Track Group, Inc. - Quarter Report: 2020 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, 2020
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ___________ to
____________
Commission file number: 0-23153
Track Group, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
87-0543981
|
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification Number)
|
200 E. 5th Avenue Suite 100, Naperville, IL 60563
(Address of principal executive offices) (Zip
Code)
(877) 260-2010
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer [ ]
|
Accelerated
filer [
]
|
|
Non-accelerated filer [X]
|
Smaller reporting company [X]
|
|
|
Emerging growth company [ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [
]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [
] No [X]
The number of shares outstanding of the registrant’s common
stock as of May 7, 2020 was
11,414,150.
FORM 10-Q
For the Quarterly Period Ended March 31, 2020
INDEX
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27
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PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
March
31,
|
September
30,
|
|
Assets
|
2020
|
2019
|
|
Current assets:
|
(Unaudited)
|
|
|
Cash
|
$7,686,042
|
$6,896,711
|
|
Accounts
receivable, net of allowance for doubtful accounts of $2,580,537
and $2,454,281, respectively
|
4,960,428
|
6,763,236
|
|
Prepaid
expense and deposits
|
1,218,843
|
1,339,465
|
|
Inventory,
net of reserves of $62,147 and $26,934, respectively
|
60,132
|
274,501
|
|
Total
current assets
|
13,925,445
|
15,273,913
|
|
Property
and equipment, net of accumulated depreciation of $2,290,429 and
$2,248,913, respectively
|
532,343
|
675,037
|
|
Monitoring
equipment, net of accumulated amortization of $6,387,123 and
$6,322,768, respectively
|
2,591,391
|
2,624,900
|
|
Intangible
assets, net of accumulated amortization of $15,209,788 and
$14,157,090, respectively
|
21,052,972
|
21,955,679
|
|
Goodwill
|
8,012,536
|
8,187,911
|
|
Deferred
tax asset
|
580,058
|
540,563
|
|
Other
assets
|
594,719
|
124,187
|
|
Total
assets
|
$47,289,464
|
$49,382,190
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
1,560,395
|
2,628,003
|
|
Accrued
liabilities
|
14,420,182
|
13,828,696
|
|
Current
portion of long-term debt
|
3,408,413
|
33,827,689
|
|
Total
current liabilities
|
19,388,990
|
50,284,388
|
|
Long-term
debt, net of current portion
|
30,400,000
|
-
|
|
Long-term
liabilities
|
268,179
|
-
|
|
Total
liabilities
|
50,057,169
|
50,284,388
|
|
|
|
|
|
Commitments and contingencies (Note 21)
|
-
|
-
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares authorized;
11,414,150 and 11,401,650 shares outstanding,
respectively
|
1,141
|
1,140
|
|
Series
A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares
authorized; 0 shares outstanding
|
-
|
-
|
|
Paid
in capital
|
302,270,242
|
302,250,556
|
|
Accumulated
deficit
|
(304,105,976)
|
(302,152,292)
|
|
Accumulated
other comprehensive loss
|
(933,112)
|
(1,001,602)
|
|
Total
equity (deficit)
|
(2,767,705)
|
(902,198)
|
|
Total
liabilities and stockholders’ equity (deficit)
|
$47,289,464
|
$49,382,190
|
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,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue:
|
|
|
|
|
|
Monitoring
and other related services
|
$7,993,092
|
$7,877,403
|
$16,261,515
|
$15,937,731
|
|
Product
sales and other
|
138,634
|
213,839
|
291,042
|
365,046
|
|
Total
revenue
|
8,131,726
|
8,091,242
|
16,552,557
|
16,302,777
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
Monitoring,
products and other related services
|
3,201,677
|
3,065,710
|
6,468,586
|
6,165,903
|
|
Depreciation
and amortization included in cost of revenue
|
494,157
|
533,590
|
981,599
|
1,011,879
|
|
Total cost of
revenue
|
3,695,834
|
3,599,300
|
7,450,185
|
7,177,782
|
|
|
|
|
|
|
|
Gross profit
|
4,435,892
|
4,491,942
|
9,102,372
|
9,124,995
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
General &
administrative
|
2,723,219
|
3,316,069
|
5,735,073
|
6,738,341
|
|
Selling &
marketing
|
642,432
|
576,974
|
1,183,981
|
1,080,904
|
|
Research &
development
|
323,737
|
354,879
|
619,892
|
603,744
|
|
Depreciation &
amortization
|
509,287
|
520,384
|
1,025,226
|
1,035,365
|
|
Total operating
expense
|
4,198,675
|
4,768,306
|
8,564,172
|
9,458,354
|
|
|
|
|
|
|
|
Operating
income (loss)
|
237,217
|
(276,364)
|
538,200
|
(333,359)
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
Interest expense,
net
|
(596,324)
|
(584,348)
|
(1,198,857)
|
(1,185,587)
|
|
Currency exchange
rate gain (loss)
|
(1,334,240)
|
595,910
|
(1,190,932)
|
(336,767)
|
|
Other income
(loss), net
|
(4,347)
|
143
|
(4,347)
|
143
|
|
Total other income (expense)
|
(1,934,911)
|
11,705
|
(2,394,136)
|
(1,522,211)
|
|
Loss
before income taxes
|
(1,697,694)
|
(264,659)
|
(1,855,936)
|
(1,855,570)
|
|
Income
tax expense
|
23,365
|
-
|
97,748
|
144,007
|
|
Net
loss attributable to common shareholders
|
(1,721,059)
|
(264,659)
|
(1,953,684)
|
(1,999,577)
|
|
Foreign currency
translation adjustments
|
132,588
|
(255,981)
|
68,490
|
(159,308)
|
|
Comprehensive
loss
|
$(1,588,471)
|
$(520,640)
|
$(1,885,194)
|
$(2,158,885)
|
|
Net
loss per common share, basic and diluted
|
$(0.15)
|
$(0.02)
|
$(0.17)
|
$(0.18)
|
|
Weighted
average common shares outstanding, basic and diluted
|
11,414,150
|
11,251,650
|
11,336,690
|
11,175,002
|
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, 2019
|
11,401,650
|
$1,140
|
$302,250,556
|
$(302,152,292)
|
$(1,001,602)
|
$(902,198)
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
-
|
-
|
19,687
|
-
|
-
|
19,687
|
|
Issuance
of Common Stock to employees for services
|
12,500
|
1
|
(1)
|
-
|
-
|
-
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
(64,098)
|
(64,098)
|
|
Net
loss
|
-
|
-
|
-
|
(232,625)
|
-
|
(232,625)
|
|
Balance December 31, 2019
|
11,414,150
|
1,141
|
302,270,242
|
(302,384,917)
|
(1,065,700)
|
(1,179,234)
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
132,588
|
132,588
|
|
Net
loss
|
-
|
-
|
-
|
(1,721,059)
|
-
|
(1,721,059)
|
|
Balance March 31, 2020
|
11,414,150
|
$1,141
|
302,270,242
|
(304,105,976)
|
(933,112)
|
(2,767,705)
|
|
|
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)
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2020
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(1,953,684)
|
$(1,999,577)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
2,006,825
|
2,047,244
|
|
Bad
debt expense
|
135,287
|
216,510
|
|
Stock
based compensation
|
19,687
|
108,315
|
|
Loss
on monitoring equipment included in cost of revenue
|
231,226
|
234,091
|
|
Foreign
currency exchange loss
|
1,190,932
|
336,767
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
1,485,269
|
(167,305)
|
|
Prepaid
expense, deposits and other assets
|
(159,705)
|
(262,552)
|
|
Accounts
payable
|
(1,045,796)
|
(122,347)
|
|
Accrued
liabilities
|
624,904
|
1,360,818
|
|
Net
cash provided by operating activities
|
2,534,945
|
1,751,964
|
|
|
|
|
|
Cash flow used in investing activities:
|
|
|
|
Purchase
of property and equipment
|
(62,433)
|
(243,022)
|
|
Capitalized
software
|
(680,730)
|
(571,204)
|
|
Purchase
of monitoring equipment and parts
|
(748,713)
|
(593,758)
|
|
Net
cash used in investing activities
|
(1,491,876)
|
(1,407,984)
|
|
|
|
|
|
Cash flow used in financing activities:
|
|
|
|
Principal
payments on long-term debt
|
(18,137)
|
(18,704)
|
|
Net
cash used in financing activities
|
(18,137)
|
(18,704)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(235,601)
|
(106,724)
|
|
|
|
|
|
Net increase in cash
|
789,311
|
218,552
|
|
Cash, beginning of period
|
6,896,711
|
5,446,557
|
|
Cash, end of period
|
$7,686,042
|
$5,665,109
|
|
Cash
paid for interest
|
$12,441
|
$12,397
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
Non-cash
transfer of inventory to monitoring equipment
|
$659,576
|
$561,044
|
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, 2020, and results of its
operations for the three and six months ended March 31,
2020. These financial statements should be read in conjunction
with the audited annual consolidated financial statements and notes
thereto that are included in the Company’s Annual Report on
Form 10-K for the year ended September 30, 2019, filed with the SEC
on January 10, 2020. The results of operations for the three
and six months ended March 31, 2020 may not be indicative of the
results for the fiscal year ending September 30,
2020.
As
of March 31, 2020, and 2019, the Company had an accumulated deficit
of $304,105,976 and $301,587,916. respectively. The Company
incurred a net loss of $1,953,684 and $1,999,577 for the six months
ended March 31, 2020 and 2019, respectively. The Company may
continue to incur losses and require additional financial
resources. The Company also has debt maturing in September 2020 and
July 2021. The Company’s transition to profitable operations
is dependent upon generating a level of revenue adequate to support
its cost structure, which it has almost achieved, and resolving the
balance sheet. Management has evaluated the significance of these
conditions and has determined that the Company can meet its
operating obligations for a reasonable period of time. The Company
expects to fund operations using cash on hand and through
operational cash flows 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.
Recently Adopted Accounting Standards
In February 2016, FASB issued Accounting Standards
Update (“ASU”) No. 2016-02, “Leases (Topic
842)”.
For lessees, the amendments in this
update require that for all leases not considered to be short term,
a company recognize both a lease liability and right-of-use asset
on its balance sheet, representing the obligation to make payments
and the right to use or control the use of a specified asset for
the lease term. The amendments in this update are effective for
annual periods beginning after December 15, 2018 and interim
periods within those annual periods. The Company adopted ASU
2016-02 on October 1, 2019. See Note 15 for the impact the adoption
had on our consolidated financial position, results of operations
and cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
“Intangibles – Goodwill
and Other: Simplifying the Test for Goodwill
Impairment”. The new
guidance simplifies the subsequent measurement of goodwill by
removing the second step of the two-step impairment test. The
amendment requires an entity to perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The new
guidance will be effective for annual periods or any interim
goodwill impairment tests in fiscal years beginning after December
15, 2019. The amendment should be applied on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company will adopt ASU 2017-04 in fiscal year 2021. Management
does not anticipate that this adoption will have a significant
impact on its consolidated financial position, results of
operations, or cash flows.
In June
2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial
Instruments”. ASU 2016-13 adds a current expected
credit loss (“CECL”) impairment model to U.S.
GAAP that is based on expected losses rather than incurred losses.
Modified retrospective adoption is required with any
cumulative-effect adjustment recorded to retained earnings as of
the beginning of the period of adoption. ASU 2016-13 is effective
for fiscal years beginning after December 15, 2019, including
interim periods within the year of adoption. Early adoption is
permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company
will adopt ASU 2016-13 in fiscal year 2021. The Company does not
expect the application of the CECL impairment model to have a
significant impact on our allowance for uncollectible amounts for
accounts receivable.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The
Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset
may not be recoverable and in the case of goodwill, at least
annually. The Company evaluates whether events and circumstances
have occurred which indicate possible impairment as of each balance
sheet date. If the carrying amount of an asset exceeds its fair
value, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there is an identifiable fair value that is
independent of other groups of assets.
(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions
under the acquisition method of accounting as indicated in ASC
805, “Business
Combinations”, which
requires the acquiring entity in a business combination to
recognize the fair value of all assets acquired, liabilities
assumed, and any non-controlling interest in the acquiree, and
establishes the acquisition date as the fair value measurement
point. Accordingly, the Company recognizes assets acquired and
liabilities assumed in business combinations, including contingent
assets and liabilities and non-controlling interest in the
acquiree, based on fair value estimates as of the date of
acquisition. In accordance with ASC 805, the Company recognizes and
measures goodwill as of the acquisition date, as the excess of the
fair value of the consideration paid over the fair value of the
identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant
to ASC No. 805-10-25, if the initial accounting for a business
combination is incomplete by the end of the reporting period in
which the combination occurs, but during the allowed measurement
period not to exceed one year from the acquisition date, the
Company retrospectively adjusts the provisional amounts recognized
at the acquisition date, by means of adjusting the amount
recognized for goodwill.
Contingent Consideration
In
certain acquisitions, the Company has agreed to pay additional
amounts to sellers contingent upon achievement by the acquired
businesses of certain future goals, which may include revenue
milestones, new customer accounts, and earnings targets. The
Company records contingent consideration based on its estimated
fair value as of the date of the acquisition. The Company evaluates
and adjusts the value of contingent consideration, if necessary, at
each reporting period based on the progress toward and likely
achievement of certain targets on which issuance of the contingent
consideration is based. Any differences between the
acquisition-date fair value and the changes in fair value of the
contingent consideration subsequent to the acquisition date are
recognized in current period earnings until the arrangement is
settled. If there is uncertainty surrounding the value of
contingent consideration, then the Company’s policy is to
wait until the end of the measurement period before making an
adjustment.
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive
income (loss) includes net income (loss) as currently reported
under GAAP and other comprehensive income (loss). Other
comprehensive income (loss) considers the effects of additional
economic events, such as foreign currency translation adjustments,
that are not required to be recorded in determining net income
(loss), but rather are reported as a separate component of
stockholders’ equity. The Chilean Peso, New Israeli Shekel
and the Canadian Dollar are used as functional currencies of the
following operating subsidiaries: (i) Track Group Chile SpA; (ii)
Track Group International Ltd.; and (iii) Track Group Analytics
Limited, respectively. The balance sheets of all subsidiaries have
been converted into United States Dollars at the prevailing
exchange rate at March 31, 2020.
(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 stockholders 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 stockholders 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, 2020, and
2019, there were 685,259 outstanding common share equivalents,
respectively, that were not included in the computation of Diluted
EPS for the three and six months ended March 31, 2020 and 2019,
respectively, as their effect would be anti-dilutive. The common
stock equivalents outstanding as of March 31, 2020 and March 31,
2019 consisted of the following:
|
|
March 31,
|
March 31,
|
|
|
2020
|
2019
|
|
Exercisable
common stock options and warrants
|
685,259
|
685,259
|
|
Total
common stock equivalents
|
685,259
|
685,259
|
At
March 31, 2020 and 2019, all stock option and warrant exercise
prices were above the market price of $0.20 and $0.55,
respectively, and thus have not been included in the basic earnings
per share calculation.
(8) REVENUE RECOGNITION
On
October 1, 2018, the Company adopted ASC 606 using the
modified retrospective method, whereby the adoption did not impact
any prior periods.
Monitoring and Other Related
Services. Monitoring services
include two components: (i) lease contracts pursuant to which the
Company provides monitoring services and lease devices to
distributors or end users and the Company retains ownership of the
leased device; and (ii) monitoring services purchased by
distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
Sales of devices and leased GPS devices are required to use the
Company’s monitoring service and both the GPS leased devices
and monitoring services are accounted for as a single performance
obligation. Monitoring revenue is recognized ratably over
time, as the customer simultaneously receives and consumes the
benefit of these services as they are performed. Payment due or
received from the customers prior to rendering the associated
services are recorded as a contract liability. The balance of the
contract liabilities at March 31, 2020 and September 30, 2019 are
$265,171 and $389,229, respectively, and are included in accrued
liabilities on the Consolidated Balance Sheets. The Company
recognized $50,987 and $124,058, respectively, of deferred revenue
in the three and six months ended March 31, 2020 and $102,532 and
$112,094, respectively, of deferred revenue in the three and six
months ended March 31, 2019.
Product Sales and
Other. The Company sells devices and replacement parts to
customers under certain contracts, as well as law enforcement
software licenses and maintenance, and analytical software. Revenue
from the sale of devices and parts is recognized upon their
transfer of control to the customer, which is generally upon
delivery. Delivery is considered complete at either the time of
shipment or arrival at destination, based on the agreed upon terms
within the contract. Payment terms are generally 30 days from
invoice date.
Multiple Element
Arrangements. The majority of
our revenue transactions do not have multiple elements. However, on
occasion, the Company may enter into revenue transactions that have
multiple elements. These may include different combinations of
products or services that are included in a single billable
rate. These products or services are delivered over time as
the customer utilizes our services. In cases where
obligations in a contract are distinct and thus require separation
into multiple performance obligations, revenue recognition guidance
requires that contract consideration be allocated to each distinct
performance obligation based on its relative standalone selling
price. The value allocated to each performance obligation is then
recognized as revenue when the revenue recognition criteria for
each distinct promise or bundle of promises has been
met.
The
standalone selling price for each performance obligation is an
amount that depicts the amount of consideration to which the entity
expects to be entitled in exchange for transferring the good or
service. When there is only one performance obligation associated
with a contract, the entire sale value is attributed to that
obligation. When a contract contains multiple performance
obligations the transaction value is first allocated using the
observable price, which is generally a list price net of applicable
discount or the price used to sell in similar circumstances. In
circumstances when a selling price is not directly observable, the
Company will estimate the standalone selling price using
information available to us.
The
following table presents the Company’s revenue by geography,
based on management’s assessment of available
data:
|
|
Three
Months Ended
March
31, 2020
|
Three
Months Ended
March
31, 2019
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
United
States
|
$5,426,065
|
67%
|
$4,823,512
|
60%
|
|
Latin
America
|
2,525,623
|
31%
|
3,263,413
|
40%
|
|
Other
|
180,038
|
2%
|
4,317
|
0%
|
|
Total
|
$8,131,726
|
100%
|
$8,091,242
|
100%
|
|
|
Six
Months Ended
March
31, 2020
|
Six
Months Ended
March
31, 2019
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
United
States
|
$10,993,923
|
66%
|
$9,885,071
|
61%
|
|
Latin
America
|
5,263,216
|
32%
|
6,370,966
|
39%
|
|
Other
|
295,418
|
2%
|
46,740
|
0%
|
|
Total
|
$16,552,557
|
100%
|
$16,302,777
|
100%
|
The
above table includes total revenue for the Company, of which
monitoring and other related services is the majority
(approximately 98%) of the Company’s revenue. Latin America
includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin
Islands. Other includes Canada, New Zealand, Saudi Arabia, South
Africa, United Kingdom, and Vietnam.
(9) PREPAID EXPENSE AND DEPOSITS
As
of March 31, 2020, and September 30, 2019, the outstanding balance
of prepaid expense and deposits was $1,218,843 and $1,339,465,
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.
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, 2020, and September 30, 2019,
inventory consisted of the following:
|
|
March 31,
2020
|
September 30,
2019
|
|
Finished
goods inventory
|
$122,279
|
$301,435
|
|
Reserve
for damaged or obsolete inventory
|
(62,147)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$60,132
|
$274,501
|
The Company uses a third-party fulfillment service
provider. As a result of this service, the Company’s
employees do not actively assemble new product or repair damaged
inventory or monitoring equipment shipped directly from suppliers.
Purchases of monitoring equipment are
recognized directly. Management believes this process reduces
maintenance and fulfillment costs associated with inventory and
monitoring equipment. Management reviews inventory regularly to
identify damaged or obsolete inventory and reserves for potential
losses. The Company recorded charges of $0 and $35,123 during the
three and six months ended March 31, 2020, respectively, for
inventory that was obsolete, lost or damaged. Obsolete, lost and
damaged inventory items are included in Monitoring, products &
other related services in the Condensed Consolidated Statement of
Operations.
(11) PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of March 31, 2020 and
September 30, 2019, respectively:
|
|
March 31,
2020
|
September 30,
2019
|
|
Equipment,
software and tooling
|
$1,259,763
|
$1,210,583
|
|
Automobiles
|
4,780
|
5,574
|
|
Leasehold
improvements
|
1,249,367
|
1,393,976
|
|
Furniture
and fixtures
|
308,862
|
313,817
|
|
Total
property and equipment before accumulated depreciation
|
2,822,772
|
2,923,950
|
|
Accumulated
depreciation
|
(2,290,429)
|
(2,248,913)
|
|
Property
and equipment, net of accumulated depreciation
|
$532,343
|
$675,037
|
Property
and equipment depreciation expense for the three months ended March
31, 2020 and 2019 was $77,346 and $87,665, respectively. Property
and equipment depreciation expense for the six months ended March
31, 2020 and 2019 was $160,778 and $167,301,
respectively.
(12) MONITORING EQUIPMENT
The
Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is amortized using the straight-line method over an
estimated useful life of between one and three years. Monitoring
equipment as of March 31, 2020 and September 30, 2019 was as
follows:
|
|
March 31,
2020
|
September 30,
2019
|
|
Monitoring
equipment
|
$8,978,514
|
$8,947,668
|
|
Less:
accumulated amortization
|
(6,387,123)
|
(6,322,768)
|
|
Monitoring
equipment, net of accumulated amortization
|
$2,591,391
|
$2,624,900
|
Amortization
of monitoring equipment for the three months ended March 31, 2020
and 2019 was $367,571 and $406,877, respectively. Amortization of
monitoring equipment for the six months ended March 31, 2020 and
2019 was $728,201 and $761,503, respectively. Amortization expense
for monitoring devices is recognized in cost of revenue. During the
six months ended March 31, 2020 and March 31, 2019, the Company
recorded charges of $231,226 and $234,091, 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, 2020 and
September 30, 2019, respectively:
|
Intangible
assets:
|
March 31,
2020
|
September 30,
2019
|
|
Patent
& royalty agreements
|
$21,170,565
|
$21,170,565
|
|
Developed
technology
|
12,837,145
|
12,685,281
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
316,849
|
318,722
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
36,262,760
|
36,112,769
|
|
Accumulated
amortization
|
(15,209,788)
|
(14,157,090)
|
|
Intangible
assets, net
|
$21,052,972
|
$21,955,679
|
The
intangible assets summarized above were purchased or developed on
various dates from January 2010 through March 31, 2020. The assets
have useful lives ranging from three to twenty years. Amortization
expense for the three months ended March 31, 2020 and 2019 was
$558,527 and $559,433, respectively. Amortization expense for the
six months ended March 31, 2020 and 2019 was $1,117,846 and
$1,118,441, respectively.
(14) GOODWILL
The
following table summarizes the activity of goodwill at March 31,
2020 and September 30, 2019, respectively:
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Balance
- beginning of
period
|
$8,187,911
|
$8,076,759
|
|
Effect
of foreign currency translation on goodwill
|
(175,375)
|
111,152
|
|
Balance
- end of period
|
$8,012,536
|
$8,187,911
|
Goodwill
is recognized in connection with acquisition transactions in
accordance with ASC 805. The Company performs an impairment test
for goodwill annually or more frequently if indicators of potential
impairment exist. No impairment of goodwill was recognized through
March 31, 2020.
(15) LEASES
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified
lease accounting for lessees to create transparency and
comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing
arrangements. The Company adopted the new lease standard utilizing
the modified retrospective transaction method, under which amounts
in prior periods were not restated. For contracts existing at the
time of the adoption, the Company elected not to reassess (a)
whether any are or contain leases, (b) lease classification, and
(c) initial direct costs. Upon adoption on October 1, 2019, the
Company recorded $597,289 right of use assets and lease
liabilities. The adoption of the new standard did not impact the
Company’s Statements of Operations or Statements of Cash
Flows.
The
following table shows right of use assets and lease liabilities and
the associated financial statement line items as of March 31,
2020.
|
|
Operating
lease asset
|
Operating
lease liability
|
|
|
|
|
|
Other
assets
|
471,695
|
-
|
|
Accrued
liabilities
|
-
|
203,517
|
|
Long-term
liabilities
|
-
|
268,178
|
|
|
$471,695
|
$471,695
|
The
following table summarizes the supplemental cash flow information
for the six months ended March 31, 2020:
|
|
March 31,
2020
|
|
Cash
paid for noncancelable operating leases included in operating cash
flows
|
$190,370
|
|
|
|
|
Right of use assets
obtained in exchange for operating lease liabilities:
|
$-
|
The
future minimum lease payments under noncancelable operating leases
with terms greater than one year as of March 31, 2020
are:
|
|
Operating
Leases
|
|
From April 2020 to
September 2020
|
$120,138
|
|
From October 2020
to September 2021
|
228,039
|
|
From October 2021
to September 2022
|
166,049
|
|
From October 2022
to September 2023
|
3,612
|
|
Undiscounted Cash
Flow
|
517,838
|
|
Less: imputed
interest
|
(46,143)
|
|
Total
|
$471,695
|
|
Reconciliation to
lease liabilities:
|
|
|
Lease liabilities -
current
|
$203,517
|
|
Lease liabilities -
long-term
|
268,178
|
|
Total Lease
Liabilities
|
$471,695
|
The
weighted-average remaining lease term and discount rate related to
the Company’s lease liabilities as of March 31, 2020 were 2.3
years and 8%, respectively. The Company’s lease discount
rates are generally based on the estimates of its incremental
borrowing rate as the discount rates implicit in the
Company’s leases cannot be readily determined.
(16) ACCRUED LIABILITES
Accrued
liabilities consisted of the following as of March 31, 2020 and
September 30, 2019, respectively:
|
|
March 31,
2020
|
September 30,
2019
|
|
Accrued
payroll, taxes and employee benefits
|
$1,340,704
|
$1,680,634
|
|
Deferred
revenue
|
265,171
|
389,229
|
|
Deposits
payable
|
10,000
|
10,000
|
|
Accrued
taxes - foreign and domestic
|
976,182
|
1,071,532
|
|
Accrued
other expense
|
147,243
|
170,055
|
|
Accrued
legal costs
|
863,047
|
1,057,305
|
|
Accrued
costs of revenue
|
339,118
|
251,262
|
|
Accrued
bond guarantee
|
-
|
142,405
|
|
Right
of use liability
|
203,517
|
-
|
|
Accrued
interest
|
10,275,200
|
9,056,274
|
|
Total
accrued liabilities
|
$14,420,182
|
$13,828,696
|
(17) DEBT OBLIGATIONS
On February 24, 2019,
the Company and Conrent Invest S.A. (“Conrent”)
entered into a second amendment to their Facility Agreement (the
“Second Amended
Facility Agreement”), which Second
Amended Facility Agreement (i) extends the maturity date of the
Facility to the earlier of either April 1, 2020 or the date upon
which the outstanding principal amount is repaid by the Company,
and (ii) provides that in the event of a change of control of the
Company, Conrent shall immediately cancel the Second Amended Credit
Facility and declare the outstanding principal amount, together
with unpaid interest, immediately due and payable.
On December 4, 2019, the Company
requested that Conrent extend the maturity of the Amended Facility
Agreement from April 1, 2020 to July 1, 2021. On January 6,
2020, the investors who owned the securities from Conrent used to
finance the debt (the “Noteholders”) held a meeting to address the
Company’s request. On January 7, 2020, Conrent notified the
Company in writing that the Noteholders agreed to extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 10, 2020, the Company and Conrent entered
into an amendment to the Facility Agreement which extends the
maturity of the Facility to July 1, 2021.
Debt
obligations as of March 31, 2020 and September 30, 2019,
respectively, are comprised of the following:
|
|
March 31,
2020
|
September 30,
2019
|
|
|
|
|
|
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 July 1, 2021. The Company
did not pay interest on this loan during the six months ended March
31, 2020.
|
$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 acquisition.
|
8,769
|
28,045
|
|
|
|
|
|
Total
debt obligations
|
33,808,413
|
33,827,689
|
|
Less
current portion
|
(3,408,413)
|
(33,827,689)
|
|
Long-term
debt, net of current portion
|
$30,400,000
|
$-
|
The
following table summarizes future maturities of debt obligations as
of March 31, 2020:
|
Twelve-month period ended March 31,
|
Total
|
|
|
|
|
2021
|
$3,408,413
|
|
2022
|
30,400,000
|
|
Thereafter
|
-
|
|
Total
|
$33,808,413
|
(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 stockholder 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, 2020, there were no shares of
preferred stock outstanding.
No
dividends were paid during the three- and six-month periods ended
March 31, 2020 or 2019, 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, 2020, no shares of Series A Preferred were issued
and outstanding.
(19)
STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting
of stockholders on March 21, 2011, our stockholders approved the
2012 Equity Compensation Plan (the “2012
Plan”). The 2012
Plan provides for the grant of incentive stock options and
nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units, other stock-based awards and performance-based awards to
employees and certain non-employees who provide services to the
Company in lieu of cash. A total of 90,000 shares were initially
authorized for issuance pursuant to awards granted under the 2012
Plan. At the 2015 annual meeting of stockholders 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 March 31, 2019, the Board of Directors suspended further
awards under the 2012 Plan until further notice. The Company
recorded expense of $19,687 and $87,083 for the six months ended
March 31, 2020 and 2019, respectively, related to the vesting of
common stock awarded prior to the suspension of the 2012 Plan.
There were 27,218 shares of common stock available for issuance
under the 2012 Plan as of March 31, 2020.
All Options and Warrants
The
fair value of each stock option and warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model.
During the six months ended March 31, 2020 and 2019, the Company
granted no 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 $0 and
$21,232 for the six months ended March 31, 2020 and 2019,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
All options
and warrants have vested and are exercisable at March 31, 2020 and
no future issuances are expected.
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, 2020 is presented below:
|
|
Shares Under Option
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life
|
Aggregate Intrinsic Value
|
|
Outstanding
as of September 30, 2019
|
685,259
|
$1.56
|
2.9
years
|
$-
|
|
Granted
|
-
|
$-
|
-
|
-
|
|
Expired/Cancelled
|
-
|
$-
|
-
|
-
|
|
Exercised
|
-
|
$-
|
-
|
-
|
|
Outstanding
as of March 31, 2020
|
685,259
|
$1.56
|
2.4
years
|
$-
|
|
Exercisable
as of March 31, 2020
|
685,259
|
$1.56
|
2.4
years
|
$-
|
The
intrinsic value of options and warrants outstanding and exercisable
is based on the Company’s share price of $0.20 at March 31,
2020.
(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, 2020 and 2019, the Company incurred
a net loss for income tax purposes of $1,953,684 and $1,999,577,
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
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. 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. The Supreme Court took action to resolve previous,
conflicting decisions 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. The Collegiate Court issued a ruling in August 2019 that
the matter of dispute was previously resolved by a lower court in
2016. The Company disagrees with this ruling and is exploring its
options going forward. Based upon the fee arrangement the Company
has with its counsel, we anticipate the future liabilities
attributable to legal expense will be minimal.
Blaike Anderson v.
Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson
filed a complaint seeking unspecified damages in the State Court of
Marion County, Indiana, alleging liability on the part of
defendants for providing a defective ankle monitoring device and
failure to warn plaintiff regarding the condition thereof. The
Company removed the matter to federal court and subsequently filed
its answer denying Plaintiff’s allegations in August 2019.
Discovery is currently ongoing. The Company intends to vigorously
defend the case.
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and is pursuing such a ruling before the
Court.
Eli Sabag v. Track
Group, Inc., et al. On March 12, 2020, Eli Sabag commenced
an arbitration with the International Centre for Dispute
Resolution, Case Number 01-20-0003-6931. The arbitration claim, as
it pertains to the Company, alleges breach of the Share Purchase
Agreement (“SPA”) between the Company
and Sabag. Sabag alleges the that the Company breached the SPA
because it failed to pay him his earn-out after it sold or leased a
sufficient number of GPS Global Tracking devices to meet the
earn-out milestone, or alternatively, breached the SPA by failing
to act in “good faith” to allow Sabag to achieve his
earn-out. Sabag further claims that the Company fraudulently
induced Sabag to sell GPS Global Tracking and Surveillance System
Ltd. to the Company. The Company has entered its appearance and
intends to vigorously defend against the allegations.
(22) SUBSEQUENT EVENTS
Currently, the
Company and the Chilean Prison System (“GENCHI”) are operating a
monitoring program under a one-year contract that expires in
October 2020 and contains automatic monthly renewals (the
“Program”). In
March 2020, GENCHI issued an Intent to Award the Program to a
competitor of the Company based on a request for proposal
(“RFP”) process
run in 2017 and delayed by litigation. To confirm the Intent to
Award, the competitor must implement the new system successfully.
If the competitor fails to do so, then GENCHI has the authority to
award the new program to the next highest scoring company in the
RFP process, which would be the Company. Given all of the
uncertainty, the time required for implementation is difficult to
determine; however, the Company is estimating that the competitor
may require up to fifteen months to complete. During this period,
the Company will continue to provide services and be paid by
GENCHI. This customer provided approximately 25% of the
Company’s revenue in fiscal year 2019 and approximately 22%
of the Company’s revenue during the first six months of
fiscal year 2020. The Company is continually pursuing additional
domestic and international customers and management believes
revenue from new customers and growth from existing customers could
offset a portion and potentially all the lost revenue from the
Program in Chile, although no assurances can be given.
The
ramifications of the coronavirus (“COVID-19”) outbreak reported to
have started in December 2019 and spread globally are filled with
uncertainty and changing quickly. As of May 7, 2020, the Company
has not been materially adversely impacted by the COVID-19 pandemic
for several reasons. The monitoring being performed by the
Company’s customers across the globe are considered essential
services and remain operational. Furthermore, at this time,
the Company has not experienced unusual payment interruptions from
any large customers and the Company’s employees are all
working principally from home. Also, the Company has experienced an
uptick in demand in the U.S. as government agencies transition
certain offenders in confinement to our electronic monitoring
services to assist in combatting the spread of the coronavirus.
These positive changes have been partially offset by declines in
Chile revenue caused by limitations in the Chile court system due
to COVID-19.
However, the
Company is operating in a rapidly changing environment so the
extent to which COVID-19 impacts its business, operations and
financial results from this point forward will depend on numerous
evolving factors that the Company cannot accurately predict. Those
factors include the following: the duration and scope of the
pandemic; governmental, business and individuals’ actions
that have been and continue to be taken in response to the
pandemic; the development of widespread testing or a vaccine; the
ability of our supply chain to meet the Company’s need for
equipment; the ability to sell and provide services and solutions
if shelter in place restrictions and people working from home are
extended to ensure employee safety; the strengthening of the U.S.
dollar and subsequent impact on foreign operations; and any
closures of clients’ offices or the courts on which they
rely.
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, 2019, and Current
Reports on Form 8-K that have been filed with the SEC through the
date of this Report. Except as otherwise indicated, as used in this
Report, the terms the “Company”,
“Track Group”, “we”, “our”, and “us” refer to Track Group, Inc., a Delaware
corporation.
General
Our core business is
based on the leasing of patented tracking and monitoring solutions
to federal, state and local law enforcement agencies, both in the
U.S and abroad, for the electronic monitoring of offenders and
offering unique data analytics services on a platform-as-a-service
(“PaaS”)
business model. Currently, we deploy offender-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.
Other
Services. The Company offers
smartphone applications specifically designed for the criminal
justice market, including a domestic violence app that creates a
mobile geo-zone around a survivor and an alcohol monitoring app
linked to a police-grade breathalyzer.
Business Strategy
We are committed to helping our customers improve
offender rehabilitation and re-socialization outcomes through our
innovative hardware, software, and services. We treat our
business as a service business. Although we still manufacture
patented tracking technology, we see the physical goods as only a
small part of the integrated offender monitoring solutions we
provide. Accordingly, rather than receiving a payment just for a
piece of manufactured equipment, the Company receives a recurring
stream of revenue for ongoing device agnostic subscription
contracts. As part of our strategy, we continue to expand our
device-agnostic platform to not
only collect, but also store, analyze, assess and correlate
location data for both accountability and auditing reasons, as well
as to use for predictive analytics and assessment of effective and
emerging techniques in criminal behavior and rehabilitation.
We believe a high-quality customer
experience with knowledgeable salespersons who can convey the value
of our products and services greatly enhances our ability to
attract and retain customers. Therefore, our strategy also includes
building and expanding our own direct sales force and our
third-party distribution network to effectively reach more
customers and provide them with a world-class sales and post-sales
support experience. In addition, we are developing related-service
offerings to address adjacent market opportunities in both the
public and private sectors. We believe continual investment in
research and development (“R&D”), including smartphone applications and
other monitoring services is critical to the development and sale
of innovative technologies and integrated solutions today and in
the future.
Critical Accounting Policies
From
time to time, management reviews and evaluates certain accounting
policies that are considered to be significant in determining our
results of operations and financial position.
A description of the
Company’s critical accounting policies that affect the
preparation of the Company’s financial statements is set
forth in the Company’s Annual Report on Form 10-K for the
year ended September 30, 2019,
filed with the SEC on January 10, 2020. During the six months
ended March 31, 2020, there have been no material changes to the
Company’s critical accounting policies, except as noted
below.
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) "ASC Topic 842" which modified lease
accounting for lessees to create transparency and comparability by
recording lease assets and liabilities for operating leases and
disclosing key information about leasing arrangements. See
Note 15.
The
preparation of financial statements requires management to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expense. By their
nature, these judgments are subject to an inherent degree of
uncertainty. We assess the reasonableness of our estimates,
including those related to bad debts, inventories, right of use
assets, estimated useful lives, intangible assets, warranty
obligations, product liability, revenue, legal matters and income
taxes. We base our estimates on historical experience as well as
available current information on a regular basis. Management
uses this information to form the basis for making judgments about
the carrying value of assets and liabilities. Actual results
may differ from these estimates under different assumptions or
conditions.
Government Regulation
Our
operations are subject to various federal, state, local and
international laws and regulations. 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, 2020 Compared to Three Months Ended
March 31, 2019
Revenue
For
the three months ended March 31, 2020, the Company recognized
revenue from operations of $8,131,726 compared to $8,091,242 for
the three months ended March 31, 2019, an increase of $40,484 or
less than 1%. The $40,484 increase in revenue was principally
the result of an increase in growth driven by clients in Illinois,
Washington DC and Puerto Rico, partially offset by lower revenue in
Chile. The decrease in revenue in Chile is largely due to the
strengthening U.S. dollar, which amounts to $380,933 when compared
to the second fiscal quarter of 2019. See Note 22 for additional
information on the Company’s Chilean
customer.
Other
revenue for the three months ended March 31, 2020 decreased to
$138,634 from $213,839 in the same period in 2019, a decrease of
$75,205, largely due to lower product sales.
Cost of Revenue
During the three months ended March 31, 2020, cost
of revenue totaled $3,695,834 compared to cost of revenue during
the three months ended March 31, 2019 of $3,599,300, an increase of
$96,534 or approximately 3%. The increase in cost of
revenue was largely the result
of higher monitoring costs of $154,953, higher server costs of
$59,282, higher commission expense of $57,981 and higher hardware
costs of $20,311, partially offset by lower communication costs of
$161,197 and lower depreciation expense of
$39,433.
Depreciation and amortization included in cost of
revenue for the three months ended March 31, 2020 and 2019 totaled
$494,157 and $533,590, respectively. These costs represent the
depreciation of ReliAlert™ and other monitoring
devices, as well as the amortization of monitoring software and
certain royalty agreements. The
decrease of $39,433 primarily represents a decrease in device
amortization due to additional fully amortized devices, partially
offset by an increase in the number of
devices. We believe the
equipment lives on which the depreciation is based are appropriate
due to rapid changes in electronic monitoring technology and the
corresponding potential for obsolescence. Management
periodically assesses the useful life of the devices for
appropriateness. Amortization of a patent related to GPS and
satellite tracking is also included in cost of
sales.
Gross Profit and Margin
During
the three months ended March 31, 2020, gross profit totaled
$4,435,892 representing a decrease of $56,050 or approximately 1%
compared to the same period last year, and resulting in a gross
margin of approximately 55% compared to $4,491,942 or a gross
margin of approximately 56% during the three months ended March 31,
2019.
General and Administrative Expense
During
the three months ended March 31, 2020, general and administrative
expense totaled $2,723,219 compared to $3,316,069 for the three
months ended March 31, 2019. The decrease of $592,850 or
approximately 18% in general and administrative costs resulted
largely from lower legal and professional fees of $597,234, lower
bad debt expense of $99,984 and lower stock-based compensation of
$25,097, partially offset by higher wages and related taxes of
$163,139.
Selling and Marketing Expense
During
the three months ended March 31, 2020, selling and marketing
expense increased to $642,432 compared to $576,974 for the three
months ended March 31, 2019. The increase in expense of $65,458, or
approximately 11% is principally the result of higher consulting
and outside services of $83,657 and higher payroll and taxes of
$36,682, partially offset by lower travel and entertainment expense
of $24,654 and lower trade show expense of $17,407.
Research and Development Expense
During the three months ended March 31, 2020,
research and development expense totaled $323,737 compared to
$354,879 for the three months ended March 31, 2019, a decrease of
$31,142 or approximately 9%. The decrease resulted
largely from lower payroll and taxes of $39,450, partially offset
by higher dues and subscriptions of $9,038. 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, $339,108 was
capitalized as developed technology during the three months ended
March 31, 2020 and $295,581 was capitalized in the three months
ended March 31, 2019. 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, 2020, depreciation and
amortization expense totaled $509,287 compared to $520,384 for the
three months ended March 31, 2019, a decrease of $11,097 or
approximately 2%, largely due to fully depreciated
assets.
Total Operating Expense
During
the three months ended March 31, 2020, total operating expense
decreased to $4,198,675 compared to $4,768,306 for the three months
ended March 31, 2019, a decrease of $569,631 or approximately
12%.
Operating income (loss)
During
the three months ended March 31, 2020, operating income was
$237,217 compared to an operating loss of $276,364 for the three
months ended March 31, 2019, an improvement of $513,581. This
improvement was due to a decrease in operating expense of $569,631,
partially offset by a decrease in gross profit of
$56,050.
Other Income and Expense
For the three months ended March 31, 2020, other
income (expense) totaled ($1,934,911) compared to income of $11,705
for the three months ended March 31, 2019, an increase in net
expense of $1,946,616. The increase in other
expense is largely due to negative currency exchange rate movements
of $1,930,150 compared to the second fiscal quarter of
2019.
Net Loss Attributable to Common Stockholders
The Company had net loss attributable to common
stockholders of $1,721,059 for the three months ended March 31,
2020, compared to a net loss attributable to common stockholders of
$264,659 for the three months ended March 31, 2019, an increase in
net loss of $1,456,400. This increase in net
loss is largely due to negative currency exchange rate movements,
partially offset by lower operating expense.
Six Months Ended March 31, 2020 Compared to Six Months Ended March
31, 2019
Revenue
For
the six months ended March 31, 2020, the Company recognized revenue
from operations of $16,552,557, compared to $16,302,777 for the six
months ended March 31, 2019, an increase of $249,780 or
approximately 2%. Of this revenue, $16,261,515 and
$15,937,731, respectively, were from monitoring and other related
services, an increase of $323,784 or approximately 2%. The
increase in revenue was principally the result of an increase in
total growth of our North American monitoring operations
driven by clients in Illinois, Washington DC, Puerto Rico, Nevada
and Michigan, partially offset by our customers in Mexico and
Chile. The decrease in revenue in Chile is largely due to the
strengthening U.S. dollar, which amounts to $621,053 when compared
to the same period in 2019. See Note 22 for additional
information on the Company’s Chilean
customer.
Other
revenue for the six months ended March 31, 2020 decreased to
$291,042 from $365,046 in the same period in 2019 largely due to
lower sales of products, partially offset by higher sales of
consumable items.
Cost of Revenue
During the six months ended March 31, 2020, cost
of revenue totaled $7,450,185 compared to cost of revenue during
the six months ended March 31, 2019 of $7,177,782, an increase of
$272,403 or approximately 4%. The increase in cost of
revenue was largely the result of monitoring costs of
$249,178, higher commission costs of $112,381, higher server costs
of $86,681 and higher hardware costs of $47,174, partially offset
by lower communication costs of
$199,672 and lower depreciation of monitoring devices of $30,280,
due to an increase in fully depreciated
devices.
Depreciation and amortization included in cost of
revenue for the six months ended March 31, 2020 and 2019 totaled
$981,599 and $1,011,879, respectively. This $30,280 or
approximately 3% decrease in costs represents additional fully
depreciated monitoring devices,
partially offset by 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, 2020, gross
profit totaled $9,102,372, resulting in a gross margin of
approximately 55%, compared to $9,124,995, or a gross margin of
approximately 56% during the six months ended March 31,
2019. The decrease in
absolute gross profit of $22,623 or less than 1% is due to nominal
increases in certain costs of revenue, including monitoring
activity, commission costs, server costs and accelerated
depreciation of devices, largely offset by increased
revenue.
General and Administrative Expense
During
the six months ended March 31, 2020, general and administrative
expense totaled $5,735,073 compared to $6,738,341 for the six
months ended March 31, 2019. The decrease of $1,003,268 or
approximately 15% in general and administrative costs resulted
largely from a lower legal and professional fees of $863,881, a
decrease in stock based compensation of $88,627, lower fees and
licenses of $63,737 and lower outside services of $41,991,
partially offset by higher insurance costs of $82,783.
Selling and Marketing Expense
During
the six months ended March 31, 2020, selling and marketing expense
totaled $1,183,981 compared to $1,080,904 for the six months ended
March 31, 2019. The $103,077, or approximately 10% increase
resulted largely from higher outside services and consulting of
$119,540, higher wages and related taxes of $36,779, partially
offset by lower travel and entertainment expense of
$41,638.
Research and Development Expense
During the six months ended March 31, 2020,
research and development expense totaled $619,892 compared to
research and development expense for the six months ended March 31,
2019 totaling $603,744, an increase of $16,148 or approximately 3%.
The increase resulted
largely from increased dues and subscriptions of $22,730. 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, $680,730 was
capitalized as developed technology during the six months ended
March 31, 2020 and $571,204 was capitalized during the six months
ended March 31, 2019. 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, 2020, depreciation and amortization
expense totaled $1,025,226 compared to $1,035,365 for the six
months ended March 31, 2019. The $10,139 or approximately 1%
decrease was largely the result of certain property and equipment
assets becoming fully depreciated.
Total Operating Expense
During the six months ended March 31, 2020, total
operating expense decreased to $8,564,172 compared to
$9,458,354 for the six months ended
March 31, 2019, a decrease of $894,182 or approximately 9%. The
decrease was largely due to lower general and administrative
expense of $1,003,268 and lower depreciation and amortization of
$10,139. These costs were partially offset by higher selling and
marketing expense of $103,077, and higher research and development
expense of $16,148.
Operating income (loss)
During the six months ended March 31, 2020,
operating income was $538,200 compared to an operating loss of
$333,359 for the six months
ended March 31, 2019, an improvement of $871,559 or approximately
261%. This improvement was due to a reduction in operating expense
of $894,182 partially offset by a decrease in gross profit of
$22,623.
Other Income and Expense
For the six months
ended March 31, 2020, other
income (expense) totaled expense of $2,394,136 compared to expense of
$1,522,211 for the six months ended March 31, 2019. The
increase in expense of $871,925 in net other expense resulted
primarily to negative currency exchange rate movements of $854,165
and higher interest expense, net of $13,270.
Net Loss Attributable to Common Shareholders
The
Company had a net loss from continuing operations for the six
months ended March 31, 2020 totaling $1,953,684 compared to a net
loss of $1,999,577 for the six months ended March 31, 2019,
representing a nominal reduction in the loss of $45,893 or
approximately 2%.
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 stockholders, receipt of
certain disgorgement funds, and from the sale and issuance of
debt securities. Subsequently, the Company was self-funded through
net cash provided by operating activities. As of March 31, 2020,
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”) that matures
on July 1, 2021. No borrowings or sales of equity securities
occurred during the six months ended March 31, 2020 or during the
year ended September 30, 2019.
Net Cash Flows from Operating Activities.
During the six months ended March 31,
2020, we had cash flows from
operating activities of $2,534,945, compared to cash flows from
operating activities of $1,751,964 for the six months ended March
31, 2019, representing a
$782,981 increase of approximately 45%. The increase in cash
from operations was the result of an improvement in operating
performance, excluding non-cash adjustments, of $1,630,273 in net
income compared to the quarter one year ago of $943,350, an
increase of $686,923. This was augmented by a decrease in accounts
receivable and a decline accounts payable.
Net Cash Flows from Investing Activities.
The Company used $1,491,876 of cash for investing
activities during the six months ended March
31, 2020, compared to
$1,407,984 of cash used during the six months ended March
31, 2019. 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, 2020.
Purchases of property and equipment decreased $180,589, compared to
the prior period, largely due to a decrease in leasehold
improvements.
Net Cash Flows from Financing Activities.
The Company used $18,137 of cash for financing
activities during the six months ended March
31, 2020, compared to $18,704
of cash used in financing activities during the six months ended March
31, 2019.
Liquidity, Working Capital and
Management’s Plan
As of March
31, 2020, the Company had
unrestricted cash of $7,686,042 compared to unrestricted cash of
$6,896,711 as of September 30,
2019. As of
March
31, 2020, we had a working
capital deficit of $5,463,545, compared to a working capital
deficit of $35,010,475 as of September 30, 2019. This decrease
in working capital deficit of $29,546,930 is due to the extension
of the $30,400,000 Conrent Amended Facility and cash provided by
operations, partially offset by an increase in accrued liabilities,
largely due to interest payable, purchases of monitoring equipment
and capitalized software.
On
December 4, 2019, the Company requested that Conrent extend the
maturity of the Amended Facility Agreement from April 1, 2020 to
July 1, 2021. On January 6,
2020, the investors who owned the securities from Conrent used to
finance the debt (the “Noteholders”) held a meeting to
address the Company’s request. On January 7, 2020, Conrent
notified the Company in writing that the Noteholders agreed to
extend the maturity of the Amended Facility Agreement from April 1,
2020 to July 1, 2021. On January 10, 2020, the Company and Conrent
entered into an amendment to the Facility Agreement which extends
the maturity of the Facility to July 1, 2021.
On
March 13, 2017, the Company successfully extended the Sapinda Loan
Agreement from September 30, 2017 to September 30, 2020. The
Company intends to explore an additional extension of the Sapinda
Loan Agreement or, if an extension is unavailable, to pay the loan
amount from existing funds.
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.
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 $5,558,634 and $6,417,706 in revenue from sources outside of
the United States for the six-months ended March 31, 2020 and 2019,
respectively. We made and received payments in a foreign
currency during the periods indicated, which resulted in foreign
exchange expense of $1,190,932 and foreign exchange expense of
$336,767 in the six months ended March 31, 2020 and 2019,
respectively. Fluctuations in the exchange loss or gain in any
given period are due to the strengthening or weakening of the U.S.
dollar against the Chilean Peso and Canadian dollar which have been
magnified by the coronavirus. Changes in currency exchange rates
affect the relative prices at which we sell our products and
purchase goods and services. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations
on our future business, product pricing, results of operations, or
financial condition. We do not use foreign currency exchange
contracts or derivative financial instruments for hedging or
speculative purposes. To the extent foreign sales become a more
significant part of our business in the future, we may seek to
implement strategies which make use of these or other instruments
in order to minimize the effects of foreign currency exchange on
our business.
Item 4. 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, 2020 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, 2020.
Changes in Internal Controls
We
maintain a system of internal control over financial reporting that
is designed to provide reasonable assurance that our books and
records accurately reflect our transactions and that our
established policies and procedures are followed. There was no
change in our internal control over financial reporting during our
quarter ended March 31, 2020 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER
INFORMATION
Item 1. Legal
Proceedings
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. 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. The Supreme Court took action to resolve previous,
conflicting decisions 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. The Collegiate Court issued a ruling in August 2019 that
the matter of dispute was previously resolved by a lower court in
2016. The Company disagrees with this ruling and is exploring its
options going forward. Based upon the fee arrangement the Company
has with its counsel, we anticipate the future liabilities
attributable to legal expense will be minimal.
Blaike Anderson v.
Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson
filed a complaint seeking unspecified damages in the State Court of
Marion County, Indiana, alleging liability on the part of
defendants for providing a defective ankle monitoring device and
failure to warn plaintiff regarding the condition thereof. The
Company removed the matter to federal court and subsequently filed
its answer denying Plaintiff’s allegations in August 2019.
Discovery is currently ongoing. The Company intends to vigorously
defend the case.
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and is pursuing such a ruling before the
Court.
Eli Sabag v. Track
Group, Inc., et al. On March 12, 2020, Eli Sabag commenced
an arbitration with the International Centre for Dispute
Resolution, Case Number 01-20-0003-6931. The arbitration claim, as
it pertains to the Company, alleges breach of the Share Purchase
Agreement (“SPA”) between the Company
and Sabag. Sabag alleges the that the Company breached the SPA
because it failed to pay him his earn-out after it sold or leased a
sufficient number of GPS Global Tracking devices to meet the
earn-out milestone, or alternatively, breached the SPA by failing
to act in “good faith” to allow Sabag to achieve his
earn-out. Sabag further claims that the Company fraudulently
induced Sabag to sell GPS Global Tracking and Surveillance System
Ltd. to the Company. The Company has entered its appearance and
intends to vigorously defend against the allegations.
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, 2019, filed on January 10,
2020. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of May 7, 2020, there have been no
material changes to the disclosures made in the above-referenced
Form 10-K, other than set forth below.
COVID-19 could affect our sales and disrupt our operations and
could have a material adverse impact on us.
The coronavirus (“COVID-19”) that was reported to have surfaced in
December 2019 and that has spread worldwide, could adversely impact
the Company’s operations or those of our third-party
suppliers, as well as our sales to customers. The extent to which
the coronavirus impacts the Company’s operations, those of
our third-party suppliers or our customers will depend on future
developments, which are highly uncertain and cannot be predicted
with confidence. If the Company, or any of our third-party
suppliers encounter any disruptions to our or their respective
operations or facilities, or if our customers were to partially or
fully close for an extended period of time due to the coronavirus
then we or they may be prevented or delayed from effectively
operating our or their business, respectively, and the manufacture,
supply, and sale of our services and our financial results could be
adversely affected.
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
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(a)
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Exhibits Required by Item 601 of Regulation S-K
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Exhibit
Number
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Title of Document
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|
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|
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Certification
of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act
of 2002 (filed herewith).
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|
|
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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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|
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101.INS
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|
XBRL
INSTANCE DOCUMENT
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|
101.SCH
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|
XBRL
TAXONOMY EXTENSION SCHEMA
|
|
101.CAL
|
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
101.DEF
|
|
XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
101.LAB
|
|
XBRL
TAXONOMY EXTENSION LABEL LINKBASE
|
|
101.PRE
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|
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
|
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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||
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Date: May 7, 2020
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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 7, 2020
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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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-27-