Track Group, Inc. - Quarter Report: 2014 December (Form 10-Q)

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Utah			87-0543981
(State or other jurisdiction of incorporation or organization )			(I.R.S. Employer Identification Number)

Large accelerated filer   [   ]	Accelerated filer                      [   ]
Non-accelerated filer     [   ] (Do not check if a smaller reporting company)	Smaller reporting company    [X]

 

 

			Page
PART I.  FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)		1
	Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)		2
	Condensed Consolidated Statements of Cash Flows (Unaudited)		3
	Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4	Controls and Procedures		20
PART II.  OTHER INFORMATION
Item 1	Legal Proceedings		21
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 5	Other Information		21
Item 6	Exhibits		21
Signatures

 

 

 

		December 31,				September 30,
Assets		2014				2014
Current assets:
Cash		$	5,188,582			$	11,101,822
Accounts receivable, net of allowance for doubtful accounts of $4,070,000, respectively			5,202,473				3,788,207
Notes receivable, current portion			281,631				273,964
Prepaid expenses and other current assets			1,007,068				1,226,054
Inventory, net of reserves of $225,900 and $223,500, respectively			1,434,515				1,248,264
Total current assets			13,114,269				17,638,311
Property and equipment, net of accumulated depreciation of $2,486,779 and $2,292,521, respectively			1,881,028				1,860,247
Monitoring equipment, net of accumulated amortization of $1,449,671 and $1,251,551, respectively			2,057,078				1,914,666
Intangible assets, net of accumulated amortization of $3,389,500 and $2,818,894, respectively			25,934,994				26,743,626
Goodwill			10,455,453				6,577,609
Other assets			3,739,925				3,150,428
Total assets		$	57,182,747			$	57,884,887
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,370,524			$	1,995,607
Accrued liabilities			2,876,658				2,413,557
Current portion of long-term related-party debt			2,700,000				-
Current portion of long-term debt, net of discount of $9,529 and $375,370, respectively			4,917				1,906,040
Total current liabilities			6,952,099				6,315,204
Stock payable - acquisitions			4,771,000				3,000,000
Long-term portion of related party debt, net of current portion			-				2,700,000
Long-term portion of debt, net of current portion and discount of $375,000 and $93,750, respectively			27,640,886				25,868,361
Other long-term liabilities			88,840				85,275
Total liabilities			39,452,825				37,968,840
Stockholders’ equity:
Preferred stock:			-				-
Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 0 shares outstanding
Common stock, $0.0001 par value: 15,000,000 shares authorized; 10,131,629 and 10,093,130 shares outstanding, respectively			1,013				1,009
Additional paid-in capital			296,020,137				295,364,173
Accumulated other comprehensive loss			(898,832	)			(271,954	)
Accumulated deficit			(277,392,396	)			(275,177,181	)
Total equity			17,729,922				19,916,047
Total liabilities and stockholders’ equity		$	57,182,747			$	57,884,887

The accompanying notes are an integral part of these condensed consolidated statements.

 

 

			Three Months Ended December 31,
			2014			2013
Revenues:
Products		$	91,589			$	65,611
Monitoring and other related services			4,529,030				2,593,683
Total revenues			4,620,619				2,659,294
Cost of revenues:
Products			21,357				62,721
Monitoring and other related services			1,968,730				1,261,108
Impairment of monitoring equipment and parts (Note 13)			55,080				75,000
Total cost of revenues			2,045,167				1,398,829
Gross profit			2,575,452				1,260,465
Operating expenses:
Selling, general and administrative expense			3,739,681				2,171,447
Research and development			464,178				319,570
Loss from continuing operations			(1,628,407	)			(1,230,552	)
Other income (expense):
Currency exchange rate gain (loss)			80,562				(7,035	)
Interest income			11,450				11,223
Interest expense, net			(683,941	)			(43,918	)
Other income, net			5,121				89
Net loss from continuing operations			(2,215,215	)			(1,270,193	)
Dividends on Series D Preferred			-				(9,427	)
Net loss attributable to common stockholders		$	(2,215,215	)		$	(1,279,620	)
Foreign currency translation adjustments			(626,878	)			-
Comprehensive Loss		$	(2,842,093	)		$	(1,279,620	)
Net loss per common share, basic and diluted from continuing operations		$	(0.22	)		$	(0.13	)
Weighted average common shares outstanding, basic and diluted			10,108,000				9,808,000

The accompanying notes are an integral part of these condensed consolidated statements.

 

		Three Months Ended December 31
		2014				2013
Cash flows from operating activities:
Net Loss		$	(2,215,215	)		$	(1,270,193	)
Adjustments to reconcile net loss to net cash used and provided by in operating activities:
Depreciation and amortization			997,120				459,799
Vesting of stock options and warrants granted for services			75,082				71,250
Issuance of common stock for services			-				15,000
Amortization of debt discount			89,821				2,118
Issuance of warrants with related parties			-				53,946
Impairment of monitoring equipment and parts			55,080				75,000
Loss on disposal of monitoring equipment and parts			12,575				10,771
Change in assets and liabilities:
Accounts receivable, net			(2,041,899	)			158,508
Notes receivable			(7,667	)			37,403
Inventories			(403,794	)			(63,498	)
Prepaid expenses and other assets			(182,680	)			(446,379	)
Accounts payable			680,288				322,535
Accrued expenses			450,615				52,808
Deferred revenue			(10,792	)			11
Net cash used in operating activities			(2,501,466	)			(520,921	)
Cash flow from investing activities:
Purchase of property and equipment			(2,317	)			(62,082	)
Purchase of monitoring equipment and parts			(837,014	)			(750,189	)
Cash paid for purchase of subsidiary and other investments			(1,937,902	)			-
Cash deposit in escrow to secure international bond			-				(3,346,622	)
Net cash used in investing activities			(2,777,233	)			(4,158,893	)
Cash flow from financing activities:
Borrowings on related-party notes payable			-				2,700,000
Proceeds from exercise of options and warrants			-				8,000
Principal payments on related party notes payable			-				(60,000	)
Principal payments on notes payable			(598,251	)			(24,336	)
Net cash provided (used) by financing activities			(598,251	)			2,623,664
Foreign currency translation adjustments			(36,290	)			-
Net decrease in cash			(5,913,240	)			(2,056,150	)
Cash, beginning of period			11,101,822				3,382,428
Cash, end of period		$	5,188,582			$	1,326,278

 

 

		Three Months Ended December 31,
		2014				2013
Cash paid for interest		$	3,086			$	7,519
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock in connection with Series D Preferred stock dividends			-				9,427
Series D Preferred stock dividends earned			-				9,427
Issuance of common stock in connection with the acquisition of a subsidiary			580,886				-

 

 

 

		Three Months Ended December 31,
		2014				2013
United States of America		$	3,364,318			$	1,884,164
Latin American countries			432,929				-
Caribbean countries and commonwealths			763,736				756,678
Other foreign countries			59,236				18,452
Total		$	4,620,219			$	2,659,294

		Net Property and Equipment								Net Monitoring Equipment
		December 31, 2014				September 30, 2014				December 31, 2014				September 30, 2014
United States of America		$	568,127			$	611,095			$	1,406,581			$	1,645,137
Latin American countries			1,200,687				1,168,406				626,628				237,667
Caribbean countries and commonwealths			-				-				-				-
Other foreign countries			112,214				80,746				23,869				31,862
Total		$	1,881,028			$	1,860,247			$	2,057,078			$	1,914,666

 

 

		December 31, 2014				December 31, 2013
Conversion of Series D Preferred			-				24,503
Exercise of outstanding common stock options and warrants			281,251				399,591
Exercise and conversion of outstanding Series D Preferred warrants			42,000				42,000
Total common stock equivalents			323,251				466,094

●	Cash to Mr. Sabag of $311,404 at the closing;

●	Shares of the Company's common stock valued at $7,500,000, delivered to Mr. Sabag as follows:

●

Common stock valued at $1,600,000 delivered to Mr. Sabag at the closing;

●

Common stock valued at $2,900,000, delivered to an escrow agent to be released by Bank to Mr. Sabag after six months from the closing, conditioned upon the Company's verification that GPS Global’s global positioning satellite (“GPS”) products (the “Devices”) meet expected operating specifications;

●

Common stock valued at $1,000,000, the number of shares to be determined by dividing $1,000,000 by the weighted average closing price of the Company’s common stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Mr. Sabag within 30 days of certification that GPS Global has sold or leased a minimum of 1,500 of its Devices under revenue-generating contracts; and

 

 

●

Common stock valued at $2,000,000,  the number of shares to be determined by dividing $2,000,000 by the weighted average closing price of the Company’s common stock for the 60 consecutive trading days preceding the third business day prior to release of such shares, to be issued to Mr. Sabag within 30 days of certification that GPS Global has sold or leased a minimum of 2,500 of its Devices under revenue-generating contracts, in addition to the 1,500 Devices previously mentioned (i.e., a minimum of 4,000 Devices sold or leased).

Current assets		$	217
Inventory			17
Property and equipment			47
Monitoring equipment			48
Other non-current assets			21
Intangible assets			4,856
Tradename			192
Accounts payable and accrued expenses			(215	)
Loan payable			(753	)
Goodwill			3,381
Total fair value of assets acquired		$	7,811

Inventory		$	451
Property and equipment			227
Other assets			109
Developed technology			1,600
Customer contracts/relationships			1,860
Tradename /trademarks			110
Goodwill			3,382
Total fair value of assets acquired		$	7,739

 

 

Current assets		$	477
Property and equipment			5
Accounts payable and accrued expenses			(65	)
Loan payable			(381	)
Goodwill			4,050
Total fair value of assets acquired		$	4,086

		Three Months Ended December 31,
		2014				2013
Revenues		$	4,976,416			$	4,289,544
Loss from operations			(1,513,379	)			(4,961,452	)
Net loss attributable to the Company			(1,944,824	)			(4,368,889	)
Basic income per share			(0.19	)			(0.43	)
Diluted income per share			(0.19	)			(0.43	)
Net loss attributable to common shareholders			(1,924,388	)			(4,378,316	)
Basic income per share			(0.19	)			(0.43	)
Diluted income per share			(0.19	)			(0.43	)

		December 31,				September 30,
		2014				2014
Raw materials, work-in-process, and finished goods		$	1,660,415			$	1,471,764
Reserve for damaged or obsolete inventory			(225,900	)			(223,500	)
Total inventory, net of reserves		$	1,434,515			$	1,248,264

 

 

		December 31,				September 30,
		2014				2014
Equipment, software and tooling		$	2,751,312			$	2,571,450
Automobiles			33,466				33,466
Leasehold improvements			1,316,120				1,294,386
Furniture and fixtures			266,909				253,466
Total property and equipment before accumulated depreciation			4,367,807				4,152,768
Accumulated depreciation			(2,486,779	)			(2,292,521	)
Property and equipment, net of accumulated depreciation		$	1,881,028			$	1,860,247

		December 31,				September 30,
		2014				2014
Monitoring equipment		$	3,506,749			$	3,166,217
Less: accumulated depreciation			(1,449,671	)			(1,251,551	)
Monitoring equipment,  net of accumulated depreciation		$	2,057,078			$	1,914,666

		December 31, 2014				September 30, 2014
Other intangible assets:
Patent license agreement		$	4,550,000			$	4,550,000
Royalty agreements			16,620,565				16,620,565
Technology			5,961,110				6,190,083
Customer relationships			1,860,000				1,860,000
Trade name			282,433				291,486
Other			50,386				50,386
Total intangible assets			29,324,494				29,562,520
Accumulated amortization			(3,389,500	)			(2,818,894	)
Intangible assets, net of accumulated amortization		$	25,934,994			$	26,743,626

 

		December 31,				September 30,
		2014				2014
Beginning balance		$	6,577,609			$	-
Additions resulting from acquisitions:
Acquisition of GPS Global Tracking & Surveillance, Ltd.			-				3,381,000
Acquisition of Emerge Monitoring, Inc.			-				3,381,754
Acquisition of Track Group Analytics Limited			4,037,267				-
Foreign currency translation adjustment			(159,423	)			(185,145	)
Ending balance		$	10,455,453			$	6,577,609

		December 31,				September 30,
		2014				2014
Accrued royalties		$	7,077			$	-
Accrued taxes - foreign and domestic			108,247				203,941
Accrued interest			1,076,010				504,124
Accrued payroll, taxes and employee benefits			552,268				822,847
Accrued consulting			133,650				267,300
Accrued outside services			11,458				23,562
Accrued travel costs			35,000				96,922
Accrued settlement costs			50,000				52,000
Accrued board of directors fees			240,000				120,000
Accrued cellular costs			48,150				25,000
Accrued legal costs			100,000				6,454
Accrued warranty and manufacturing costs			17,092				14,031
Accrued other expenses			497,706				277,376
Total accrued expenses		$	2,876,658			$	2,413,557

 

 

 

		December 31				September 30,
		2014				2014
Unsecured facility agreement with an entity whereby the Company may borrow up to $25 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 January 3, 2016. A $750,000 origination fee or 3% on the total amount under the agreement was paid and recorded as a debt discount and will be amortized as interest expense over the term of the loan. As of December 31, 2014, the remaining debt discount was $375,000.		$	24,625,000			$	24,531,250
The Company entered into an agreement whereby the Company was granted a non-exclusive, irrevocable, perpetual and royalty-free license to certain patents with an entity. The Company agreed to pay $4,500,000 over two years or $187,500 per month through February 2016.			2,625,000				3,187,500
Note issued in connection with the acquisition of a subsidiary and matured in December 2014.			-				9,630
Capital leases with effective interest rates that range between 8.51% and 17.44%.  Leases mature between June 2015 and November 2015.			38,693				46,021
Related notes payable for $1.5 million and $1.2 million, due December 31, 2015 and November 19, 2015, respectively (See note 9 below).			2,700,000				2,700,000
Notes payable assumed in conjunction with the G2 acquisition, net of $9,529 discount.			4,917				-
Non-interest bearing notes payable to a governmental agency assumed in conjunction with the G2 acquisition.			352,193				-
Total debt obligations			30,345,803				30,474,401
Less current portion			(2,704,917	)			(1,906,040	)
Long-term portion of related party debt			-				(2,700,000	)
Long-term debt, net of current portion		$	27,640,886			$	25,868,361

Fiscal Year		Total
2015		$	4,700,884
2016			25,460,444
2017			77,192
2018			54,560
Thereafter			52,723
Total		$	30,345,803

 

 

 

 

		December 31, 2014				Sept. 30, 2014
Loan from a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on December 30, 2015.		$	1,200,000			$	1,200,000
Promissory note with a significant shareholder with an interest rate of 8% per annum. Principal and interest due at maturity on November 19, 2015.			1,500,000				1,500,000
Total related-party debt obligations			2,700,000				2,700,000
Less current portion			(2,700,000	)			-
Long-term debt, net of current portion		$	-			$	2,700,000

 

 

		Three Months Ended December 31
		2014				2013
Expected cash dividend yield			N/A(1)				-
Expected stock price volatility			N/A(1)				103	%
Risk-free interest rate			N/A(1)				0.10	%
Expected life of options/warrants						1 Year

(1) This information was deemed not applicable (N/A) since no options or warrants to purchase common stock were granted during the three months ended December 31, 2014.

		Shares Under Option/ Warrant				Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding as of September 30, 2014			305,251			$	15.71		1.05 years		487,402
Granted			-			$
Expired / Cancelled			(24,000	)		$	17.50
Exercised			-			$
Outstanding as of December 31, 2014			281,251			$	15.63		0.85 years		$	526,550
Exercisable as of December 31, 2014			255,463			$	15.44		0.79 years		$	526,550

The intrinsic value of options outstanding and exercisable is based on the Company’s share price of $14.99 at December 31, 2014.

 

		Total Equity
Balance at September 30, 2014		$	19,916,047
Issuance of common stock for acquisition			580,886
Other comprehensive income			(626,878	)
Vesting of stock options and warrants			75,082
Net loss			(2,215,215	)
Balance at December 31, 2014		$	17,729,922