Track Group, Inc. - Quarter Report: 2019 March (Form 10-Q)
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 March 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)
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, 2019 was 11,401,650.
Track Group,
Inc.
FORM 10-Q
For the Quarterly Period Ended March 31, 2019
INDEX
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PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
|
Assets
|
March 31,
2019
(unaudited)
|
September 30,
2018
|
|
Current assets:
|
|
|
|
Cash
|
$5,665,109
|
$5,446,557
|
|
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
|
|
Total
current assets
|
13,188,445
|
12,972,615
|
|
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
|
|
Goodwill
|
8,033,631
|
8,076,759
|
|
Other
assets
|
124,453
|
145,839
|
|
Total
assets
|
$47,523,067
|
$48,356,284
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$2,385,082
|
$2,518,030
|
|
Accrued
liabilities
|
11,797,155
|
10,333,103
|
|
Current
portion of long-term debt
|
37,810
|
30,437,810
|
|
Total
current liabilities
|
14,220,047
|
43,288,943
|
|
Long-term
debt, net of current portion
|
33,808,193
|
3,428,975
|
|
Total
liabilities
|
48,028,240
|
46,717,918
|
|
|
|
|
|
Commitments and contingencies (Note 21)
|
-
|
-
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares
authorized;11,401,650 shares outstanding, respectively
|
1,140
|
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
|
|
Accumulated
deficit
|
(301,587,916)
|
(299,495,370)
|
|
Accumulated
other comprehensive loss
|
(1,129,578)
|
(970,270)
|
|
Total
equity (deficit)
|
(505,173)
|
1,638,366
|
|
Total
liabilities and stockholders’ equity (deficit)
|
$47,523,067
|
$48,356,284
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(Unaudited)
|
|
Three
Months Ended
|
Six
Months Ended
|
||
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenue:
|
|
|
|
|
|
Monitoring
and other related services
|
$7,877,403
|
$7,162,205
|
$15,937,731
|
$14,513,010
|
|
Product
sales and other
|
213,839
|
153,971
|
365,046
|
293,860
|
|
Total
revenue
|
8,091,242
|
7,316,176
|
16,302,777
|
14,806,870
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
Monitoring,
products and other related services
|
3,065,710
|
2,827,842
|
6,165,903
|
5,369,849
|
|
Depreciation
and amortization included in cost of revenue
|
533,590
|
467,666
|
1,011,879
|
944,808
|
|
Total cost of
revenue
|
3,599,300
|
3,295,508
|
7,177,782
|
6,314,657
|
|
|
|
|
|
|
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Gross profit
|
4,491,942
|
4,020,668
|
9,124,995
|
8,492,213
|
|
|
|
|
|
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Operating
expense:
|
|
|
|
|
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General &
administrative
|
3,316,069
|
3,495,343
|
6,738,341
|
7,153,081
|
|
Selling &
marketing
|
576,974
|
518,993
|
1,080,904
|
928,730
|
|
Research &
development
|
354,879
|
182,808
|
603,744
|
346,754
|
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Depreciation &
amortization
|
520,384
|
539,537
|
1,035,365
|
1,104,277
|
|
Total operating
expense
|
4,768,306
|
4,736,681
|
9,458,354
|
9,532,842
|
|
|
|
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Loss
from operations
|
(276,364)
|
(716,013)
|
(333,359)
|
(1,040,629)
|
|
|
|
|
|
|
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Other
income (expense):
|
|
|
|
|
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Interest expense,
net
|
(584,348)
|
(805,966)
|
(1,185,587)
|
(1,479,793)
|
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Currency exchange
rate gain (loss)
|
595,910
|
(221,048)
|
(336,767)
|
(276,120)
|
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Other income,
net
|
143
|
6,542
|
143
|
17,466
|
|
Total other income (expense)
|
11,705
|
(1,020,472)
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(1,522,211)
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(1,738,447)
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Loss
before income taxes
|
(264,659)
|
(1,736,485)
|
(1,855,570)
|
(2,779,076)
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Income
tax expense
|
-
|
-
|
144,007
|
-
|
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Net
loss attributable to common shareholders
|
(264,659)
|
(1,736,485)
|
(1,999,577)
|
(2,779,076)
|
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Foreign currency
translation adjustments
|
(255,981)
|
241,726
|
(159,308)
|
430,451
|
|
Comprehensive
loss
|
$(520,640)
|
$(1,494,759)
|
$(2,158,885)
|
$(2,348,625)
|
|
Net
loss per common share, basic and diluted
|
$(0.02)
|
$(0.17)
|
$(0.18)
|
$(0.27)
|
|
Weighted
average common shares outstanding, basic and diluted
|
11,251,650
|
10,462,433
|
11,175,002
|
10,469,466
|
The
accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY/(DEFICIT)
(Unaudited)
|
|
Common stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
March 31,
|
|
|
|
2019
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(1,999,577)
|
$(2,779,076)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
2,047,244
|
2,049,085
|
|
Bad
debt expense
|
216,510
|
287,618
|
|
Amortization
of debt discount
|
-
|
111,487
|
|
Stock
based compensation
|
108,315
|
1,345,097
|
|
Loss
on monitoring equipment included in cost of revenue
|
234,091
|
223,114
|
|
Foreign
currency exchange loss
|
336,767
|
276,120
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
(167,305)
|
308,839
|
|
Prepaid
expense and other assets
|
(262,552)
|
(1,225,045)
|
|
Accounts
payable
|
(122,347)
|
(43,724)
|
|
Accrued
liabilities
|
1,360,818
|
1,220,429
|
|
Net
cash provided by operating activities
|
1,751,964
|
1,773,944
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(243,022)
|
(124,720)
|
|
Capitalized
software
|
(571,204)
|
(502,851)
|
|
Purchase
of monitoring equipment and parts
|
(593,758)
|
(494,254)
|
|
Net
cash used in investing activities
|
(1,407,984)
|
(1,121,825)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Principal
payments on long-term debt
|
(18,704)
|
(36,632)
|
|
Net
cash used in financing activities
|
(18,704)
|
(36,632)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(106,724)
|
19,021
|
|
|
|
|
|
Net increase in cash
|
218,552
|
634,508
|
|
Cash, beginning of period
|
5,446,557
|
2,027,321
|
|
Cash, end of period
|
$5,665,109
|
$2,661,829
|
|
Cash
paid for interest
|
$12,397
|
$22,483
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Non-cash
transfer of inventory to monitoring equipment
|
$561,044
|
$88,242
|
The accompanying notes are an integral part of these condensed
consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated
financial information of Track Group, Inc. and subsidiaries
(collectively, the “Company” or “Track Group”) has been prepared in accordance with the
Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission
(“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information
contains all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the Company’s
financial position as of March 31, 2019, and results of its
operations for the three and six months ended March 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, filed with the SEC
on December 19, 2018. The results of operations for the three
and six months ended March 31, 2019 may not be indicative of the
results for the fiscal year ending September 30,
2019.
As
of March 31, 2019 and 2018, the Company had an accumulated deficit
of $301,587,916 and $296,846,405, respectively. The Company
incurred a net loss of $1,999,577 and $2,779,076 for the six months
ended March 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. 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, 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, the FASB issued Accounting Standards Update (“ASU”) 2014-09 and related amendments
“Revenue from Contracts with
Customers (Topic 606)” (“ASC 606”), 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. On October 1, 2018, we adopted ASC 606 using 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 conditions of a share-based payment award
require an entity to apply modification accounting. An entity will
account 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 award 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. The update is to be adopted prospectively to an
award modified on or after the adoption date. Early adoption is
permitted. The Company’s adoption of ASU 2017-09 did not have
an impact on its consolidated financial position, results of
operations, or cash flows.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic
230)” 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.
Management does not anticipate that this adoption will have a
significant impact on its consolidated financial position, results
of operations, or cash flows.
In February 2016, FASB issued ASU No. 2016-02,
“Leases (Topic
841).” For lessees, the
amendments in this update require that for all leases not
considered to be short term, a company recognize both a lease
liability and right-of-use asset on its balance sheet, representing
the obligation to make payments and the right to use or control the
use of a specified asset for the lease term. The amendments in this
update are effective for annual periods beginning after December
15, 2018 and interim periods within those annual periods.
Management does not anticipate that this adoption will have a
material impact on our consolidated financial position, results of
operations, or cash flows.
(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 March 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 shareholders 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 shareholders 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 March 31, 2019 and
2018, there were 685,259 and 573,800 outstanding common share
equivalents, respectively, that were not included in the
computation of Diluted EPS for the three and six months ended March
31, 2019 and 2018, respectively, as their effect would be
anti-dilutive. The common stock equivalents outstanding as of March
31, 2019 and March 31, 2018 consisted of the
following:
|
|
March 31,
|
March 31,
|
|
|
2019
|
2018
|
|
Exercisable
common stock options and warrants
|
685,259
|
573,800
|
|
Total
common stock equivalents
|
685,259
|
573,800
|
At
March 31, 2019 and 2018, all stock option and warrant exercise
prices were above the market price of $0.55 and $1.02,
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 does
not impact any prior periods.
Monitoring and Other Related
Services. Monitoring services
include two components: (i) lease contracts pursuant to which we
provide monitoring services and lease devices to distributors or
end users and we retain 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 our
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 devices and monitoring
services are considered to be stated at their individual
stand-alone selling prices. We
recognize revenue on leased devices and monitoring services at 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.
Product Sales and
Other. The Company sells replacement parts to customers
under certain contracts, as well as law enforcement software
licenses and maintenance, and analytical software. The Company recognizes device and other product
sales in the period when: (a) the Company has transferred physical
possession of the products, (b) the Company has a present right to
payment, (c) the customer has legal title to the products, and (d)
the customer bears significant risks and rewards of ownership of
the products. We recognize revenue from other services as the
customer receives services and the Company has the right to
payment.
Multiple Element
Arrangements. The majority of
our revenue transactions do not have multiple elements. However, on
occasion, we 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, we
will estimate the standalone selling price using information
available to us.
Effect of Adopting ASC 606. The
Company adopted ASC 606 using the modified retrospective method.
Under the modified retrospective method, the Company recognized the
cumulative effect of initially applying this accounting standard as
an adjustment to the opening balance in retained earnings of
$92,969, relating to one contract for the sale of products and
associated use of software.
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
|
Adjustments
|
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 present 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
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
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
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
United
States
|
$9,885,071
|
61%
|
$9,543,002
|
64%
|
|
Latin
America
|
6,370,966
|
39%
|
5,149,511
|
35%
|
|
Other
|
46,740
|
0%
|
114,357
|
1%
|
|
Total
|
$16,302,777
|
100%
|
$14,806,870
|
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. Other revenue,
including product sales, license renewals and parts, is considered
immaterial to the Company’s overall revenue.
(9) PREPAID EXPENSE AND OTHER
As
of March 31, 2019, and September 30, 2018, the outstanding balance
of prepaid and other expense was $1,498,775 and $1,270,043,
respectively. These balances are comprised largely of a
performance bond deposit, tax deposits, vendor deposits and other
prepaid supplier expense.
(10) INVENTORY
Inventory
is valued at the lower of the cost or net realizable
value. Cost is determined using the 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 March 31, 2019 and September 30, 2018,
inventory consisted of the following:
|
|
March 31,
2019
|
September 30,
2018
|
|
Finished
goods inventory
|
$113,748
|
$304,053
|
|
Reserve
for damaged or obsolete inventory
|
(26,934)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$86,814
|
$277,119
|
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.
(11) PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of March 31, 2019 and
September 30, 2018, respectively:
|
|
March 31,
2019
|
September 30,
2018
|
|
Equipment,
software and tooling
|
$1,173,562
|
$1,074,471
|
|
Automobiles
|
5,939
|
6,153
|
|
Leasehold
improvements
|
1,435,489
|
1,358,984
|
|
Furniture
and fixtures
|
309,615
|
305,089
|
|
Total
property and equipment before accumulated depreciation
|
2,924,605
|
2,744,697
|
|
Accumulated
depreciation
|
(2,140,734)
|
(1,999,222)
|
|
Property
and equipment, net of accumulated depreciation
|
$783,871
|
$745,475
|
Property and equipment depreciation expense for
the three months ended March 31, 2019 and 2018 was $87,665 and
$87,466, 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 depreciated using the straight-line method over an
estimated useful life of between one and three years. Monitoring
equipment as of March 31, 2019 and September 30, 2018 was as
follows:
|
|
March 31,
2019
|
September 30,
2018
|
|
Monitoring
equipment
|
$9,146,038
|
$8,488,196
|
|
Less:
accumulated amortization
|
(6,159,826)
|
(5,325,654)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$2,986,212
|
$3,162,542
|
Depreciation
of monitoring equipment for the three months ended March 31, 2019
and 2018 was $406,877 and $343,494, respectively. Depreciation of
monitoring equipment for the six months ended March 31, 2019 and
2018 was $761,503 and $696,521, respectively. Depreciation expense
for monitoring devices is recognized in cost of revenue. During the
three months ended March 31, 2019 and March 31, 2018, the Company
recorded charges of $130,012 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, 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 March 31, 2019 and
September 30, 2018, respectively:
|
|
March 31,
2019
|
September 30,
2018
|
|
Other
intangible assets:
|
|
|
|
Patent
& royalty agreements
|
$21,170,565
|
$21,170,565
|
|
Developed
technology
|
12,010,935
|
11,835,293
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
318,475
|
325,507
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
35,438,176
|
35,269,566
|
|
Accumulated
amortization
|
(13,031,721)
|
(12,016,512)
|
|
Intangible
assets, net
|
$22,406,455
|
$23,253,054
|
The
intangible assets summarized above were purchased or developed on
various dates from January 2010 through March 31, 2019. The assets
have useful lives ranging from three to twenty years. Amortization
expense for the three months ended March 31, 2019 and 2018 was
$559,433 and $576,244, respectively. Amortization expense for the
six months ended March 31, 2019 and 2018 was $1,118,441 and
$1,150,682, respectively.
(14) GOODWILL
The
following table summarizes the activity of goodwill at March 31,
2019 and September 30, 2018, respectively:
|
|
March 31,
|
September 30,
|
|
|
2019
|
2018
|
|
Balance
- beginning of
period
|
$8,076,759
|
$8,226,714
|
|
Effect
of foreign currency translation on goodwill
|
(43,128)
|
(149,955)
|
|
Balance
- end of period
|
$8,033,631
|
$8,076,759
|
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
March 31, 2019.
(15) ACCRUED LIABILITES
Accrued
liabilities consisted of the following as of March 31, 2019 and
September 30, 2018, respectively:
|
|
March 31,
2019
|
September 30,
2018
|
|
Accrued
payroll, taxes and employee benefits
|
$1,440,476
|
$1,937,021
|
|
Deferred
revenue
|
131,479
|
150,604
|
|
Deposits
payable
|
400,000
|
54,504
|
|
Accrued
taxes - foreign and domestic
|
248,279
|
351,469
|
|
Accrued
other expense
|
269,446
|
298,268
|
|
Accrued
legal costs
|
984,498
|
473,777
|
|
Accrued
costs of revenue
|
306,493
|
230,514
|
|
Accrued
bond guarantee
|
151,729
|
157,199
|
|
Accrued
interest
|
7,864,755
|
6,679,747
|
|
Total
accrued liabilities
|
$11,797,155
|
$10,333,103
|
(16) 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.
Debt
obligations as of March 31, 2019 and September 30, 2018,
respectively, are comprised of the following:
|
|
March 31,
2019
|
September 30,
2018
|
|
|
|
|
|
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
|
$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
|
|
|
|
|
|
Total
debt obligations
|
33,846,003
|
33,866,785
|
|
Less
current portion
|
(37,810)
|
(30,437,810)
|
|
Long-term
debt, net of current portion
|
$33,808,193
|
$3,428,975
|
The
following table summarizes future maturities of debt obligations as
of March 31, 2019:
|
Twelve-month period ended March 31,
|
Total
|
|
|
|
|
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
the Sapinda Loan Agreement.
Amendment Number One extended the maturity date of all loans made
pursuant to the Sapinda Loan Agreement
to September 30, 2020. In addition, Amendment Number One eliminated
the requirement that the Company pay Sapinda the 3% interest, and forgave
the 3% interest due to Sapinda for all undrawn funds under
the Sapinda Loan Agreement
through the Execution Date. Further, Amendment Number One provided
that all Lender Penalties accrued under the Sapinda 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 at March
31, 2019, under Section 6.3 of
the Sapinda 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
the Sapinda 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 the Sapinda Loan Agreement,
or that the penalties accruing will ever be
paid.
Additional Related-Party Transactions and Summary of All
Related-Party Obligations
|
|
March 31,
2019
|
September 30,
2018
|
|
|
|
|
|
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) 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 shareholder 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 March 31, 2019, there were no shares of
preferred stock outstanding.
No
dividends were paid during the three and six month periods ended
March 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 March 31, 2019, no shares of Series A Preferred were issued
and outstanding.
(19)
STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting
of shareholders on March 21, 2011, our shareholders 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 shareholders 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 and $856,605 for the six months ended
March 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 March 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 six months ended March 31, 2019 and 2018, the Company
granted 0 and 30,797 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 and
$195,760 for the six months ended March 31, 2019 and 2018,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
The
option and warrant grants for three months ended March 31, 2019 and
2018 were valued using the Black-Scholes model with the following
weighted-average assumptions:
|
|
Six Months Ended
March 31
|
|
|
|
2019
|
2018
|
|
Expected
stock price volatility
|
N/A
|
102%
|
|
Risk-free
interest rate
|
N/A
|
2.09%
|
|
Expected
life of options/warrants
|
5
years
|
5
years
|
The
expected life of stock options (warrants) represents the period of
time that the stock options or warrants are expected to be
outstanding based on the simplified method allowed under GAAP. The
expected volatility is based on the historical price volatility of
the Company’s common stock. 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 six months ended
March 31, 2019 is presented below:
|
|
Shares Under Option
|
Weighted Average
Exercise
Price
|
Weighted Average
Remaining
Contractual
Life
|
Aggregate Intrinsic
Value
|
|
Outstanding
as of September 30, 2018
|
685,259
|
$1.56
|
3.90 years
|
$-
|
|
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
|
$-
|
The
intrinsic value of options and warrants outstanding and exercisable
is based on the Company’s share price of $0.55 at March 31,
2019.
(20) 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 six months ended March 31, 2019 and 2018, the Company incurred
a net loss for income tax purposes of $1,999,577 and $2,779,076,
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) 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. Mr. Merrill is seeking not less than
$590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated
effective September 27, 2016. The Company filed an Answer with
Counter Claims on December 21, 2016. The Company filed a motion for
Summary Judgment on January 16, 2018. At a hearing on April 25,
2018, the court dismissed the Plaintiff’s claims related to
an oral look-back agreement and a separation agreement. The court
has not ruled on Plaintiff’s claims related to his employment
agreement. A settlement amount could not be reached by the parties.
The matter will likely proceed to trial after expert discovery is
conducted. We intend to defend the case vigorously and believe the
allegations and claims are without merit.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by Defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social of the then Public Security Department, and
presently, an agency of the National Security Commission of the
Department of the Interior, and SecureAlert, Inc., presently Track
Group, Inc. The Company’s claim amount is upwards of $6.0
million. 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 the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal. Subsequently, Plaintiff filed an Amparo action before the
Collegiate Court, seeking an appeal of the Federal Administrative
Court’s earlier decision against Plaintiff. A decision on the
Amparo action is anticipated in summer 2019. Based upon the fee
arrangement the Company has with its counsel, we anticipate the
future liabilities attributable to legal expenses will be
minimal.
Eli Sabag v. Track
Group, Inc., Sapinda Asia Limited and Lars
Windhorst. On May 4, 2018, Eli Sabag filed a
complaint before the Marion Superior Court in Marion County Indiana
for damages and declaratory Judgment against 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. The
Company believes the allegations are unfounded and without merit,
and it will 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.
Erick Cerda v.
Track Group, 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 of the Civil
Rights Act of 1964 and the Age Discrimination 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. The Company believes that Plaintiff’s
allegations are unfounded and without merit. To avoid 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.
Operating Lease Obligations
The
following table summarizes our contractual lease obligations as of
March 31, 2019:
|
Fiscal Year
|
Total
|
|
|
|
|
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) SUBSEQUENT EVENTS
On
April 22, 2019, the Company received a letter (the “Warning
Letter”) from the Bureau of
Industry and Security (“BIS”) in response to its self-disclosure,
indicating that although violations of certain export regulations
had occurred, the BIS Office of Export Enforcement closed this
matter with the issuance of the Warning Letter in lieu of
prosecution or fines given the facts and
circumstances.
In
accordance with the Subsequent Events Topic of the FASB ASC 855, we
have evaluated subsequent events, through the filing date and noted
that, other than as disclosed above, no additional subsequent
events have occurred that are reasonably likely to impact the
financial statements.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
This Report contains information that constitutes
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Generally, the statements
contained in this Quarterly Report on Form 10-Q that are not purely
historical can be considered to be “forward-looking
statements.” These statements represent our
expectations, hopes, beliefs, anticipations, commitments,
intentions, and strategies regarding the future. They may be
identified by the use of words or phrases such as
“believes,” “expects,”
“intends,” “anticipates,”
“should,” “plans,” “estimates,”
“projects,” “potential,” and
“will,” among others. Forward-looking statements
include, but are not limited to, statements contained in
Management’s Discussion and Analysis of Financial Condition
and Results of Operations regarding our financial performance,
revenue, and expense levels in the future and the sufficiency of
our existing assets to fund future operations and capital spending
needs. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. These risks and uncertainties include, but are
not limited to, those described in “Risk Factors” in
our most recent Annual Report on Form 10-K, and those described
from time to time in our reports filed with the Securities and
Exchange Commission (“SEC”).
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed consolidated financial
statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form
10-K for the fiscal year ended September 30, 2018, and Current
Reports on Form 8-K that have been filed with the SEC through the
date of this Report. Except as otherwise indicated, as used in this
Report, the terms “the Company,” “Track Group,” “we,” “our,” “us,” refer to Track Group, Inc., a Delaware
corporation.
General
Our core business is
based on the leasing of patented tracking and monitoring solutions
to federal, state and local law enforcement agencies, both in the
U.S and abroad, for the electronic monitoring of offenders and
offering unique data analytics services on a platform-as-a-service
(“PaaS”)
business model. Currently, we deploy offender based management
services that combine patented GPS tracking technologies, fulltime
24/7/365 global monitoring capabilities, case management, and
proprietary data analytics. We offer customizable tracking
solutions that leverage real-time tracking data, best practices
monitoring, and analytics capabilities to create complete,
end-to-end tracking solutions.
Our devices consist principally of the
ReliAlertTM
product line, which is supplemented by
the Shadow product line. These devices are generally leased on
a daily rate basis and may be combined with our monitoring center
services, proprietary software and data analytics subscription to
provide an end-to-end PaaS.
ReliAlertTM and
Shadow. Our tracking
devices utilize patented technology and are securely attached
around an offender’s ankle with a tamper resistant strap that
cannot be adjusted or removed without detection, unless by a
supervising officer, and which are activated through services
provided by our monitoring centers. The
ReliAlertTM
and Shadow units are intelligent
devices with integrated computer circuitry, utilizing both GPS and
RF, and constructed from case-hardened plastics designed to
promptly notify the intervention centers of any attempt made to
breach applicable protocols, or to remove or otherwise tamper with
the device or optical strap housing. The
ReliAlertTM
platform also incorporates voice
communication technology that provides officers with 24/7/365 voice
communication with the offenders. Both devices are FCC, CE and
PTCRB certified and protected by numerous patents and
trademarks.
Monitoring Center
Services. Our
monitoring center facilities provide live 24/7/365 monitoring of
all alarms generated from our devices, as well as customer and
technical support. Our monitoring center operators play a vital
role, and as such, we staff our centers with highly-trained,
bi-lingual individuals. These operators act as an extension of
agency resources receiving alarms, communicating and intervening
with offenders regarding violations, and interacting with
supervision staff, all pursuant to agency-established
protocols. The facilities have redundant power source, battery
back-up and triple redundancy in voice, data, and IP. The Company
has established monitoring centers in the U.S. and Chile. In
addition, the Company has assisted in the establishment of
monitoring centers for customers and local partners in other global
locations
Data Analytics
Services. Our
TrackerPALTM
software,
TrackerPALTM
Mobile, combined with our Data
Analytic analysis tools, provide an integrated platform allowing
case managers and law enforcement officers quick access views of an
offender’s travel behavior, mapping, and inference on
patterns. Our advanced data analytics service offers a highly
complex predictive reporting mechanism that combines modern
statistical methods, developed using computer science and used by
intelligence agencies that separate noteworthy events from normal
events, rank offender cases according to their need for
supervision, and relate decision-relevant metrics to benchmarks in
real-time.
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, 2018,
filed with the SEC on December 19, 2018. During the six months
ended March 31, 2019, there have been no material changes to the
Company’s critical accounting policies other than the
adoption of ASU 2014-09, as described in Note
8.
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, 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 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 March 31, 2019 Compared to Three Months Ended
March 31, 2018
Revenue
For
the three months ended March 31, 2019, the Company recognized
revenue from operations of $8,091,242 compared to $7,316,176 for
the three months ended March 31, 2018, an increase of $775,066 or
approximately 11%. 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,
Bahamas, Michigan and Puerto Rico.
Other
revenue for the three months ended March 31, 2019 increased to
$213,839 from $153,971 in the same period in 2018 largely due to
higher sales of products and consumable items.
Cost of Revenue
During the three months ended March 31, 2019, cost
of revenue totaled $3,599,300 compared to cost of revenue during
the three months ended March 31, 2018 of $3,295,508, an increase of
$303,792 or approximately 9%. 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, higher freight costs of $18,736 and higher
device installation costs of $18,083, partially offset by lower
device repair costs of $41,827.
Depreciation and amortization included in cost of
revenue for the three months ended March 31, 2019 and 2018 totaled
$533,590 and $467,666, respectively. These costs represent the
depreciation of ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
certain royalty agreements. 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 March 31, 2019,
gross profit totaled $4,491,942, representing an increase of
$471,274 or approximately 12% compared to the same period last
year, and resulting in a gross margin of approximately 56% compared
to $4,020,668 or a gross margin of approximately 55% during the
three months ended March 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 March 31, 2019, general and administrative
expense totaled $3,316,069 compared to $3,495,343 for the three
months ended March 31, 2018. The decrease of $179,274 or
approximately 5% in general and administrative costs resulted
largely from a decrease in stock based compensation of $367,688,
lower 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.
Selling and Marketing Expense
During
the three months ended March 31, 2019, selling and marketing
expense increased to $576,974 compared to $518,993 for the three
months ended March 31, 2018. The increase in expense of $57,981, or
approximately 11% is principally the result of higher wages and
taxes of $46,750.
Research and Development Expense
During the three months ended March 31, 2019,
research and development expense totaled $354,879 compared to
$182,808 for the three months ended March 31, 2018, an increase of
$172,071 or approximately 94%. The increase resulted
largely from reallocation of $144,564 of wages and higher travel
and entertainment of $19,511. 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 was capitalized as developed
technology during the three months ended March 31, 2019 and
$247,952 was capitalized in the three 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 three months ended March 31, 2019, depreciation and
amortization expense totaled $520,384 compared to $539,537 for the
three months ended March 31, 2018, a decrease of $19,153 or
approximately 4%, which was largely the result of certain property
and equipment assets becoming fully depreciated.
Total Operating Expense
During
the three months ended March 31, 2019, total operating expense
increased nominally to $4,768,306 compared to $4,736,681 for the
three months ended March 31, 2018, an increase of $31,625 or less
than 1%.
Loss from Operations
During
the three months ended March 31, 2019, loss from operations was
$276,364 compared to a loss of $716,013 for the three months ended
March 31, 2018, a decrease of $439,649 or approximately 61%. This
improvement was due to an improvement in gross profit of $471,274,
partially offset by a nominal increase in operating expense of
$31,625.
Other Income and Expense
For the three months ended March 31, 2019, other
income (expense) totaled income of $11,705 compared to expense of
$1,020,472 for the three months ended March 31, 2018, a decrease in
net expense of $1,032,177 or approximately 101%.
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
compared to the second fiscal quarter of 2018.
Net Loss Attributable to Common Shareholders
The Company had net loss attributable to common
shareholders of $264,659 for the three months ended March 31, 2019,
compared to a net loss attributable to common shareholders of
$1,736,485 for the three months ended March 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 of higher 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 certain ReliAlertTM
monitoring
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 increase resulted
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 $1,522,211 compared 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%. This decrease in net
loss is largely due to higher gross profit, lower general and
administrative costs, and lower depreciation and amortization,
partially offset by higher research and development costs and
higher selling and marketing expenses.
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, receipt of
certain disgorgement funds, and from the sale and issuance of
debt securities. As of March 31, 2019, excluding interest,
approximately $3.4 million was owed to Sapinda Asia Limited under a
loan agreement (the “Sapinda
Loan Agreement”) that matures
on September 30, 2020 and $30.4 million was owed to Conrent Invest
S.A. (“Conrent”)
under a loan (the
“Conrent
Loan Agreement”). No borrowings
or sales of equity securities occurred during the six months ended
March 31, 2019 or during the year ended September 30,
2018.
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 to the maturity of the Second Amended
Facility Agreement, no assurances can be given.
Net Cash Flows from Operating Activities.
During the six months ended March
31, 2019, we had cash flows
from operating activities of $1,751,964, compared to cash flows
from operating activities of $1,773,944 for the six months ended March
31, 2018, representing a
decrease of less than 1%. The decrease of cash from operations
was the result of the net loss of $1,999,577, offset by aggregated
non-cash expenses of $2,942,927 in the Condensed Consolidated
Statement of Income. In addition, there was an increase in accrued
liabilities of $1,360,818, partially offset by a decrease in
accounts payable of $122,347, an increase in prepaid expenses and
other assets of $262,552 and an increase in accounts receivable of
$167,305.
Net Cash Flows from Investing Activities.
The Company used $1,407,984 of cash for investing
activities during the six months ended March
31, 2019, compared to
$1,121,825 of cash used during the six months ended March
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 six months ended March 31,
2019.
Net Cash Flows from Financing Activities.
The Company used $18,704 of cash for financing
activities during the six months ended March
31, 2019, compared to $36,632
of cash used in financing activities during the six months ended March
31, 2018.
Liquidity, Working Capital and Management’s Plan
As of March
31, 2019, the Company had
unrestricted cash of $5,665,109, compared to unrestricted cash of
$5,446,557 as of September 30,
2018. As of
March
31, 2019, we had a working
capital deficit of $1,031,602, compared to a working capital
deficit of $30,316,328 as of September 30, 2018. This decrease
in working capital deficit of $29,284,726 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
decrease in cash due to additional capitalized software of
$571,204, purchases of monitoring equipment of $593,758 and
purchases of property and equipment of
$243,022.
The
Company believes 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. In the event that they are not sufficient, the
Company will need to obtain additional funding 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.
Inflation
We
do not believe that inflation has had a material impact on our
historical operations or profitability.
Off-Balance Sheet Financial Arrangements
The
Company has not entered into any transactions with unconsolidated
entities whereby the Company has financial guarantees, derivative
instruments, or other contingent arrangements that expose the
Company to material continuing risks, contingent liabilities, or
any other obligation that provides financing, liquidity, market
risk, or credit risk support to the Company, except as described
below.
|
|
Payments
due in
fiscal year 2019
|
Payments
due in fiscal years 2020-2021
|
Payments
due in fiscal years 2022-2023
|
Total
|
|
Operating
leases
|
$160,124
|
$425,097
|
$164,687
|
$749,908
|
As
of March 31, 2019, the Company’s total future minimum lease
payments under noncancelable operating leases were $749,908. The
Company’s facility leases typically have original terms not
exceeding five years and generally contain multi-year renewal
options.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
The
Company footprint extends to a number of countries outside the
United States, and we intend to continue to examine international
opportunities. As a result, our revenue and results of
operations are affected by fluctuations in currency exchange rates,
interest rates, transfer pricing changes, taxes and other
uncertainties inherent in doing business in more than one
currency. In addition, our operations are exposed to risks
that are associated with changes in social, political, and economic
conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as
well as, to a lesser extent, changes in United States laws and
regulations relating to foreign trade and investment.
Foreign Currency Risks
We
had $6,417,706 and $5,263,868 in revenue from sources outside of
the United States for the six months ended March 31, 2019 and 2018,
respectively. We made and received payments in a foreign
currency during the periods indicated, which resulted in a foreign
exchange expense of $336,767 and of $276,120 in the six months
ended March 31, 2019 and 2018, respectively. Fluctuations in
the exchange loss or gain in any given period are due to the
strengthening or weakening of the U.S. dollar against the Chilean
Peso and Canadian dollar. Changes in currency exchange rates affect
the relative prices at which we sell our products and purchase
goods and services. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations
on our future business, product pricing, results of operations, or
financial condition. We do not use foreign currency exchange
contracts or derivative financial instruments for hedging or
speculative purposes. To the extent foreign sales become a more
significant part of our business in the future, we may seek to
implement strategies which make use of these or other instruments
in order to minimize the effects of foreign currency exchange on
our business.
Item 4. Controls and
Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) to ensure that material information relating to the
Company is made known to the officers who certify our financial
reports and to other members of senior management and the Board of
Directors. These disclosure controls and procedures are designed to
ensure that information required to be disclosed in the reports
that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and
forms.
Under
the supervision and with the participation of management, including
the principal executive officer and principal financial officer, an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 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
March 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 March 31, 2019 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER
INFORMATION
Item 1. Legal Proceedings
We are, 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. Mr. Merrill is seeking not less than
$590,577 plus interest, attorney fees and costs. Mr.
Merrill’s employment with the Company was terminated
effective September 27, 2016. The Company filed an Answer with
Counter Claims on December 21, 2016. The Company filed a motion for
Summary Judgment on January 16, 2018. At a hearing on April 25,
2018, the court dismissed the Plaintiff’s claims related to
an oral look-back agreement and a separation agreement. The court
has not ruled on Plaintiff’s claims related to his employment
agreement. A settlement amount could not be reached by the parties.
The matter will likely proceed to trial after expert discovery is
conducted. We intend to defend the case vigorously and believe the
allegations and claims are without merit.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by Defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social of the then Public Security Department, and
presently, an agency of the National Security Commission of the
Department of the Interior, and SecureAlert, Inc., presently Track
Group, Inc. The Company’s claim amount is upwards of $6.0
million. 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 the conflicting
precedent regarding the jurisdiction of such claims and determined
that such claims will be resolved by the Federal Administrative
Tribunal. Subsequently, Plaintiff filed an Amparo action before the
Collegiate Court, seeking an appeal of the Federal Administrative
Court’s earlier decision against Plaintiff. A decision on the
Amparo action is anticipated in summer 2019. Based upon the fee
arrangement the Company has with its counsel, we anticipate the
future liabilities attributable to legal expenses will be
minimal.
Eli Sabag v. Track
Group, Inc., Sapinda Asia Limited and Lars
Windhorst. On May 4, 2018, Eli Sabag filed a
complaint before the Marion Superior Court in Marion County Indiana
for damages and declaratory Judgment against 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. The
Company believes the allegations are unfounded and without merit,
and it will 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.
Erick Cerda v.
Track Group, 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 of the Civil
Rights Act of 1964 and the Age Discrimination 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. The Company believes that Plaintiff’s
allegations are unfounded and without merit. To avoid 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.
Item 1A. Risk
Factors
Our results of
operations and financial condition are subject to numerous risks
and uncertainties described in our Annual Report on Form 10-K for
our fiscal year ended September 30, 2018, filed on December 19,
2018. 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, 2019, there have been no
material changes to the disclosures made in the above-referenced
Form 10-K.
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior
Securities
None.
Item 4.
Mine Safety Disclosures
Not
applicable.
Item 5. Other
Information
None.
Item 6.
Exhibits
|
(a)
|
Exhibits Required by Item 601 of Regulation S-K
|
|
Exhibit
Number
|
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Title of Document
|
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|
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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.
|
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Certification
of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
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Certification
of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
|
|
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Certifications
under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
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101.INS
|
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XBRL
INSTANCE DOCUMENT
|
|
101.SCH
|
|
XBRL
TAXONOMY EXTENSION SCHEMA
|
|
101.CAL
|
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
101.DEF
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XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
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101.LAB
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XBRL
TAXONOMY EXTENSION LABEL LINKBASE
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101.PRE
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XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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Track Group, Inc.
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Date: May 10, 2019
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By:
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/s/
Derek Cassell
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Derek Cassell, Chief Executive Officer
Principal Executive Officer
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Date: May 10, 2019
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By:
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/s/
Peter K. Poli
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Peter K. Poli, Chief Financial Officer
(Principal Accounting Officer)
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-25-