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 MarchDecember 31, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 0-23153
Track Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [X] | 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]
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | TRCK | OTCQX Marketplace |
The number of shares outstanding of the registrant’s common stock as of May 6, 2019February 11, 2020 was 11,401,650. 11,414,150.
FORM 10-Q
For the Quarterly Period Ended MarchDecember 31, 2019
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PARTPART I. FINANCIALNCIAL INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATEDBALANCE SHEETS
| | | | |
| Assets | | | |
| Current assets: | | |
| Cash | $5,665,109 | $5,446,557 | $8,493,550 | $6,896,711 |
| Accounts receivable, net of allowance for doubtful accounts of $3,345,012 and $3,152,966, respectively | 5,937,747 | 5,978,896 | |
| Note receivable, net of allowance for doubtful accounts of $234,733, respectively | - | |
| Prepaid expense and other | 1,498,775 | 1,270,043 | |
| Inventory, net of reserves of $26,934, respectively | 86,814 | 277,119 | |
| Accounts receivable, net of allowance for doubtful accounts of $2,556,393 and $2,454,281, respectively | | 5,321,396 | 6,763,236 |
| Prepaid expense, deposits and right of use assets | | 1,692,887 | 1,339,465 |
| Inventory, net of reserves of $62,147 and $26,934, respectively | | 442,570 | 274,501 |
| Total current assets | 13,188,445 | 12,972,615 | 15,950,403 | 15,273,913 |
| Property and equipment, net of accumulated depreciation of $2,140,734 and $1,999,222, respectively | 783,871 | 745,475 | |
| Monitoring equipment, net of accumulated amortization of $6,159,826 and $5,325,654, respectively | 2,986,212 | 3,162,542 | |
| Intangible assets, net of accumulated amortization of $13,031,721 and $12,016,512, respectively | 22,406,455 | 23,253,054 | |
| Property and equipment, net of accumulated depreciation of $2,316,172 and $2,248,913, respectively | | 636,619 | 675,037 |
| Monitoring equipment, net of accumulated amortization of $6,325,027 and $6,322,768, respectively | | 2,568,379 | 2,624,900 |
| Intangible assets, net of accumulated amortization of $14,729,536 and $14,157,090, respectively | | 21,829,868 | 21,955,679 |
| Goodwill | 8,033,631 | 8,076,759 | 8,227,025 | 8,187,911 |
| Deferred tax asset | | 526,833 | 540,563 |
| Other assets | 124,453 | 145,839 | 451,696 | 124,187 |
| Total assets | $47,523,067 | $48,356,284 | $50,190,823 | $49,382,190 |
| | | |
| Liabilities and Stockholders’ Equity (Deficit) | | |
| Current liabilities: | | |
| Accounts payable | $2,385,082 | $2,518,030 | 2,616,049 | 2,628,003 |
| Accrued liabilities | 11,797,155 | 10,333,103 | 14,607,777 | 13,828,696 |
| Current portion of long-term debt | 37,810 | 30,437,810 | 33,818,587 | 33,827,689 |
| Total current liabilities | 14,220,047 | 43,288,943 | 51,042,413 | 50,284,388 |
| Long-term debt, net of current portion | 33,808,193 | 3,428,975 | |
| Long-term liabilities | | 327,644 | - |
| Total liabilities | 48,028,240 | 46,717,918 | 51,370,057 | 50,284,388 |
| | | |
| Commitments and contingencies (Note 21) | - | |
| Commitments and contingencies (Note 22) | | - |
| | | |
| Stockholders’ equity (deficit): | | |
| Common stock, $0.0001 par value: 30,000,000 shares authorized;11,401,650 shares outstanding, respectively | 1,140 | |
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,414,150 and 11,401,650 shares outstanding, respectively | | 1,141 | 1,140 |
| Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | | - | - |
| Paid in capital | 302,211,181 | 302,102,866 | 302,270,242 | 302,250,556 |
| Accumulated deficit | (301,587,916) | (299,495,370) | (302,384,917) | (302,152,292) |
| Accumulated other comprehensive loss | (1,129,578) | (970,270) | (1,065,700) | (1,001,602) |
| Total equity (deficit) | (505,173) | 1,638,366 | (1,179,234) | (902,198) |
| Total liabilities and stockholders’ equity (deficit) | $47,523,067 | $48,356,284 | $50,190,823 | $49,382,190 |
| | | |
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 LOSS
(Unaudited)
| | | | |
| | | Three Months Ended December 31, |
| | | | | | | |
| Revenue: | | |
| Monitoring and other related services | $7,877,403 | $7,162,205 | $15,937,731 | $14,513,010 | $8,268,423 | $8,060,328 |
| Product sales and other | 213,839 | 153,971 | 365,046 | 293,860 | 152,408 | 151,207 |
| Total revenue | 8,091,242 | 7,316,176 | 16,302,777 | 14,806,870 | 8,420,831 | 8,211,535 |
| | | |
| Cost of revenue: | | |
| Monitoring, products and other related services | 3,065,710 | 2,827,842 | 6,165,903 | 5,369,849 | 3,266,909 | 3,100,193 |
| Depreciation and amortization included in cost of revenue | 533,590 | 467,666 | 1,011,879 | 944,808 | |
| Depreciation & amortization included in cost of revenue | | 487,442 | 478,289 |
| Total cost of revenue | 3,599,300 | 3,295,508 | 7,177,782 | 6,314,657 | 3,754,351 | 3,578,482 |
| | | |
| Gross profit | 4,491,942 | 4,020,668 | 9,124,995 | 8,492,213 | 4,666,480 | 4,633,053 |
| | | |
| Operating expense: | | |
| General & administrative | 3,316,069 | 3,495,343 | 6,738,341 | 7,153,081 | 3,011,854 | 3,422,272 |
| Selling & marketing | 576,974 | 518,993 | 1,080,904 | 928,730 | 541,549 | 503,930 |
| Research & development | 354,879 | 182,808 | 603,744 | 346,754 | 296,155 | 248,865 |
| Depreciation & amortization | 520,384 | 539,537 | 1,035,365 | 1,104,277 | 515,939 | 514,981 |
| Total operating expense | 4,768,306 | 4,736,681 | 9,458,354 | 9,532,842 | 4,365,497 | 4,690,048 |
| | | |
| Loss from operations | (276,364) | (716,013) | (333,359) | (1,040,629) | |
| Operating income (loss) | | 300,983 | (56,995) |
| | | |
| Other income (expense): | | |
| Interest expense, net | (584,348) | (805,966) | (1,185,587) | (1,479,793) | (602,533) | (601,239) |
| Currency exchange rate gain (loss) | 595,910 | (221,048) | (336,767) | (276,120) | |
| Other income, net | 143 | 6,542 | 143 | 17,466 | |
| Total other income (expense) | 11,705 | (1,020,472) | (1,522,211) | (1,738,447) | |
| Currency exchange gain (loss) | | 143,308 | (932,677) |
| Total other expense | | (459,225) | (1,533,916) |
| Loss before income taxes | (264,659) | (1,736,485) | (1,855,570) | (2,779,076) | (158,242) | (1,590,911) |
| Income tax expense | - | 144,007 | - | 74,383 | 144,007 |
| Net loss attributable to common shareholders | (264,659) | (1,736,485) | (1,999,577) | (2,779,076) | |
| Net loss attributable to common stockholders | | (232,625) | (1,734,918) |
| Foreign currency translation adjustments | (255,981) | 241,726 | (159,308) | 430,451 | (64,098) | 96,673 |
| Comprehensive loss | $(520,640) | $(1,494,759) | $(2,158,885) | $(2,348,625) | $(296,723) | $(1,638,245) |
| Net loss per common share, basic and diluted | $(0.02) | $(0.17) | $(0.18) | $(0.27) | $(0.02) | $(0.16) |
| Weighted average common shares outstanding, basic and diluted | 11,251,650 | 10,462,433 | 11,175,002 | 10,469,466 | 11,411,704 | 11,101,650 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRTRAACCKK GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
| | | | | | |
| | | | | | | |
| | | | | | | |
| Balance September 30, 2018 | 11,401,650 | $1,140 | $302,102,866 | $(299,495,370) | $(970,270) | $1,638,366 |
| | | | | | | |
| ASC 606 modified retrospective adjustment | - | - | - | (92,969) | - | (92,969) |
| Amortization of equity-based compensation granted to employees | - | - | 83,218 | - | - | 83,218 |
| Foreign currency translation adjustments | - | - | - | - | 96,673 | 96,673 |
| Net loss | - | - | - | (1,734,918) | - | (1,734,918) |
| Balance December 31, 2018 | 11,401,650 | 1,140 | 302,186,084 | (301,323,257) | (873,597) | (9,630) |
| Amortization of equity-based compensation granted to employees | - | - | 25,097 | - | - | 25,097 |
| Foreign currency translation adjustments | - | - | - | - | (255,981) | (255,981) |
| Net loss | - | - | - | (264,659) | - | (264,659) |
| Balance March 31, 2019 | 11,401,650 | $1,140 | $302,211,181 | $(301,587,916) | $(1,129,578) | $(505,173) |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| 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) |
| | | | | | |
| | | | | | | |
| | | | | | | |
| Balance September 30, 2017 | 11,480,984 | $1,048 | $300,717,861 | $(294,067,329) | $(675,822) | $5,975,758 |
| | | | | | | |
| Cancellation of Common Stock issued to Board Member | (18,551) | (2) | - | - | - | (2) |
| Modification of warrants | | | 149,888 | | | 149,888 |
| Amortization of equity-based compensation granted to employees | - | - | 110,859 | - | - | 110,859 |
| Foreign currency translation adjustments | - | - | - | - | 188,725 | 188,725 |
| Net loss | - | - | - | (1,042,591) | - | (1,042,591) |
| Balance December 31, 2017 | 11,462,433 | 1,046 | 300,978,608 | (295,109,920) | (487,097) | 5,382,637 |
| Modification of warrants | | | 12,530 | | | 12,530 |
| Amortization of equity-based compensation granted to employees | - | - | 47,694 | - | - | 47,694 |
| Foreign currency translation adjustments | - | - | - | - | 241,726 | 241,726 |
| Net loss | - | - | - | (1,736,485) | - | (1,736,485) |
| Balance March 31, 2018 | 11,462,433 | $1,046 | $301,038,832 | $(296,846,405) | $(245,371) | $3,948,102 |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| Balance September 30, 2018 | 11,401,650 | $1,140 | $302,102,866 | $(299,495,370) | $(970,270) | $1,638,366 |
| | | | | | | |
| ASC 606 modified retrospective adjustment | - | - | - | (92,969) | - | (92,969) |
| Share-based compensation | - | - | 83,218 | - | - | 83,218 |
| Foreign currency translation adjustments | - | - | - | - | 96,673 | 96,673 |
| Net loss | - | - | - | (1,734,918) | - | (1,734,918) |
| Balance December 31, 2018 | 11,401,650 | 1,140 | 302,186,084 | (301,323,257) | (873,597) | (9,630) |
The accompanying notes are an integral part of these condensed consolidated statements.
TTRRAACKCK GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Six Months Ended March 31, | Three Months Ended December 31, |
| | | | | |
| Cash flows from operating activities: | | |
| Net loss | $(1,999,577) | $(2,779,076) | $(232,625) | $(1,734,918) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| Depreciation and amortization | 2,047,244 | 2,049,085 | 1,003,381 | 993,270 |
| Bad debt expense | 216,510 | 287,618 | 109,161 | 90,400 |
| Amortization of debt discount | - | 111,487 | |
| Stock based compensation | 108,315 | 1,345,097 | 19,687 | 83,218
|
| Loss on monitoring equipment included in cost of revenue | 234,091 | 223,114 | 134,047 | 104,079 |
| Foreign currency exchange loss | 336,767 | 276,120 | (143,308) | 932,677 |
| Change in assets and liabilities: | | |
| Accounts receivable, net | (167,305) | 308,839 | 1,155,606 | (380,133) |
| Prepaid expense and other assets | (262,552) | (1,225,045) | |
| Prepaid expense, deposits and right of use assets | | (179,203) | (106,071) |
| Accounts payable | (122,347) | (43,724) | (9,101) | (153,690) |
| Accrued liabilities | 1,360,818 | 1,220,429 | 793,323 | 1,309,601 |
| Net cash provided by operating activities | 1,751,964 | 1,773,944 | 2,650,968 | 1,138,433 |
| | | |
| Cash flow from investing activities: | | |
| Cash flows from investing activities: | | |
| Purchase of property and equipment | (243,022) | (124,720) | (54,581) | (141,595) |
| Capitalized software | (571,204) | (502,851) | (341,622) | (275,623) |
| Purchase of monitoring equipment and parts | (593,758) | (494,254) | (606,225) | (133,981) |
| Net cash used in investing activities | (1,407,984) | (1,121,825) | (1,002,428) | (551,199) |
| | | |
| Cash flow from financing activities: | | |
| Cash flows from financing activities: | | |
| Principal payments on long-term debt | (18,704) | (36,632) | (9,552) | (9,357) |
| Net cash used in financing activities | (18,704) | (36,632) | (9,552) | (9,357) |
| | | |
| Effect of exchange rate changes on cash | (106,724) | 19,021 | (42,149) | (158,888) |
| | | |
| Net increase in cash | 218,552 | 634,508 | 1,596,839 | 418,989 |
| Cash, beginning of period | 5,446,557 | 2,027,321 | 6,896,711 | 5,446,557 |
| Cash, end of period | $5,665,109 | $2,661,829 | $8,493,550 | $5,865,546 |
| Cash paid for interest | $12,397 | $22,483 | $6,856 | $8,858 |
| | | |
| Supplemental schedule of non-cash investing and financing activities: | | |
| Non-cash transfer of inventory to monitoring equipment | $561,044 | $88,242 | $230,105 | $128,044 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACKTRACK GROUP, INC. AND SUBSIDIARIESNOTES 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 MarchDecember 31, 2019, and results of its operations for the three and six months ended MarchDecember 31, 2019. These financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018,2019, filed with the SEC on December 19, 2018.January 10, 2020. The results of operations for the three and six months ended MarchDecember 31, 2019 may not be indicative of the results for the fiscal year ending September 30, 2019.2020.
As of MarchDecember 31, 2019, and 2018, the Company had an accumulated deficit of $301,587,916$302,384,917 and $296,846,405,$301,323,257, respectively. The Company incurred a net loss of $1,999,577$232,625 and $2,779,076$1,734,918 for the sixthree months ended MarchDecember 31, 2019 and 2018, respectively. The Company may continue to incur losses and require additional financial resources. The Company also has debt maturing in April 2020.September 2020 and July 2021. See Note 23. The Company’s transition to profitable operations is dependent upon generating a level of revenue adequate to support its cost structure, which it has almost achieved and resolving the balance sheet. Management has evaluated the significance of these conditions and has determined that the Company can meet its operating obligations for a reasonable period of time. The Company expects to fund operations using cash on hand and through operational cash flows and the extension 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 consolidated financial statements include the accounts of Track Group, Inc. and its active subsidiaries, Track Group Analytics Limited, Track Group Americas, Inc., Track Group International LTD., and Track Group - Chile SpA. All significant inter-company transactions have been eliminated in consolidation.
(3) RECENT ACCOUNTING STANDARDS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies, which are adopted by the Company as of the specified effective date. During the three months ended March 31, 2019, there were no new accounting pronouncements that had a material impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
In May 2014, theFebruary 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “ 2014-09 and relatedLeases (Topic 842)”. For lessees, the amendments “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”), which supersededin this update require that for all prior revenue recognition methods and industry-specific guidance. The principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expectsleases not considered to be entitled in exchange for those goodsshort 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 services. On October 1, 2018, we adopted ASC 606 usingcontrol the modified retrospective method, whereby the adoption does not impact any prior periods. See Note 8.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditionsuse of a share-based payment award require an entity to apply modification accounting. An entity will accountspecified asset for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified awardlease term. The amendments in this update are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The update is effective for annual periods beginning after December 15, 2017.2018 and interim periods within those annual periods. The update is to beCompany adopted prospectively to an award modifiedASU 2016-02 on or afterOctober 1, 2019. See Note 15 for the impact the adoption date. Early adoption is permitted. The Company’s adoption of ASU 2017-09 did not have an impacthad on itsour consolidated financialfinancil position, results of operations orand cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)” requiring the 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 ASU 2016-15 did not have an effect on the Company’s consolidated statement of cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment”.” The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will adopt ASU 2017-04 in fiscal year 2021. Management does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows.
In FebruaryJune 2016, the FASB issued ASU No. 2016-02,2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 adds a current expected credit loss (“Leases (Topic 841).CECL”For lessees,) 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 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, representingbeginning of the obligation to make payments and the right to use or control the useperiod of a specified asset for the lease term. The amendments in this update areadoption. ASU 2016-13 is effective for annualfiscal years beginning after December 15, 2019, including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018, andincluding interim periods within those annual periods. Managementfiscal years. The Company will adopt ASU 2016-13 in fiscal year 2021. The Company does not anticipate that this adoption willexpect the application of the CECL impairment model to have a materialsignificant impact on our consolidated financial position, results of operations, or cash flows.allowance for uncollectible amounts for accounts receivable.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there is an identifiable fair value that is independent of other groups of assets.
(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree, and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and non-controlling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with ASC 805, the Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date, by means of adjusting the amount recognized for goodwill.
Contingent Consideration
In certain acquisitions, the Company has agreed to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain future goals, which may include revenue milestones, new customer accounts, and earnings targets. The Company records contingent consideration based on its estimated fair value as of the date of the acquisition. The Company evaluates and adjusts the value of contingent consideration, if necessary, at each reporting period based on the progress toward and likely achievement of certain targets on which issuance of the contingent consideration is based. Any differences between the acquisition-date fair value and the changes in fair value of the contingent consideration subsequent to the acquisition date are recognized in current period earnings until the arrangement is settled. If there is uncertainty surrounding the value of contingent consideration, then the Company’s policy is to wait until the end of the measurement period before making an adjustment.
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as currently reported under GAAP and other comprehensive income (loss). Other comprehensive income (loss) considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (USD) at the prevailing exchange rate at MarchDecember 31, 2019.
(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) available to common 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 MarchDecember 31, 2019, and 2018, there were 685,259 and 573,800681,926 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS for the three and six months ended MarchDecember 31, 2019 and 2018, respectively, as their effect would be anti-dilutive. The common stock equivalents outstanding as of MarchDecember 31, 2019 and MarchDecember 31, 2018 consisted of the following:
| | | |
| | | | | |
| Exercisable common stock options and warrants | 685,259 | 573,800 | 685,259 | 681,926 |
| Total common stock equivalents | 685,259 | 573,800 | 685,259 | 681,926 |
At MarchDecember 31, 2019 and 2018, all stock option and warrant exercise prices were above the market price of $0.55$0.49 and $1.02,$0.51, respectively, and thus have not been included in the basic earnings per share calculation.
(8) REVENUE RECOGNITION
In May 2014, the FASB issued ASU 2014-09 and related amendments, which superseded all prior revenue recognition methods and industry-specific guidance. The principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (i.e., either over time or at a point in time). ASC 606 further requires that companies disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On October 1, 2018, the Company adopted ASC 606 using the modified retrospective method, whereby the adoption doesdid not impact any prior periods.
Monitoring and Other Related Services. Monitoring services include two components: (i) lease contracts pursuant to which we providethe Company provides monitoring services and lease devices to distributors or end users and we retainthe 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 ourthe Company’s monitoring services. Sales of devices and leased GPS devices provided by the Company 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. The rates for leased devicesMonitoring revenue is recognized ratably over time, as the customer simultaneously receives and monitoringconsumes the benefit of these services as they are performed. Payment due or received from the customers prior to rendering the associated services are considered to be statedrecorded as a contract liability. The balance of the contract liabilities at their individual stand-alone selling prices. We recognizeDecember 31, 2019 and September 30, 2019 are $316,158 and $389,229, respectively, and are included in accrued liabilities on the Consolidated Balance Sheets. The Company recognized $73,071 of deferred revenue on leased devices and monitoring services atin the end of each month the services have been provided and payment terms are 30 days from invoice date. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue.three months ended December 31, 2019.
Product Sales and Other. The Company sells devices and replacement parts to customers under certain contracts, as well as law enforcement software licenses and maintenance, and analytical software. The Company recognizes deviceRevenue from the sale of devices and other product sales in the period when: (a) the Company has transferred physical possessionparts is recognized upon their transfer of the products, (b) the Company has a present rightcontrol to payment, (c) the customer, has legal title towhich is generally upon delivery. Delivery is considered complete at either the products, and (d)time of shipment or arrival at destination, based on the customer bears significant risks and rewards of ownership ofagreed upon terms within the products. We recognize revenuecontract. Payment terms are generally 30 days from other services as the customer receives services and the Company has the right to payment.invoice date.
Multiple Element Arrangements. The majority of our revenue transactions do not have multiple elements. However, on occasion, wethe Company may enter into revenue transactions that have multiple elements. These may include different combinations of products or services that are included in a single billable rate. These products or services are delivered over time as the customer utilizes our services. In cases where obligations in a contract are distinct and thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle of promises has been met.
The standalone selling price for each performance obligation is an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the good or service. When there is only one performance obligation associated with a contract, the entire sale value is attributed to that obligation. When a contract contains multiple performance obligations the transaction value is first allocated using the observable price, which is generally a list price net of applicable discount or the price used to sell in similar circumstances. In circumstances when a selling price is not directly observable, wethe Company will estimate the standalone selling price using information available to us.
Effect
The cumulative effect of the changes made to the Company’s Consolidated October 1, 2018 Balance Sheet for the adoption of ASC 606 is as follows:
| Balance Sheet | As Reported at September 30, 2018 | | Balance as of October 1, 2018 |
| | | | |
| LIABILITIES | | | |
| Accrued liabilities | $10,333,103 | $92,969 | $10,426,072 |
| Total current liabilities | $43,288,943 | $92,969 | $43,381,912 |
| Total liabilities | $46,717,918 | $92,969 | $46,810,887 |
| | | | |
| STOCKHOLDERS' EQUITY | | | |
| Accumulated deficit | $(299,495,370) | $(92,969) | $(299,588,339) |
| Total equity | $1,638,366 | $(92,969) | $1,545,397 |
| Total liabilities and stockholders’ equity | $48,356,284 | $(92,969) | $48,263,315 |
The following tables presenttable presents the Company’s revenue disaggregated by geography, based on management’s assessment of available data:
| | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | | | | |
| | | | | |
| United States | $4,823,512 | 60% | $4,613,612 | 63% |
| Latin America | 3,263,413 | 40% | 2,643,488 | 36% |
| Other | 4,317 | 0% | 59,076 | 1% |
| Total | $8,091,242 | 100% | $7,316,176 | 100% |
| | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | Three months ended December 31, 2019 | Three months ended December 31, 2018 |
| | | | | | | | | |
| | | |
| United States | $9,885,071 | 61% | $9,543,002 | 64% | $5,567,858 | 66% | $5,061,559 | 62% |
| Latin America | 6,370,966 | 39% | 5,149,511 | 35% | 2,737,593 | 33% | 3,107,553 | 38% |
| Other | 46,740 | 0% | 114,357 | 1% | 115,380 | 1% | 42,423 | 0% |
| Total | $16,302,777 | 100% | $14,806,870 | 100% | $8,420,831 | 100% | $8,211,535 | 100% |
The above table includes total revenue for the Company, of which monitoring and other related services is the majority (approximately 98%) of the Company’s revenue. Latin America includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin Islands. Other revenue, including product sales, license renewalsincludes Canada, Saudi Arabia, United Kingdom, South Africa and parts, is considered immaterial to the Company’s overall revenue.
Vietnam.
(9) PREPAID EXPENSE, DEPOSITS AND OTHERRIGHT OF USE ASSETS
As of MarchDecember 31, 2019, and September 30, 2018,2019, the outstanding balance of prepaid expense, deposits and other expenseright of use assets was $1,498,775$1,692,887 and $1,270,043,$1,339,465, respectively. These balances are comprised largely of a performance bond deposit, tax deposits, right of use lease assets, vendor deposits and other prepaid supplier expense.
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the standard costing method. Net realizable value is determined based on the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. The Company did not record impairment of inventory during the quarters ended March 31, 2019 and 2018, respectively.
Inventory consists of finished goods that are to be shipped to customers and parts used for minor repairs of ReliAlert™, Shadow, and other tracking devices. Completed and shipped ReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of MarchDecember 31, 2019, and September 30, 2018,2019, inventory consisted of the following:
| | | | | |
| Finished goods inventory | $113,748 | $304,053 | $504,717 | 301,435 |
| Reserve for damaged or obsolete inventory | (26,934) | (62,147) | (26,934) |
| Total inventory, net of reserves | $86,814 | $277,119 | $442,570 | 274,501 |
The Company uses a third-party fulfillment service provider. As a result of this service, the Company’s employees do not actively assemble new product or repair damaged inventory or monitoring equipment shipped directly from suppliers. Purchases of monitoring equipment are recognized directly. Management believes this process reduces maintenance and fulfillment costs associated with inventory and monitoring equipment. Management reviews inventory regularly to identify damaged or obsolete inventory and reserves for potential losses. The Company recorded charges of $35,123 and $0 during the three months ended December 31, 2019 and 2018, respectively, for devices that were obsolete, lost or damaged. Obsolete, lost and damaged inventory items are included in Monitoring, products & other related services in the Condensed Consolidated Statement of Operations
(11) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of MarchDecember 31, 2019 and September 30, 2018,2019, respectively:
| | | | | |
| Equipment, software and tooling | $1,173,562 | $1,074,471 | $1,264,375 | $1,210,583 |
| Automobiles | 5,939 | 6,153 | 5,433 | 5,574 |
| Leasehold improvements | 1,435,489 | 1,358,984 | 1,368,519 | 1,393,976 |
| Furniture and fixtures | 309,615 | 305,089 | 314,464 | 313,817 |
| Total property and equipment before accumulated depreciation | 2,924,605 | 2,744,697 | 2,952,791 | 2,923,950 |
| Accumulated depreciation | (2,140,734) | (1,999,222) | (2,316,172) | (2,248,913) |
| Property and equipment, net of accumulated depreciation | $783,871 | $745,475 | $636,619 | $675,037 |
Property and equipment depreciation expense for the three months ended MarchDecember 31, 2019 and 2018 was $87,665$83,432 and $87,466,$79,636, respectively. Property and equipment depreciation expense for the six months ended March 31, 2019 and 2018 was $167,301 and $201,883, respectively.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is depreciatedamortized using the straight-line method over an estimated useful life of between one and three years. Monitoring equipment as of MarchDecember 31, 2019 and September 30, 20182019 was as follows:
| | | | | |
| Monitoring equipment | $9,146,038 | $8,488,196 | $8,893,406 | $8,947,668 |
| Less: accumulated amortization | (6,159,826) | (5,325,654) | (6,325,027) | (6,322,768) |
| Monitoring equipment, net of accumulated depreciation | $2,986,212 | $3,162,542 | |
| Monitoring equipment, net of accumulated amortization | | $2,568,379 | $2,624,900 |
DepreciationAmortization of monitoring equipment for the three months ended MarchDecember 31, 2019 and 2018 was $406,877$360,630 and $343,494,$354,626, respectively. Depreciation of monitoring equipment for the six months ended March 31, 2019 and 2018 was $761,503 and $696,521, respectively. DepreciationAmortization expense for monitoring devices is recognized in cost of revenue. During the three months ended MarchDecember 31, 2019 and MarchDecember 31, 2018, the Company recorded charges of $130,012$98,924 and $127,297, respectively, for devices that were lost, stolen or damaged. During the six months ended March 31, 2019 and March 31, 2018, the Company recorded charges of $234,091 and $223,114,$104,079, respectively, for devices that were lost, stolen or damaged. Lost, stolen and damaged items are included in Monitoring, products & other related services in the Condensed Consolidated Statement of Operations.
(13) INTANGIBLE ASSETS
The following table summarizes intangible assets at MarchDecember 31, 2019 and September 30, 2018,2019, respectively:
| | | | |
| Other intangible assets: | | |
| Intangible assets: | | | |
| Patent & royalty agreements | $21,170,565 | $21,170,565 |
| Developed technology | 12,010,935 | 11,835,293 | 13,131,519 | 12,685,281 |
| Customer relationships | 1,860,000 | 1,860,000 |
| Trade name | 318,475 | 325,507 | 319,119 | 318,722 |
| Website | 78,201 | 78,201 |
| Total intangible assets | 35,438,176 | 35,269,566 | 36,559,404 | 36,112,769 |
| Accumulated amortization | (13,031,721) | (12,016,512) | (14,729,536) | (14,157,090) |
| Intangible assets, net | $22,406,455 | $23,253,054 | $21,829,868 | $21,955,679 |
The intangible assets summarized above were purchased or developed on various dates from January 2010 through MarchDecember 31, 2019. The assets have useful lives ranging from three to twenty years. Amortization expense for the three months ended MarchDecember 31, 2019 and 2018 was $559,433$559,319 and $576,244, respectively. Amortization expense for the six months ended March 31, 2019 and 2018 was $1,118,441 and $1,150,682,$559,008, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwill at MarchDecember 31, 2019 and September 30, 2018,2019, respectively:
| | | | | |
| | | | |
Balance - beginning of period | $8,076,759 | $8,226,714 | $8,187,911 | $8,076,759 |
| Effect of foreign currency translation on goodwill | (43,128) | (149,955) | 39,114 | 111,152 |
| Balance - end of period | $8,033,631 | $8,076,759 | $8,227,025 | $8,187,911 |
Goodwill is recognized in connection with acquisition transactions in accordance with ASC 805. The Company performs an impairment test for goodwill annually or more frequently if indicators of potential impairment exist. No impairment of goodwill was recognized through MarchDecember 31, 2019.
(15) LEASES
Effective October 1, 2019, the Company adopted the new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified lease accounting for lessees to create transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted the new lease standard utilizing the modified retrospective transaction method, under which amounts in prior periods were not restated. For contracts existing at the time of the adoption, the Company elected not to reassess (a) whether any are or contain leases, (b) lease classification, and (c) initial direct costs. Upon adoption on October 1, 2019, the Company recorded $597,289 right of use assets and lease liabilities. The adoption of the new standard did not impact the Company’s Statements of Operations or Statements of Cash Flows.
The following table shows right of use assets and lease liabilities and the associated financial statement line items as of December 31, 2019.
| | | Operating lease liability |
| Prepaid expense, deposits and right of use assets | $213,228 | $- |
| Other assets | 327,644 | - |
| Accrued liabilities | - | 213,228 |
| Long-term liabilities | - | 327,644 |
| | $540,872 | $540,872 |
The following table summarizes the supplemental cash flow information for the three months ended December 31, 2019:
| |
| Cash paid for noncancelable operating leases included in operating cash flows | $116,411 |
| |
| Right of use assets obtained in exchange for operating lease liabilities: | $- |
The future minimum lease payments under noncancelable operating leases with terms greater than one year as of December 31, 2019 are:
| |
| From January 2020 to September 2020 | $180,259 |
| From October 2020 to September 2021 | 233,331 |
| From October 2021 to September 2022 | 181,598 |
| From October 2022 to September 2023 | 4,082 |
| Undiscounted Cash Flow | 599,270 |
| Less: imputed interest | (58,398) |
| Total | $540,872 |
| Reconciliation to lease liabilities: | |
| Lease liabilities - current | $213,228 |
| Lease liabilities - long-term | 327,644 |
| Total Lease Liabilities | $540,872 |
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of December 31, 2019 were 2.5 years and 8%, respectively. The Company’s lease discount rates are generally based on the estimates of its incremental borrowing rate as the discount rates implicit in the Company’s leases cannot be readily determined.
Accrued liabilities consisted of the following as of MarchDecember 31, 2019 and September 30, 2018,2019, respectively:
| | | | | |
| Accrued payroll, taxes and employee benefits | $1,440,476 | $1,937,021 | $1,993,428 | $1,680,634 |
| Deferred revenue | 131,479 | 150,604 | 316,158 | 389,229 |
| Deposits payable | 400,000 | 54,504 | 10,000 | 10,000 |
| Accrued taxes - foreign and domestic | 248,279 | 351,469 | 942,946 | 1,071,532 |
| Accrued other expense | 269,446 | 298,268 | 159,408 | 170,055 |
| Accrued legal costs | 984,498 | 473,777 | 915,784 | 1,057,305 |
| Accrued costs of revenue | 306,493 | 230,514 | 257,593 | 251,262 |
| Accrued bond guarantee | 151,729 | 157,199 | 138,788 | 142,405 |
| Right of use liability | | 213,228 | - |
| Accrued interest | 7,864,755 | 6,679,747 | 9,660,444 | 9,056,274 |
| Total accrued liabilities | $11,797,155 | $10,333,103 | $14,607,777 | $13,828,696 |
(16)(17) DEBT OBLIGATIONS
On February 24, 2019, the Company and Conrent Invest S.A. (“Conrent”) entered into a second amendment to their Facility Agreement (the “Second Amended Facility Agreement”), which Second Amended Facility Agreement (i) extends the maturity date of the Facility to the earlier of either April 1, 2020 or the date upon which the outstanding principal amount is repaid by the Company, and (ii) provides that in the event of a change of control of the Company, Conrent shall immediately cancel the Second Amended Credit Facility and declare the outstanding principal amount, together with unpaid interest, immediately due and payable.
the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020, the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021. See Note 23.
Debt obligations as of MarchDecember 31, 2019 and September 30, 2018,2019, respectively, are comprised of the following:
| | | | | |
| | | |
| Unsecured facility agreement with Conrent whereby, as of June 30, 2015, the Company had borrowed $30.4 million, bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on April 1, 2020. The Company did not pay interest on this loan during the six months ended March 31, 2019. | $30,400,000 | |
| Unsecured facility agreement with Conrent whereby, as of June 30, 2015, the Company had borrowed $30.4 million, bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on April 1, 2020. The Company did not pay interest on this loan during the three months ended December 31, 2019. | | $30,400,000 |
| | | |
| 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. | 46,359 | 67,141 | |
| Non-interest bearing notes payable to a Canadian governmental agency assumed in conjunction with the acquisition. | | 18,943 | 28,045 |
| | | |
| Total debt obligations | 33,846,003 | 33,866,785 | 33,818,587 | 33,827,689 |
| Less current portion | (37,810) | (30,437,810) | (33,818,587) | (33,827,689) |
| Long-term debt, net of current portion | $33,808,193 | $3,428,975 | $- |
The following table summarizes future maturities of debt obligations as of MarchDecember 31, 2019:
Twelve-month period ended March 31, | |
| | |
| 2020 | $37,810 |
| 2021 | 33,808,193 |
| Thereafter | - |
| Total | $33,846,003 |
(17) RELATED-PARTY TRANSACTIONS
Related-Party Loan Agreement
On September 25, 2015, the Company entered into a loan agreement (the “Sapinda Loan Agreement”) with Sapinda Asia Limited (“Sapinda”), a related party at that time, to provide the Company with a $5.0 million line of credit that accrued 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 could 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 would have become due and payable. The Company, however, was entitled to 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 extended the maturity date of all loans made pursuant to theSapinda Loan Agreement to September 30, 2020. In addition, Amendment Number One eliminated the requirement that the Company pay Sapinda the3%interest, and forgave the 3% interest due to Sapinda for all undrawn funds under theSapinda Loan Agreement through the Execution Date. Further, Amendment Number One provided that all Lender Penalties accrued under theSapinda Loan Agreement through the Execution Date were forgiven. Per Amendment Number One, Lender Penalties began to accrue again because Sapinda failed to fund the amount of $1.5 million on or before 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 $730,000 atMarch 31, 2019, under Section 6.3 of theSapinda Loan Agreement, as amended, and the Company intends to offset Lender Penalties against future payments due. We did not draw on this line of credit, nor did we pay any interest during the three months ended March 31, 2019. The undrawn balance of this line of credit at March 31, 2019 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.| Twelve-month period ended December 31, | |
| | |
| 2020 | $33,818,587 |
| 2021 | - |
| Thereafter | - |
| Total | $33,818,587 |
Additional Related-Party Transactions and Summary of All Related-Party Obligations(18) RELATED-PARTY
| | | |
| | | |
| Related party loan with an interest rate of 8% per annum for borrowed funds. 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 of the Company’s Board of Directors.
(18)(19) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share.
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s Board of Directors has the authority to amend the Company’s Certificate of Incorporation, without further 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 MarchDecember 31, 2019, there were no shares of preferred stock outstanding.
No dividends were paid during the three and six month periodsthree-month period ended MarchDecember 31, 2019 or 2018, respectively.
Series A Preferred Stock
On October 12, 2017, the Company filed a Certificate of Designation of the Relative Rights and Preferences (“Certificate of Designation”) with the Delaware Division of Corporations, designating 1,200,000 shares of the Company’s preferred stock as Series A Preferred. Shares of Series A Preferred rank senior to the Company’s common stock, and all other classes and series of equity securities of the Company that by their terms do not rank senior to the Series A Preferred.
Except with respect to transactions upon which holders of the Series A Preferred are entitled to vote separately as a class under the terms of the Certificate of Designation, the Series A Preferred has no voting rights. The shares of common stock into which the Series A Preferred is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding shares of our common stock.
The Series A Preferred has no separate dividend rights; however, whenever the Board declares a dividend on the Company’s common stock, if ever, each holder of record of a share of Series A Preferred shall be entitled to receive an amount equal to such dividend declared on one share of common stock multiplied by the number of shares of common stock into which such share of Series A Preferred could be converted on the Record Date.
Each share of Series A Preferred has a Liquidation Preference of $35.00 per share, and is convertible, at the holder’s option, into ten shares of the Company’s common stock, subject to adjustments as set forth in the Certificate of Designation, at any time beginning five hundred and forty days after the date of issuance.
As of MarchDecember 31, 2019, no shares of Series A Preferred were issued and outstanding.
(19)(20) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of shareholdersstockholders on March 21, 2011, our shareholdersstockholders 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 31, 2018, the Board of Directors suspended further awards under the 2012 Plan until further notice. The Company recorded expense of $87,083$19,687 and $856,605$65,312 for the sixthree months ended MarchDecember 31, 2019 and 2018, respectively, related to the vesting of common stock awarded prior to the suspension of the 2012 Plan. There were 27,218 shares of common stock available for issuance under the 2012 Plan as of MarchDecember 31, 2019.
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/options issued under the 2012 Plan, with original exercise prices ranging from $1.81 to $19.46, to $1.24, resulting in incremental stock-based compensation of $149,088, which was expensed in the three-month period ending December 31, 2017.
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. During the sixthree months ended MarchDecember 31, 2019 and 2018, the Company granted 0 and 30,797no options and warrants to purchase shares of common stock under the 2012 Plan. The warrants for Board members vest immediately and expire five years from grant date and warrants or options issued to employees vest annually over either a two to three-year period and expire five years after the final vesting date of the grant. The Company recorded expense of $21,232$0 and $195,760$17,906 for the sixthree months ended MarchDecember 31, 2019 and 2018, respectively, related to the issuance and vesting of outstanding stock options and warrants.
The optionAll options and warrant grants for three months ended Marchwarrants have vested and are exercisable at December 31, 2019 and 2018 were valued using the Black-Scholes model with the following weighted-average assumptions:
| | |
| | | |
| Expected stock price volatility | N/A | 102% |
| Risk-free interest rate | N/A | 2.09% |
| 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 sixthree months ended MarchDecember 31, 2019 is presented below:
| | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |
| Outstanding as of September 30, 2018 | 685,259 | $1.56 | 3.90 years | $- | |
| Outstanding as of September 30, 2019 | | 685,259 | $1.56 | | $- |
| Granted | - | $- | | - | $- | - |
| Expired/Cancelled | - | $- | | - | $- | - |
| Exercised | - | $- | | - | $- | - |
| Outstanding as of March 31, 2019 | 685,259 | $1.56 | 3.40 years | $- | |
| Exercisable as of March 31, 2019 | 685,259 | $1.56 | 3.40 years | $- | |
| Outstanding as of December 31, 2019 | | 685,259 | $1.56 | | $- |
| Exercisable as of December 31, 2019 | | 685,259 | $1.56 | | $- |
The intrinsic value of options and warrants outstanding and exercisable is based on the Company’s share price of $0.55$0.49 at MarchDecember 31, 2019.
(20)(21) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the sixthree months ended MarchDecember 31, 2019 and 2018, the Company incurred a net loss for income tax purposes of $1,999,577$232,625 and $2,779,076,$1,734,918, respectively. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, our future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
In computing income tax, we recognize an income tax provision in tax jurisdictions in which we have pre-tax income for the period and are expecting to generate pre-tax book income during the fiscal year.
(21)(22) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc.On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The Plaintiffs are alleging $1,587,604 in combined damages. 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 an Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. The Appellate court ruled in favor of the Plaintiff, finding that factual issues remain, reversing the Summary Judgment and remanding the case back to the trial court. On February 21, 2019, the trial concluded and a jury returned a verdict in Plaintiffs’ favor; awarding the Plaintiffs $336,000 or less than a third of what Plaintiffs originally sought. The Company has filed a motion seeking to reverse the verdict in its entirety, which is pending before the court.
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, as of November 16, 2018, were in the amount of $291,313.81, plus interest as it continues to accrue. The Defendant’s initial Counterclaim was dismissed; however, the Court granted the Defendant leave to amend. The Amended Counterclaim was filed on June 23, 2017 alleging $1,628,667 in damages. On March 13, 2019, the parties resolved their disagreements by entering into a settlement of all claims without liability, and on April 17, 2019, the court entered an order dismissing this matter pursuant to the settlement.
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 the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) by and between the Company and ICS. The Company asserted that ICS has failed to pay the Company fees owed to it under the C&M Agreement. On August 22, 2018, the arbitrator issued a ruling awarding the Company $689,613.50. However, on October 15, 2018, the arbitrator issued a “corrected award” in which he reduced the amount of his award to zero. On January 8, 2019, the Company filed a motion in the United States District Court, District of Puerto Rico to vacate the “corrected award” and confirm the original arbitration award of $689,613.50. On March 13, 2019, the parties resolved their disagreements by entering into a settlement of all claims without liability, and on April 17, 2019, the court entered an order dismissing this matter pursuant to the settlement.
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.employment effective September 27, 2016. Mr. Merrill is seekingsought 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. At a hearing on April 25, 2018, the court dismissed the Plaintiff’splaintiff’s claims related to existence of an oral look-back agreement and a separation agreement. TheIn an order entered July 25, 2019, the court has not ruledgranted the defendants’ motion to strike plaintiff’s damages’ expert report and barred plaintiff’s expert from testifying at trial, if any. Plaintiff’s motion to reconsider the court’s July 25, 2019 order was denied on Plaintiff’s claims related to his employment agreement. AAugust 21, 2019. Subsequently, the parties reached an immaterial mutually agreeable settlement amount could not be reached by the parties. The matter will likely proceed to trial after expert discovery is conducted. We intend to defendon October 18, 2019, and as a result, the case vigorously and believe the allegations and claims are without merit.was dismissed with prejudice on November 1, 2019.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by 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 of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, based on its determination that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decision of the Federal Administrative Tribunal. The Tribunal ruled the claims should be resolved in the Civil Court. Following that ruling the Supreme Court took action to resolve theprevious, conflicting precedentdecisions regarding the jurisdiction of such claims and determined that such claims will be resolved by the Federal Administrative Tribunal. Subsequently, Plaintiffplaintiff filed an Amparo action before the Collegiate Court, seeking an appeal of the Federal Administrative Court’s earlier decision against Plaintiff. A decision onplaintiff. The Collegiate Court issued a ruling in August 2019 that the Amparo actionmatter of dispute was previously resolved by a lower court in 2016. The Company disagrees with this ruling and is anticipated in summer 2019.exploring its options going forward. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expensesexpense will be minimal.
Eli SabagBlaike Anderson v. Track Group, Inc., Sapinda Asia Limited and Lars Windhorst.et. al. On May 4, 2018, Eli SabagJune 24, 2019, Blaike Anderson filed a complaint beforeseeking unspecified damages in the Marion SuperiorState Court inof Marion County, Indiana, alleging liability on the part of defendants for damagesproviding a defective ankle monitoring device and declaratory Judgment againstfailure to warn plaintiff regarding the Company. The complaint seeks to enforce an “earn-out” clause in a Share Purchase Agreement (“SPA”) between the Company and Sabag. Sabag alleges that the Company breached the SPA because it failed to pay him his earn out after it sold and leased a sufficient number of GPS devices to meet the earn-out milestone. In the alternative, Sabag sued the Company for breach of fiduciary duty and tortious interference, alleging that the Company avoided selling sufficient GPS devices so as to not trigger the issuance of Contingent Stock under the SPA. Finally, Sabag alleges that the Company was unjustly enriched because it failed to pay full value for his shares under the SPA.condition thereof. The Company believesremoved the matter to federal court and subsequently filed its answer denying Plaintiff’s allegations are unfounded and without merit, and it willin August 2019. Discovery is currently ongoing. The Company intends to vigorously defend the case vigorously. Furthermore, according to the SPA, any disputes are to be resolved through binding arbitration and enforced in the State of Utah. The Company filed a motion to dismiss the Complaint and Compel Arbitration on September 5, 2018. On March 29, 2019, the Marion Superior Court ruled in favor of the Company and dismissed all claims against the Company without prejudice.case.
Erick CerdaCommonwealth 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. On July 25, 2018, former employee Erick Cerda, the Plaintiff, filed a complaint against the Company, in the United States District Court for the Northern District of Illinois, Case No. 18-CV-05075, alleging violations of Title VII ofPuerto 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 Civil Rights Act of 1964Company believes were properly made in accordance with a contract between ISS and the Age Discriminationgovernment of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in Employment Act. Plaintiff seeks injunctive relief and monetary damages in an unspecific amount. On October 5, 2018, the Company filed its answer and affirmative defenses to Plaintiff’s First Amended Complaint denying Plaintiff’s allegations in their entirety.2011. The Company believesis confident that Plaintiff’s allegations are unfoundedall payments it received were earned and without merit. To avoiddue under applicable law and is pursuing such a ruling before the costs and uncertainties of prolonged litigation, the parties reached a settlement in principle for a minimal amount on March 13, 2019. Efforts to finalize the settlement remain ongoing.Court.
Operating Lease Obligations
The following table summarizes our contractual lease obligations as of March 31, 2019:
| Fiscal Year | |
| | |
| 2019 (six months) | $160,124 |
| 2020 | 248,806 |
| 2021 | 176,291 |
| 2022 | 161,075 |
| 2023 | 3,612 |
| Thereafter | - |
| Total | $749,908 |
The total operating lease obligations of $749,908 is largely related to facilities operating leases. During the six months ended March 31, 2019 and 2018, the Company paid $239,928 and $238,265, in lease payment obligations, respectively.
(22) (23) SUBSEQUENT EVENTS
On April 22,As previously reported, on December 4, 2019, the Company received a letterrequested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020, the investors who owned the securities from Conrent used to finance the debt (the “Warning Letter”) from the Bureau of Industry and Security (““BISNoteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in responsewriting that the Noteholders agreed to its self-disclosure, indicating that although violations of certain export regulations had occurred,extend the BIS Office of Export Enforcement closed this matter with the issuancematurity of the Warning Letter in lieuAmended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of prosecution or fines given the facts and circumstances.Facility to July 1, 2021.
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted that, other than as disclosed above, no additional subsequent events have occurred that are reasonably likely to impact the financial statements.
Item 2. Manageamnagement’sent’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 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, 2018,2019, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report. Except as otherwise indicated, as used in this Report, the terms the“the Company”,” “Track Group”,” “we”,” “our”,” and “us,” refer to Track Group, Inc., a Delaware corporation.
General
Our core business is based on the leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (“PaaS”) business model. Currently, we deploy offender basedoffender-based management services that combine patented GPS tracking technologies, fulltime 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. We offer customizable tracking solutions that leverage real-time tracking data, best practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.
Our devices consist principally of the ReliAlertTM product line, which is supplemented by the Shadow product line. These devices are generally leased on a daily rate basis and may be combined with our monitoring center services, proprietary software and data analytics subscription to provide an end-to-end PaaS.
ReliAlertTM and Shadow. Our tracking devices utilize patented technology and are securely attached around an offender’s ankle with a tamper resistant strap that cannot be adjusted or removed without detection, unless by a supervising officer, and which are activated through services provided by our monitoring centers. The ReliAlertTM and Shadow units are intelligent devices with integrated computer circuitry, utilizing both GPS and RF, and constructed from case-hardened plastics designed to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing. The ReliAlertTM platform also incorporates voice communication technology that provides officers with 24/7/365 voice communication with the offenders. Both devices are FCC, CE and PTCRB certified and protected by numerous patents and trademarks.
Monitoring Center Services. Our monitoring center facilities provide live 24/7/365 monitoring of all alarms generated from our devices, as well as customer and technical support. Our monitoring center operators play a vital role, and as such, we staff our centers with highly-trained,highly trained, bi-lingual individuals. These operators act as an extension of agency resources receiving alarms, communicating and intervening with offenders regarding violations, and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power source, battery back-up and triple redundancy in voice, data, and IP. The Company has established monitoring centers in the U.S. and Chile. In addition, the Company has assisted in the establishment of monitoring centers for customers and local partners in other global locations
Data Analytics Services. Our TrackerPALTM software, TrackerPALTM Mobile, combined with our Data Analytic analysis tools, provide an integrated platform allowing case managers and law enforcement officers quick access views of an offender’s travel behavior, mapping, and inference on patterns. Our advanced data analytics service offers a highly complex predictive reporting mechanism that combines modern statistical methods, developed using computer science and used by intelligence agencies that separate noteworthy events from normal events, rank offender cases according to their need for supervision, and relate decision-relevant metrics to benchmarks in real-time.
Other Services. The Company offers smartphone applications specifically designed for the criminal justice market, including a domestic violence app that creates a mobile geo-zone around a survivor and an alcohol monitoring app linked to a police-grade breathalyzer.
Business Strategy
We are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software, and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. Accordingly, rather than receiving a payment just for a piece of manufactured equipment, the Company receives a recurring stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, we continue to expand our device-agnostic platform to not only collect, but also store, analyze, assess and correlate location data for both accountability and auditing reasons, as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience with knowledgeable salespersons who can convey the value of our products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related-service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development (“R&D”), including smartphone applications and other monitoring services is critical to the development and sale of innovative technologies and integrated solutions today and in the future.
Critical Accounting Policies
From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining our results of operations and financial position.
A description of the Company’s critical accounting policies that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 20182019, filed with the SEC on December 19, 2018January 10, 2020.During the sixthree months ended MarchDecember 31, 2019, there have been no material changes to the Company’s critical accounting policies other thanpolicies.
Effective October 1, 2019, the adoption ofCompany adopted the new lease accounting guidance in ASU 2014-09, as described inNo. 2016-02, Leases (Topic 842) "ASC Topic 842" which modified lease acccounting for lessees to create transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. See Note 8.15.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense. By their nature, these judgments are subject to an inherent degree of uncertainty. We assess the reasonableness of our estimates, including those related to bad debts, inventories, right of use assets, estimated useful lives, intangible assets, warranty obligations, product liability, revenue, legal matters and income taxes. We base our estimates on historical experience as well as available current information on a regular basis. Management uses this information to form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Government Regulation
Our operations are subject to various federal, state, local and international laws and regulations.
In October 2018, through an internal review of our export compliance, it came to our attention that some of our products may not have been properly classified in the past, and that our export of certain products, software and technology may be subject to export licensing requirements of which we were not previously aware. As a result of these findings, we hired independent counsel to assist in, among other things, an investigation with respect to our past export practices and analyzing our classification of products, software and technology and implementation of corrective measures. In addition, on October 16, 2018, we voluntarily self-disclosed the information above to the Bureau of Industry and Security (“BIS”), followed by additional details that we sent on April 1, 2019, and we have obtained licenses for the export of our products, software and technology to all of the Company’s international customers.
Also, on February 7, 2019, the Company received authorization from BIS for all of its international customers, contractors and subsidiaries requiring approval and for its Swedish and Mexican foreign national employees to continue using electronic monitoring devices and the associated software and technology. On April 22, 2019, the Company received a letter (the “Warning Letter”) from BIS indicating that although violations of certain regulations had occurred, the BIS Office of Export Enforcement decided to close this matter with the issuance of the Warning Letter in lieu of prosecution or fines given the facts and circumstances.
Other than the above disclosure related to our exports, we We are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would require curtailment of our operations because of such laws and regulations.
Results of Operations
Three Months Ended MarchDecember 31, 2019 Compared to Three Months Ended MarchDecember 31, 2018
Revenue
For the three months ended MarchDecember 31, 2019, the Company recognized revenue from operations of $8,091,242$8,420,831 compared to $7,316,176$8,211,535 for the three months ended MarchDecember 31, 2018, an increase of $775,066$209,296 or approximately 11%3%. The increase in revenue was principally the result of an increase in total growth of our North American monitoring operations driven by clients in Nevada, Mexico,Illinois, Bahamas, Puerto Rico and Michigan, and Puerto Rico.partially offset by lower revenue in Chile, largely due to the strengthening dollar.
Other revenue for the three months ended MarchDecember 31, 2019 increased to $213,839$152,408 from $153,971$151,207 in the same period in 2018, largely due to higher salesan increase of products and consumable items.$1,201.
Cost of Revenue
During the three months ended MarchDecember 31, 2019, cost of revenue totaled $3,599,300$3,754,351 compared to cost of revenue during the three months ended MarchDecember 31, 2018 of $3,295,508,$3,578,482, an increase of $303,792$175,869 or approximately 9%5%. The increase in cost of revenue was largely the result of higher communication costs of $190,833, higher device amortization of $63,385 due to accelerated depreciation of certain devices and an increased number of devices, higher monitoring costs of $36,375 incurred to distribute additional devices to meet demand from growing clients,$94,723, higher freightserver costs of $18,736$27,398, higher lost stolen and damage expense of $29,969 and higher device installation costscommission expense of $18,083,$54,401, partially offset by lower device repaircommunication costs of $41,827.$38,475.
Depreciation and amortization included in cost of revenue for the three months ended MarchDecember 31, 2019 and 2018 totaled $533,590$487,442 and $467,666,$478,289, respectively. These costs represent the depreciation of ReliAlert™ and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. The increase of $9,153 primarily represents an increase in device amortization due to an increase inthe number of devices. We believe the equipment lives on which the depreciation is based are appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales.
Gross Profit and Margin
During the three months ended MarchDecember 31, 2019, gross profit totaled $4,491,942,$4,666,480, representing an increase of $471,274$33,427 or approximately 12%less than 1% compared to the same period last year, and resulting in a gross margin of approximately 56%55% compared to $4,020,668$4,633,053 or a gross margin of approximately 55%56% during the three months ended MarchDecember 31, 2018. The increase in gross profit is due to revenue growth, which exceeded the increases in the higher costs of revenue mentioned above.
General and Administrative Expense
During the three months ended MarchDecember 31, 2019, general and administrative expense totaled $3,316,069$3,011,854 compared to $3,495,343$3,422,272 for the three months ended MarchDecember 31, 2018. The decrease of $179,274$410,418 or approximately 5%12% in general and administrative costs resulted largely from lower legal and professional fees of $266,647, lower consulting and outside services of $77,510, a decrease in stock based compensation of $367,688,$63,530, lower travel and entertainment of $60,761, partially offset by higher insurance expense of $43,012 and higher wages and taxes of $168,323, lower Board of Director fees of $89,722, lower outside service costs of $63,963 and lower travel and entertainment costs of $42,843, partially offset by higher legal and professional expenses of $563,940.$23,456.
Selling and Marketing Expense
During the three months ended MarchDecember 31, 2019, selling and marketing expense increased to $576,974$541,549 compared to $518,993$503,930 for the three months ended MarchDecember 31, 2018. The increase in expense of $57,981,$37,619, or approximately 11%7% is principally the result of higher wagesconsulting and taxesoutside services of $46,750.$34,784, higher trade show expense of $16,199, partially offset by lower travel and entertainment expense of $16,984.
Research and Development Expense
During the three months ended MarchDecember 31, 2019, research and development expense totaled $354,879$296,155 compared to $182,808$248,865 for the three months ended MarchDecember 31, 2018, an increase of $172,071$47,290 or approximately 94%19%. The increase resulted largely from reallocation of $144,564$17,080 of wagesrent expense, higher dues and subscriptions of $13,692, higher travelcontract labor costs of $4,296 and entertainmentpayroll and benefits of $19,511.$4,024. In addition, we are significantly enhancing our technology platform to improve the efficiency of our software, firmware, user interface and automation. As a result of these improvements, $295,581$341,622 was capitalized as developed technology during the three months ended MarchDecember 31, 2019 and $247,952275,623 was capitalized in the three months ended MarchDecember 31, 2018. A portion of this expense would have been recognized as research and development expense, absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During the three months ended MarchDecember 31, 2019, depreciation and amortization expense totaled $520,384$515,939 compared to $539,537$514,981 for the three months ended MarchDecember 31, 2018, a decreasean increase of $19,153$958 or approximately 4%, which was largely the result of certain property and equipment assets becoming fully depreciated.less than 1%.
Total Operating Expense
During the three months ended MarchDecember 31, 2019, total operating expense increased nominallydecreased to $4,768,306$4,365,497 compared to $4,736,681$4,690,048 for the three months ended MarchDecember 31, 2018, an increasea decrease of $31,625$324,551 or less than 1%approximately 7%.
Loss from OperationsOperating income (loss)
During the three months ended MarchDecember 31, 2019, loss from operationsoperating income was $276,364$300,983 compared to a loss of $716,013$56,995 for the three months ended MarchDecember 31, 2018, a decreasean increase of $439,649 or approximately 61%.$357,978. This improvement was due to an improvement in gross profit of $471,274, partially offset by$33,427, and a nominal increasedecrease in operating expense of $31,625.$324,551.
Other Income and Expense
For the three months ended MarchDecember 31, 2019, other income (expense) totaled incomeexpense of $11,705$459,225 compared to expense of $1,020,472$1,533,916 for the three months ended MarchDecember 31, 2018, a decrease in net expense of $1,032,177$1,074,691 or approximately 101%70%. The improvement in other income (expense) is due to lower interest expense of $221,618, largely due to interest paid for supplier financing and deferred financing fees, both in the prior fiscal quarter, and positive currency exchange rate movements of $816,958$1,075,985 compared to the secondfirst fiscal quarter of 2018.2019.
Net Loss Attributable to Common ShareholdersStockholders
The Company had net loss attributable to common shareholdersstockholders of $264,659$232,625 for the three months ended MarchDecember 31, 2019, compared to a net loss attributable to common shareholdersstockholders of $1,736,485$1,734,918 for the three months ended MarchDecember 31, 2018, a decrease of $1,471,826 or approximately 85%. This decrease in net loss is largely due to positive currency exchange rate movements, higher gross profit and lower interest expense, net, slightly offset by higher operating expenses.
Six Months Ended March 31, 2019 Compared to Six Months Ended March 31, 2018
Revenue
For the six months ended March 31, 2019, the Company recognized revenue from operations of $16,302,777, compared to $14,806,870 for the six months ended March 31, 2018, an increase of $1,495,907 or approximately 10%. Of this revenue, $15,937,731 and $14,513,010, respectively, were from monitoring and other related services, an increase of $1,424,721 or approximately 10%. The increase in revenue was principally the result of an increase in total growth of our North American monitoring operations driven by clients in Puerto Rico, Mexico, Nevada, Michigan and Bahamas.
Other revenue for the three months ended March 31, 2019 increased to $365,046 from $293,860 in the same period in 2018 largely due to higher sales of products and consumable items.
Cost of Revenue
During the six months ended March 31, 2019, cost of revenue totaled $7,177,782 compared to cost of revenue during the six months ended March 31, 2018 of $6,314,657, an increase of $863,125 or approximately 14%.The increase in cost of revenue was largely the result ofhigher communication costs of $293,656, higher device repair costs of $273,222 incurred to distribute additional devices to meet demand from growing clients, higher monitoring costs of $94,614, higher server costs of $41,850, higher freight costs of $31,978 and higher device depreciation of $64,983 due to accelerated depreciation of certain devices and an increased number of devices.
Depreciation and amortization included in cost of revenue for the six months ended March 31, 2019 and 2018 totaled $1,011,879 and $944,808, respectively. This $67,071 or approximately 7% increase in costs represents accelerated depreciation of certainReliAlertTMmonitoring devices as well as an increase in the number of devices.Devices are depreciated over a one to three year useful life. Royalty agreements are being amortized over a ten year useful life. The Company believes these lives are appropriate due to 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 six months ended March 31, 2019, gross profit totaled $9,124,995, resulting in a gross margin of approximately 56%, compared to $8,492,213, or a gross margin of approximately 57% during the six months ended March 31, 2018. The increase in absolute gross profit of $632,782 or approximately 7% is due to an increase in revenue offset by increases in certain aspects of cost of revenue, including device repair, monitoring activity, communication costs and accelerated depreciation of devices.
General and Administrative Expense
During the six months ended March 31, 2019, general and administrative expense totaled $6,738,341 compared to $7,153,081 for the six months ended March 31, 2018. The decrease of $414,740 or approximately 6% in general and administrative costs resulted largely from a decrease in stock based compensation of $922,061, lower Board of Director fees of $164,722, lower wages and taxes of $140,516, lower bad debt expense of $71,108 and lower travel and entertainment of $54,749, partially offset by higher legal and professional expenses of $889,307, and higher insurance costs of $57,225.
Selling and Marketing Expense
During the six months ended March 31, 2019, selling and marketing expense totaled $1,080,904 compared to $928,730 for the six months ended March 31, 2018. The $152,174, or approximately 16% increase resulted largely from higher wages and taxes of $63,027 and higher travel and entertainment of $79,189 visiting existing and new customers.
Research and Development Expense
During the six months ended March 31, 2019, research and development expense totaled $603,744 compared to research and development expense for the six months ended March 31, 2018 totaling $346,754, an increase of $256,990 or approximately 74%. The increaseresulted largely from the reallocation of $230,566 of wages and higher travel and entertainment of $32,419. 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, $571,204 was capitalized as developed technology during the six months ended March 31, 2019 and $502,851 was capitalized during the six months ended March 31, 2018. A portion of this expense would have been recognized as research and development expense, absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During the six months ended March 31, 2019, depreciation and amortization expense totaled $1,035,365 compared to $1,104,277 for the six months ended March 31, 2018. The $68,912, or approximately 6% decrease was largely the result of certain property and equipment assets becoming fully depreciated.
Total Operating Expense
During the six months ended March 31, 2019, total operating expense decreased to $9,458,354 compared to $9,532,842 for the six months ended March 31, 2018, a decrease of $74,488 or approximately 1%. The decrease was largely due to lower general and administrative expense of $414,740 and lower depreciation and amortization of $68,912. These costs were partially offset by higher selling and marketing expense of $152,174, and higher research and development expense of $256,990.
Loss from Operations
During the six months ended March 31, 2019, loss from operations was $333,359 compared to a loss of $1,040,629 for the six months ended March 31, 2018, a decrease of $707,270 or approximately 68%. This improvement was due to an improvement in gross profit of $632,782 and a reduction in operating expense of $74,488.
Other Income and Expense
For the six months ended March 31, 2019,other income (expense) totaled expense of $1,522,211compared to expense of $1,738,447 for the six months ended March 31, 2018. The decrease in expense of $216,236 in net other expense resulted primarily to lower interest expense of $294,206, net, largely due to interest paid for supplier financing and deferred financing fees, both in the prior fiscal year, partially offset by negative currency exchange rate movements of $60,647.
Net Loss Attributable to Common Shareholders
The Company had a net loss from continuing operations for the six months ended March 31, 2019 totaling $1,999,577 compared to a net loss of $2,779,076 for the six months ended March 31, 2018, representing a decrease of $779,499 or approximately 28%.$1,502,293. This decrease in net loss is largely due to higher gross profit, lower generaloperating expense and administrative costs, and lower depreciation and amortization, partially offset by higher research and development costs and higher selling and marketing expenses.positive currency exchange rate movements.
Liquidity and Capital Resources
During and prior to the fiscal year ended September 30, 2017, we supplemented cash flows by financing the business from borrowings under a credit facility, a revolving line of credit from one of our shareholders,stockholders, receipt of certain disgorgement funds, and from the sale and issuance of debt securities. Subsequently, the Company was self-funded through net cash provided by operating activities. As of MarchDecember 31, 2019, excluding interest,approximately $3.4 millionwas owed to Sapinda Asia Limited under a loan agreement (the “Sapinda Loan Agreement”) that matures on September 30, 2020 and $30.4 million was owed to Conrent Invest S.A. (“Conrent”) under a loan (the “Conrent Loan Agreement”). No borrowings or sales of equity securities occurred during the sixthree months ended MarchDecember 31, 2019 or during the year ended September 30, 2018.2019.
On July 19, 2018, the Company and Conrent entered into an amendment to their Facility Agreement (the “Amended Facility Agreement”), which Amended Facility Agreement (i) extended the maturity date of the Facility to the earlier of either April 1, 2019 or the date upon which the outstanding principal amount is repaid by the Company, and (ii) provided that in the event of a change of control of the Company, Conrent shall immediately cancel the Amended Credit Facility and declare the outstanding principal amount, together with unpaid interest, immediately due and payable. On February 24, 2019, the Company and Conrent entered into a second amendment to their Facility Agreement (the “Second Amended Facility Agreement”), which Second Amended Facility Agreement (i) extends the maturity date of the Facility to the earlier of either April 1, 2020 or the date upon which the outstanding principal amount is repaid by the Company, and (ii) provides that in the event of a change of control of the Company, Conrent shall immediately cancel the Second Amended Credit Facility and declare the outstanding principal amount, together with unpaid interest, immediately due and payable.
Management will continue to seek additional extensions of maturity of debt, other sources of capital, refinancing options, and potentially other transactions to meet all of its future obligations. While management believes it will be successful in completing one of these alternatives prior toOn December 4, 2019, the Company requested that Conrent extend the maturity of the Second Amended Facility Agreement no assurances can be given.from April 1, 2020 to July 1, 2021. On January 6, 2020, the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
Net Cash Flows from Operating Activities.
During the three six months ended MarchDecember 31, 2019, we had cash flows from operating activities of $1,751,964,$2,650,968, compared to cash flows from operating activities of $1,773,944$1,138,433 for the sixthree months ended MarchDecember 31, 2018, representing a decreasean increase of less than 1%approximately 133%. The decrease ofincrease in cash from operations was the result of a drop in the net loss of $1,999,577, offset by aggregated non-cash expenses of $2,942,927from $1,734,918 in the Condensed Consolidated Statementquarter one year ago to $232,625. This was augmented by a decline in accounts receivable of Income. In addition, there was$1,155,606 and an increase in accrued liabilities of $1,360,818, partially$793,323, offset by a decrease in accounts payable of $122,347, an increase in prepaid expensesexpense and other assets of $262,552 and an increase in accounts receivable of $167,305.$179,203.
Net Cash Flows from Investing Activities.
The Company used $1,407,984$1,002,428 of cash for investing activities during the sixthree months ended MarchDecember 31, 2019, compared to $1,121,825$551,199 of cash used during the sixthree months ended MarchDecember 31, 2018. Cash used for investing activities was used for significant enhancements of our software platform and purchases of monitoring and other equipment to meet customer demand during the sixthree months ended MarchDecember 31, 2019. Purchases of property and equipment decreased $87,014, compared to the prior period, largely due to a decrease in leasehold improvements.
Net Cash Flows from Financing Activities.
The Company used $18,704$9,552 of cash for financing activities during the sixthree months ended MarchDecember 31, 2019, compared to $36,632$9,357 of cash used in financing activities during the sixthree months ended MarchDecember 31, 2018.
Liquidity, Working Capital and Management’s Plan
As of MarchDecember 31, 2019, the Company had unrestricted cash of $5,665,109,$8,493,550 compared to unrestricted cash of $5,446,557$6,896,711 as of September 30, 20182019. As of MarchDecember 31, 2019, we had a working capital deficit of $1,031,602,$35,092,010, compared to a working capital deficit of $30,316,328$35,010,475 as of September 30, 2018.2019. This decreaseincrease in working capital deficit of $29,284,726$81,535 is principally due to the extended maturity date of the $30,400,000 Facility Agreement, to April 1, 2020 and cash flows from operations, partially offset by a decreasean increase in cashaccrued liabilities, largely due to additional capitalized software of $571,204,interest payable, purchases of monitoring equipment of $593,758 and purchases of property and equipment of $243,022.capitalized software, largely offset by cash provided by operations.
TheOn January 7, 2020, Conrent notified the Company believesin writing that the Noteholders agreed to extend the maturity of the Facility to July 1, 2021. We currently believe that our cash on hand, in addition to cash derived from our operating activities, will be sufficient to sustain operations through the next twelve months, although no assurance can be given.months. In the event that they are not sufficient, the Company willwe need to obtain additional funding, the Company may obtain additional financing from outside sources. No assurances can be given that we will be able to obtain additional funding on terms favorable to us, if at all.
On March 13, 2017, the Company successfully extended the Sapinda Loan Agreement from September 30, 2017 to September 30, 2020. On February 24, 2019, the Company successfully extended the Conrent Loan Agreement to the earlier of either April 1, 2020 or the date upon which the outstanding principal amount is repaid by the Company.
On December 4, 2019, the Company requested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020 the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company, except as described below.Company.
| | Payments due in fiscal year 2019 | Payments due in fiscal years 2020-2021 | Payments due in fiscal years 2022-2023 | |
| Operating leases | $160,124 | $425,097 | $164,687 | $749,908 |
Item 3. QuaQuanntitativetitative and Qualitative Disclosures About Market Risk
The Company footprint extends to a number of countries outside the United States, and we intend to continue to examine international opportunities. As a result, our revenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, transfer pricing changes, taxes and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
Foreign Currency Risks
We had $6,417,706$2,852,973 and $5,263,868$3,149,976 in revenue from sources outside of the United States for the sixthree months ended MarchDecember 31, 2019 and 2018, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange income of $143,308 and foreign exchange expense of $336,767 and of $276,120$932,677 in the sixthree months ended MarchDecember 31, 2019 and 2018, respectively. Fluctuations in the exchange loss or gain in any given period are due to the strengthening or weakening of the U.S. dollar against the Chilean Peso and Canadian dollar. Changes in currency exchange rates affect the relative prices at which we sell our products and purchase goods and services. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition. We do not use foreign currency exchange contracts or derivative financial instruments for hedging or speculative purposes. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.
Item 4. 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 MarchDecember 31, 2019 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of MarchDecember 31, 2019.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There was no change in our internal control over financial reporting during our quarter ended MarchDecember 31, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PARTPART II. OTHEROTHER INFORMATION
Item 1. Legal Proceedings
We are,The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
Lazar Leybovich et al. v. SecureAlert, Inc.On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The Plaintiffs are alleging $1,587,604 in combined damages. 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 an Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. The Appellate court ruled in favor of the Plaintiff, finding that factual issues remain, reversing the Summary Judgment and remanding the case back to the trial court. On February 21, 2019, the trial concluded and a jury returned a verdict in Plaintiffs’ favor, awarding the Plaintiffs $336,000 or less than a third of what Plaintiffs originally sought. The Company has filed a motion to reverse the verdict in its entirety, which is pending before the court.
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, as of November 16, 2018, were in the amount of $291,313.81, plus interest as it continues to accrue. The Defendant’s initial Counterclaim was dismissed; however, the Court granted the Defendant leave to amend. The Amended Counterclaim was filed on June 23, 2017 alleging $1,628,667 in damages. On March 13, 2019, the parties resolved their disagreements by entering into a settlement of all claims without liability, and on April 17, 2019, the court entered an order dismissing this matter pursuant to the settlement.
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 the Commercial and Monitoring Representative Agreement dated November 30, 2010 (the “C&M Agreement”) by and between the Company and ICS. The Company asserted that ICS has failed to pay the Company fees owed to it under the C&M Agreement. On August 22, 2018, the arbitrator issued a ruling awarding the Company $689,613.50. However, on October 15, 2018, the arbitrator issued a “corrected award” in which he reduced the amount of his award to zero. On January 8, 2019, the Company filed a motion in the United States District Court, District of Puerto Rico to vacate the “corrected award” and confirm the original arbitration award of $689,613.50. On March 13, 2019, the parties resolved their disagreements by entering into a settlement of all claims without liability, and on April 17, 2019, the court entered an order dismissing this matter pursuant to the settlement.
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.employment effective September 27, 2016. Mr. Merrill is seekingsought 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. At a hearing on April 25, 2018, the court dismissed the Plaintiff’splaintiff’s claims related to existence of an oral look-back agreement and a separation agreement. TheIn an order entered July 25, 2019, the court has not ruledgranted the defendants’ motion to strike plaintiff’s damages’ expert report and barred plaintiff’s expert from testifying at trial, if any. Plaintiff’s motion to reconsider the court’s July 25, 2019 order was denied on Plaintiff’s claims related to his employment agreement. AAugust 21, 2019. Subsequently, the parties reached an immaterial mutually agreeable settlement amount could not be reached by the parties. The matter will likely proceed to trial after expert discovery is conducted. We intend to defendon October 18, 2019, and as a result, the case vigorously and believe the allegations and claims are without merit.was dismissed with prejudice on November 1, 2019.
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by 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 of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. On March 28, 2017, the Federal Administrative Tribunal rejected our claim, based on its determination that this case should be resolved by a Civil Court and not by the Federal Administrative Tribunal. For that reason, on April 25, 2017, the Company filed an appeal before the Collegiate Tribunals against the decision of the Federal Administrative Tribunal. The Tribunal ruled the claims should be resolved in the Civil Court. Following that ruling the Supreme Court took action to resolve theprevious, conflicting precedentdecisions regarding the jurisdiction of such claims and determined that such claims will be resolved by the Federal Administrative Tribunal. Subsequently, Plaintiffplaintiff filed an Amparo action before the Collegiate Court, seeking an appeal of the Federal Administrative Court’s earlier decision against Plaintiff. A decision onplaintiff. The Collegiate Court issued a ruling in August 2019 that the Amparo actionmatter of dispute was previously resolved by a lower court in 2016. The Company disagrees with this ruling and is anticipated in summer 2019.exploring its options going forward. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expensesexpense will be minimal.
Eli SabagBlaike Anderson v. Track Group, Inc., Sapinda Asia Limited and Lars Windhorst.et. al. On May 4, 2018, Eli SabagJune 24, 2019, Blaike Anderson filed a complaint beforeseeking unspecified damages in the Marion SuperiorState Court inof Marion County, Indiana, alleging liability on the part of defendants for damagesproviding a defective ankle monitoring device and declaratory Judgment againstfailure to warn plaintiff regarding the Company. The complaint seeks to enforce an “earn-out” clause in a Share Purchase Agreement (“SPA”) between the Company and Sabag. Sabag alleges that the Company breached the SPA because it failed to pay him his earn out after it sold and leased a sufficient number of GPS devices to meet the earn-out milestone. In the alternative, Sabag sued the Company for breach of fiduciary duty and tortious interference, alleging that the Company avoided selling sufficient GPS devices so as to not trigger the issuance of Contingent Stock under the SPA. Finally, Sabag alleges that the Company was unjustly enriched because it failed to pay full value for his shares under the SPA.condition thereof. The Company believesremoved the matter to federal court and subsequently filed its answer denying Plaintiff’s allegations are unfounded and without merit, and it willin August 2019. Discovery is currently ongoing. The Company intends to vigorously defend the case vigorously. Furthermore, according to the SPA, any disputes are to be resolved through binding arbitration and enforced in the State of Utah. The Company filed a motion to dismiss the Complaint and Compel Arbitration on September 5, 2018. On March 29, 2019, the Marion Superior Court ruled in favor of the Company and dismissed all claims against the Company without prejudice.case.
Erick CerdaCommonwealth 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. On July 25, 2018, former employee Erick Cerda, the Plaintiff, filed a complaint against the Company, in the United States District Court for the Northern District of Illinois, Case No. 18-CV-05075, alleging violations of Title VII ofPuerto 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 Civil Rights Act of 1964Company believes were properly made in accordance with a contract between ISS and the Age Discriminationgovernment of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in Employment Act. Plaintiff seeks injunctive relief and monetary damages in an unspecific amount. On October 5, 2018, the Company filed its answer and affirmative defenses to Plaintiff’s First Amended Complaint denying Plaintiff’s allegations in their entirety.2011. The Company believesis confident that Plaintiff’s allegations are unfoundedall payments it received were earned and without merit. To avoiddue under applicable law and is pursuing such a ruling before the costs and uncertainties of prolonged litigation, the parties reached a settlement in principle for a minimal amount on March 13, 2019. Efforts to finalize the settlement remain ongoing.Court.
Item 1A. RiskRisk Factors
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended September 30, 2018,2019, filed on December 19, 2018.January 10, 2020. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of May 9, 2019February 13, 2020, there have been no material changes to the disclosures made in the above-referenced Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
| (a) | Exhibits Required by Item 601 of Regulation S-K |
Exhibit Number | | Title of Document |
| | | |
| | Amendment to Facility Agreement by and between Track Group, Inc. and Conrent S.A., acting on behalf of its compartment “Safety 2,” dated February 24, 2019. |
| | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). |
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| 101.INS | | XBRL INSTANCE DOCUMENT |
| 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA |
| 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
| 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
| 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
| 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
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: May 10, 2019February 13, 2020 | By: | /s/ Derek Cassell
| |
| | | Derek Cassell, Chief Executive Officer Principal Executive Officer |
| | | |
Date: May 10, 2019February 13, 2020 | By: | /s/ Peter K. Poli
| |
| | | Peter K. Poli, Chief Financial Officer (Principal Accounting Officer) |