements, $254,899$397,402 was capitalized as developed technology during the three months ended December 31, 20172020 and $570,093$341,622 was capitalized in the three months ended December 31, 2016.2019. A portion of these expensesthis expense would have been recognized as research and development expense, absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During the three months ended December 31, 2017,2020, depreciation and amortization expense totaled $564,740$531,763 compared to $575,111$515,939 for the three months ended December 31, 2016,2019, an increase of $15,824 or approximately 3%.
Total Operating Expense
During the three months ended December 31, 2020, total operating expense decreased to $3,790,249 compared to $4,365,497 for the three months ended December 31, 2019, a decrease of $10,371$575,248 or approximately 2%13%.
Operating Income
During the three months ended December 31, 2020, operating income was $1,422,555 compared to operating income of $300,983 for the three months ended December 31, 2019, an improvement of $1,121,572 or approximately 373%. This improvement was due to a decrease in operating expense of $575,248, primarily due to lower general and administrative expense. and an increase in gross profit of $546,324, largely due to an increase in revenue of $981,074, partially offset by the higher cost of revenue directly related to additional monitoring devices.
Other Income and Expense(Expense)
For the three months ended December 31, 2017,2020, other income (expense) totaled $717,975$178,630 compared to $763,252other expense of $(459,225) for the three months ended December 31, 2016,2019, a decrease in net expense of $45,277 or approximately 6%.$637,855. The decrease in other income (expense)expense is largely due to positive currency exchange rate movements of $675,318 compared to the first fiscal quarter of 2019, partially offset by higher interest expense of $37,489.
Net Income (Loss) Attributable to Common Stockholders
The Company had net income attributable to common stockholders of $1,323,494 for the three months ended December 31, 2020, compared to a net loss attributable to common stockholders of $(232,625) for the three months ended December 31, 2019, an improvement of $1,556,119. This improvement to positive net income from a net loss is largely due to significant growth in operating income and positive currency exchange rate movements, partially offset by higher interest expense, net.income tax expense.
Net Loss Attributable to Common Shareholders
The Company had Net loss attributable to common shareholders of $1,042,591 for the three months ended December 31, 2017, compared to a Net loss attributable to common shareholders of $2,613,759 for the three months ended December 31, 2016, a decrease of $1,571,168 or 60%. This decrease in net loss is largely due tohighergross profit, the absence of restructuring costs, lower selling and marketing expense, lower research and development costs and lower currency exchange expense. These amounts were offset by higher stock-based compensation costs.
Liquidity and Capital Resources
Historically, we have been unable to finance our business solely fromThe Company is currently self-funded through net cash flows fromprovided by operating activities. During prior periods, the Company supplemented cash flows to finance the business from borrowings under a credit facility, a revolving line of credit from one of our shareholders, receipt of certain disgorgement funds, and from the sale and issuance of debt securities. As of December 31, 2017, excluding2020, approximately $30.4 million of principal and $12.1 million of interest $3.4 million was owed to Sapinda under theSapinda Loan Agreement and $30.4 million was owed to Conrent Invest S.A. (“Conrent”) under a loan (the “Conrent Facility Agreement”) that matures on July 1, 2024. Pursuant to an amendment to the Conrent Facility Agreement dated December 21, 2020, previously accrued interest will be capitalized and added to the original principal of $30.4 million after Conrent updates agreement with its bondholders, which we estimate will occur in the 2nd fiscal quarter of 2021. See Note 19 to the Consolidated Financial Statements.
In addition, we received proceeds of approximately $933,200 from a potentially forgivable loan from the U.S. Small Business Administration ("SBA") pursuant to the Paycheck Protection Program ("PPP") enacted by Congress under the of the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "CARES Act") administered by the SBA (the "PPP Loan"). ConrentOn December 8, 2020, the Company filed the application for forgiveness, and on January 8, 2021, the Company received a notification from the Lender that the SBA remitted funds to fully repay the PPP Loan, Agreement. Noand that the funds were utilized to pay-off and close the PPP Loan and that the PPP Loan was fully forgiven. See Note 24 to the Consolidated Financial Statements.
Aside from the PPP Loan, no borrowings or sales of equity securities occurred during the three months ended December 31, 2017.
On October 9, 2017,2020 or during the Company entered into a Debt Exchange Agreement with Conrent regarding total debt and unpaid interest of approximately $34.7 million as of October 31, 2017 (the “Debt”) (the “Debt Exchange”). The Debt Exchange called for the Company to exchange newly issued shares of preferred stock for the entire Debt subject to approval by the investors who purchased securities from Conrent to finance the Debt (the “Noteholders”). On November 2, 2017, Conrent convened a meeting of the Noteholders to approve the Debt Exchange; however, the quorum required to approve the Debt Exchange was not achieved. Management continues to negotiate with Conrent regarding terms for the Debt Exchange acceptable to Noteholders with the objective of reaching an agreement acceptable to both Conrent and the Noteholders before the Debt matures on July 31, 2018. year ended September 30, 2020.
Net Cash Flows from Operating Activities.
During the three months ended December 31, 20172020, we incurred a net loss of $1,042,591 and we had cash flows from operating activities of $328,210,$582,002, compared to a net loss from continuing operations of $2,613,759 and cash flows from operating activities of $2,136,796$2,650,968 for the three months ended December 31, 2016.2019, representing a $2,068,966 decrease of approximately 78%. The decrease ofin cash from operations compared to the prior year period was largely the result of an increase in accounts receivable caused principally by the growth of one customer, an increase in prepaid expenses and deposits,expense associated with the award of a decreasenew contract in Chile, a decline in accounts payable and higher accounts receivable,a decrease in accrued liabilities, partially offset by improvedan improvement in operating results. performance.
Net Cash Flows from Investing Activities.
The Company used $594,726$1,533,392 of cash for investing activities during the three months ended December 31, 2017,2020, compared to $1,401,455$1,002,428 of cash used during the three months ended December 31, 2016.2019. Cash used for investing activities was used for significant enhancements of our software platform and used for purchases of monitoring and other equipment to meet customer demand during the three months ended December 31, 2017.2020. Purchases of monitoring equipment and parts increased $448,582, compared to the prior period, largely due to increased demand from customers.
Net Cash Flows from Financing Activities.
The Company used $17,289$89,286 of cash forfrom financing activities during the three months ended December 31, 2017,2020, compared to $17,266$9,552 of cash used in financing activities during the three months ended December 31, 2016.2019. The $89,286 used in the three months ended December 31, 2020 was the payment of financing fee costs.
Liquidity, Working Capital and Management’s Plan
As of December 31, 2017, we2020, the Company had unrestricted cash of $1,755,437,$5,862,442 compared to unrestricted cash of $2,027,321$6,762,099 as of September 30 2017, 2020. As of December 31, 2017,2020, we had a working capital deficit of $28,965,590,$4,654,988, compared to a working capital deficit of $30,874,107$34,773,161 as of September 30, 2017.2020. This increasedecrease in working capital deficit of $30,118,173 is principally due to a transferthe 3-year extension of a short-term bond from a long-term assetthe Conrent loan of $2,860,358, partially offset by a decrease in cash due to additional capitalized software of $254,899 and purchases of monitoring equipment of $311,142.$30,400,000.
On March 13, 2017,May 19, 2020, the Company successfully extendedreceived net proceeds of $933,200 from a potentially forgivable loan from the Sapinda Loan Agreement from September 30, 2017SBApursuant to September 30, 2020. In addition, management is currently exploring options to restructure the debt owedPPPenacted by Congress under the of the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "CARES Act"). See Notes 19 and 24 to the Consolidated Financial Statements
On December 4, 2019, the Company requested that Conrent Loan Agreement, which may include exchanging debt for equity or extendingextend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020, the investors who owned the securities from Conrent Loanused to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Amended Facility Agreement which extends the maturity of the Amended Facility Agreement to July 1, 2021. On October 21, 2020, the Company requested, in writing, an additional extension to the maturity date of the Amended Facility Agreement. On November 25, 2020, the Noteholders held a meeting to address the Company’s request and approved a new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company signed an Amendment to the Amended Facility Agreement which extends the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”). Pursuant to the Amended Facility, previously accrued interest will be capitalized and added to the original principal of $30.4 million after Conrent updates an agreement with its bondholders, which we currently expect to occur in the second fiscal quarter of 2021, and reduces the interest rate of the Amended Facility from 8% to 4%. At December 31, 2020, accrued and unpaid interest is approximately $12.1 million. See Note 19 to the Consolidated Financial Statements.
The Company incurred a net loss of $1,042,591 and $2,613,759 for the three months ended December 31, 2017 and 2016, respectively. The Company may continue to incur losses until it is able to achieve a level 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 of all conditions and determined that it will have adequate cash flow from operations to meet its operating obligations and provide for its working capital requirements for the upcoming twelve months. However, in the event we are unable 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.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company, except as described below.
| | Payments due in less than 1 year | Payments due in 1 – 3 years | Payments due in 3 – 5 years | |
| Operating leases | $329,252 | $479,023 | $58,808 | $867,083 |
As of December 31, 2017, the Company’s total future minimum lease payments under noncancelable operating leases were $867,083. The Company’s facility leases typically have original terms not exceeding 5 years and generally contain multi-year renewal options.Company.
Item 3. QuantitatiQuanvteitative and Qualitative Disclosures About Market Risk
The Company footprint extends to severala number of 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$2,604,147 and $2,795,781$2,852,973 in revenue from sources outside of the United States for the three monthsthree-months ended December 31, 20172020 and 2016,2019, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange gains of $55,072$818,626 and $116,442$143,308 in the three months ended December 31, 20172020 and 2016,2019, respectively. Fluctuations in the exchange loss or gain in any given period are due to the strengthening or weakening of the U.S. dollar against the Chilean Peso and Canadian dollar which have been magnified by the coronavirus. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
Item 4. ControlsControls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20172020 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, 2017.2020.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There was no change in our internal control over financial reporting during our quarter ended December 31, 20172020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PARTPART II. OTHEROTHER INFORMATION
Item 1. Legal ProceedingsProceedings
We are, fromFrom time to time, involved in various legal proceedings incidental toclaims are made against the conduct of our business. Historically, the outcome of all such legal proceedings has not,Company in the aggregate, hadordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties, and unfavorable outcomes could occur. In the opinion of management, the resolution of these matters, if any, will not have a material adverse effectimpact on our business,the Company’s financial condition,position or results of operations or liquidity.operations. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc.On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. On May 2, 2016, the Court resolved this case in favor of the Company by granting the Company’s motion for Summary Judgment. The Plaintiffs filed a Notice of Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. Plaintiff’s appeal succeeded and will result in a trial occurring within the next four to eight months. We intend to defend the case vigorously.
Boggs et al. v. Judicial Electronic Monitoring, SecureAlert, Inc. et al.On December 3, 2015, Candace Boggs et al. filed a complaint in the State Court of Dougherty County, Georgia, alleging breach of contract and negligence in monitoring of certain offenders in Dougherty County, Georgia, as well as a request for punitive damages in an amount sufficient to deter similar conduct in the future. Plaintiffs withdrew their complaint in February 2016, but refiled the complaint on October 12, 2016. The Company’s motion for Summary Judgment was denied on February 27, 2017 and a Notice of Appeal was filed by The Company’s counsel on April 15, 2017. We are awaiting a ruling on an oral argument that took place on December 13, 2017 regarding a new statute which exempts vendors who assist law enforcement officials. We believe the allegations are inaccurate and are defending the case vigorously. We believe the probability of incurring a material loss to be remote.
Track Group, Inc. v. I.C.S. of the Bahamas Co. Ltd.On May 18, 2016, the Company filed a complaint in the District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, under the terms of a loan agreement and promissory note between the Company and I.C.S. of the Bahamas Co. Ltd (“ICS”). The Company’s damages of unpaid principal and interest on the Promissory Note are in the amount of $230,000.00, plus per annum interest. The Defendant’s initial Counterclaims were dismissed; however, the Court granted the Defendant leave to amend. The Amended Counter Claims were filed on June 23, 2017. The Company’s Motion to Dismiss the Amended Counterclaims was denied on September 19, 2017. The Company filed an Answer to the Amended Counterclaims on October 3, 2017. Once the discovery period ends on March 30, 2018, the Company will proceed with a Motion for Summary Judgment. We believe we will be successful in this action for amounts owed under the loan agreement and promissory note; however, the Company may encounter problems enforcing a favorable judgment in the foreign jurisdiction where ICS resides.
Track Group Inc. v. I.C.S. of the Bahamas Co. Ltd.On September 26, 2016, the Company filed a Notice of Arbitration with the International Centre for Dispute Resolution, alleging breach of contract by ICS. Under the terms of the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) by and between the Company and ICS, any dispute must be resolved by binding arbitration. The Company asserts that ICS has failed to pay the Company fees owed to it under the C&M Agreement. The amount owed to the Company is approximately $1.0 million. Depositions were completed in August of 2017. The arbitration hearing took place on January 31, 2018 and we expect a ruling within 30 days. The Company is confident it will be successful in the arbitration; however, the Company may encounter problems enforcing a successful arbitration award in the foreign jurisdiction where ICS resides.
John Merrill v. Track Group, Inc. and Guy Dubois.On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment. Mr. Merrill is seeking not less than $590,577 plus interest, attorney fees and costs. Mr. Merrill’s employment with the Company was terminated effective September 27, 2016. The Company filed an Answer with Counter Claims on December 21, 2016. The Company filed a motion for Summary Judgment on January 16, 2018 and we expect a ruling within six months. We intend to defend the case vigorously and believe the allegations and claims are without merit.
Michael Anthony Johnson v. Community Corrections of Marion County and Track Group, Inc.On February 28, 2017, the Company was notified that Mr. Johnson, the Plaintiff, had filed a pro se complaint in the United States District Court for the Southern District of Indiana, asserting violations of his rights under 28 U.S.C. Sec.1331. Mr. Johnson alleges damages of at least $250,000. We believe the allegations and claims are unfounded and without merit. The Company plans to file a motion for Summary Judgment before the end of February 2018. We will defend the case vigorously and believe the probability of incurring a material loss to be remote.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by Defendantsdefendants to pay claimant amounts agreed to, and due under, the Pluri Annual Contract for the Rendering of Monitoring Services of Internees, through Electric Bracelets, in the Islas Marias Penitentiary Complex dated July 15, 2011, entered into by and between the Organo Administrativo Desconcentrado Prevencion y Readaptacion Social (“OADPRS”) of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. On March 28, 2017,The Supreme Court took action to resolve previous, conflicting decisions regarding the Federal Administrative Tribunal rejected our claim, based on its determinationjurisdiction of such claims and determined that this case shouldsuch claims will be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the CompanySubsequently, plaintiff filed an appealAmparo action before the Collegiate Tribunals against the decisionCourt, seeking an appeal of the Federal Administrative Tribunal. Counsel estimates the Tribunal should haveCourt’s earlier decision against plaintiff. The Collegiate Court issued a ruling in August 2019 that the matter of dispute was previously resolved by a lower court in 2016. The Company disagrees with this ruling and on or before June 30, 2018. IfNovember 11, 2020 made a re-demand of the Company’s appeal is successful,OADPRS for payment due under the caseJuly 15, 2011 contract. The OADPRS has 3 months from November 11, 2020 in which to formally respond. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expense will be sent back to the Federal Administrative Tribunal for a resolution on the merits of the case.minimal.
Inversiones Tecnologicas SpABlaike Anderson v. Track Group, Chile SpA.Inc., et. al. On October 10, 2014, Inversiones Tecnologicas SpA (a.k.a. Position)June 24, 2019, Blaike Anderson filed a complaint beforeseeking unspecified damages in the CivilState Court of Santiago, in order to collect $1.0 million of fees for alleged services rendered with occasion of the public tender for the adjudication of the contract ID 634-66-LP13 labeled “Telematics Surveillance of Convicts.” On April 13, 2017, the Court issued its decision, rejecting the Plaintiff’s claim, under the consideration that insufficient evidence of a service agreement between Track Group Chile SpA (formerly Secure Alert Chile SpA) and Inversiones Tecnologicas SpA, was submitted to the Court. Moreover, the fact that Secure Alert Chile SpA was incorporated after the facts on which the lawsuit is based, led to the complete dismissal of the claim. Position filed an appeal on May 4, 2017. A hearingMarion County, Indiana, alleging liability on the Appeal may be scheduled in late February, 2018.part of defendants for providing a defective ankle monitoring device and failure to warn plaintiff regarding the condition thereof. The Company expectsremoved the matter to federal court and subsequently filed its answer denying Plaintiff’s allegations in August 2019. Discovery, delayed by the COVID-19 crisis, remains ongoing. The Company continues to make a decision within three months ofvigorously defend the hearing date.case.
Pablo Gonzalez-Cruz, et al. v. Track Group-Puerto Rico, et al. On June 9, 2017, the Plaintiff, Pablo Gonzalez-Cruz, and relatives of the Plaintiff, filed a Complaint in the Court of First Instance, San Juan Superior Court, Common WealthCommonwealth of Puerto Rico, through its Trustees v. International Surveillance Services Corporation. On January 23, 2020, the Company was served with a summons for an Adversary Action pending against International Surveillance Services Corporation (“ISS”), a subsidiary of the Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to avoid and recover allegedly constructive fraudulent transfers and to disallow claims pursuant to United States Bankruptcy and Puerto Rican law. The allegations stem from payments made to ISS between 2014 and 2017, which the Company believes were properly made in accordance with a contract between ISS and the government of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in 2011. The Company is confident that all payments it received were earned and due under applicable law and has produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6, 2020, though the Commonwealth, through its financial advisory firm, in correspondence dated November 13, 2020, requested additional information and discussion. The Company remains confident in its current position and continues to defend the case.
Eli Sabag v. Track Group, Inc., et al. On March 12, 2020, Eli Sabag commenced an arbitration with the International Centre for Dispute Resolution, Case Number 01-20-0003-6931. The arbitration claim, as it pertains to the Company, alleges breach of the Share Purchase Agreement (“SPA”) between the Company and associated parties allegingSabag. Sabag alleges that the deathCompany breached the SPA because it failed to pay him his earn-out after it sold or leased a sufficient number of GPS Global Tracking devices to meet the earn-out milestone, or alternatively, breached the SPA by failing to act in “good faith” to allow Sabag to achieve his daughter was a directearn-out. Sabag further claims that the Company fraudulently induced Sabag to sell GPS Global Tracking and immediate resultSurveillance System Ltd. to the Company. The Company has entered its appearance and on July 17, 2020, filed its Answer denying the allegations of the gross negligenceclaim and guilty indifferent actions and omissionsasserting numerous defenses. The Company continues to vigorously defend against the allegations. The Company participated in mediation discussions on December 15, 2020 with all parties. The Company has not accrued any potential loss as the probability of all the defendants. Plaintiffincurring a material loss is requesting damagesdeemed remote by management, after consultation with outside legal counsel.
Item 1A. Risk RisFkactorsFactors
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, 2017,2020, filed on December 19, 2017.23, 2020. 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, our business, financial condition and future prospects could be negatively impacted. As of February 10, 2021 8, 2018, there have been no material changes to the disclosures made in the above-referenced Form 10-K.
Item 2. UnregisteredUnregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. DefaultsDefaults Upon Senior Securities
None.
Item 4. Mine SafetySafety Disclosures
Not applicable.
Item 5. Other Information
None.
| (a) | Exhibits Required by Item 601 of Regulation S-K |
Exhibit Number | | Title of Document |
| | Monitoring Services Agreement, dated December 18, 2017, by and between Track Group, Inc. and Marion County Community Corrections Agency, by and through Marion County Community Corrections Board (filed herewith). |
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| | Amendment to Facility Agreement by and between Track Group, Inc. and Conrent Invest S.A., acting on behalf of its compartment, “Safety 2”, dated December 21, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed December 23, 2020. |
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| | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
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| | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
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| | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). |
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| 101.INS | | XBRL INSTANCE DOCUMENT |
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| 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA |
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| 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
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| 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
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| 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
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| 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
+ Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission.
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. |
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Date: February 8, 2018 10, 2021 | By: | /s/ Derek Cassell | |
| | | Derek Cassell, Chief Executive Officer Principal Executive Officer |
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Date: February 8, 201810, 2021 | By: | /s/ Peter K. Poli | |
| | | Peter K. Poli, Chief Financial Officer (Principal Accounting Officer) |