UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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:
NoneIndicate 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 ☒ 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 ☒ 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 | ☒ | Smaller reporting company | ☒ |
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 ☒
The number of shares outstanding of the registrant’s common stock as of February 1,
FORM 10-Q
For the Quarterly Period Ended December 31, 2020
INDEX
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) December 31, 2021 | September 30, 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 8,599,296 | $ | 8,421,162 | ||||
Accounts receivable, net of allowance for doubtful accounts of $43,359 and $91,262, respectively | 6,490,046 | 7,163,615 | ||||||
Prepaid expense and deposits | 1,040,711 | 998,589 | ||||||
Inventory, net of reserves of $0 and $0, respectively | 647,070 | 305,210 | ||||||
Total current assets | 16,777,123 | 16,888,576 | ||||||
Property and equipment, net of accumulated depreciation of $2,601,242 and $2,615,967, respectively | 198,689 | 202,226 | ||||||
Monitoring equipment, net of accumulated depreciation of $6,153,405 and $5,977,093, respectively | 3,020,456 | 3,068,100 | ||||||
Intangible assets, net of accumulated amortization of $18,453,714 and $17,607,457, respectively | 19,685,985 | 20,434,143 | ||||||
Goodwill | 8,658,772 | 8,519,998 | ||||||
Deferred tax asset | 0 | 101,159 | ||||||
Other assets | 4,131,835 | 4,309,040 | ||||||
Total assets | $ | 52,472,860 | $ | 53,523,242 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,619,448 | $ | 2,821,982 | ||||
Accrued liabilities | 3,961,682 | 4,350,030 | ||||||
Current portion of long-term debt | 502,463 | 526,134 | ||||||
Total current liabilities | 7,083,593 | 7,698,146 | ||||||
Long-term debt, net of current portion | 43,309,260 | 43,452,216 | ||||||
Long-term liabilities | 31,463 | 3,650 | ||||||
Total liabilities | 50,424,316 | 51,154,012 | ||||||
Commitments and contingencies (Notes 16 and 23) | ||||||||
| - | - | |||||||
Stockholders’ equity: | ||||||||
Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,541,452 and 11,524,978 shares outstanding, respectively | 1,154 | 1,152 | ||||||
Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | 0 | 0 | ||||||
Paid in capital | 302,258,446 | 302,250,954 | ||||||
Accumulated deficit | (299,133,849 | ) | (298,828,527 | ) | ||||
Accumulated other comprehensive loss | (1,077,207 | ) | (1,054,349 | ) | ||||
Total equity | 2,048,544 | 2,369,230 | ||||||
Total liabilities and stockholders’ equity | $ | 52,472,860 | $ | 53,523,242 | ||||
(Unaudited) December 31, | September 30, | |
| Assets | 2020 | 2020 |
| Current assets: | ||
| Cash | $5,862,442 | $6,762,099 |
| Accounts receivable, net of allowance for doubtful accounts of $2,624,536 and $2,654,173, respectively | 6,420,253 | 5,546,213 |
| Prepaid expense and deposits | 817,774 | 866,389 |
| Inventory, net of reserves of $6,392 and $6,483, respectively | 118,510 | 124,606 |
| Total current assets | 13,218,979 | 13,299,307 |
| Property and equipment, net of accumulated depreciation of $2,746,715 and $2,531,631, respectively | 359,317 | 378,764 |
| Monitoring equipment, net of accumulated depreciation of $5,589,903 and $6,639,883, respectively | 2,755,331 | 2,065,947 |
| Intangible assets, net of accumulated amortization of $17,019,421 and $16,390,721, respectively | 21,412,818 | 21,171,045 |
| Goodwill | 8,527,257 | 8,220,380 |
| Deferred tax asset | 425,666 | 432,721 |
| Other assets | 2,577,659 | 2,166,743 |
| Total assets | $49,277,027 | $47,734,907 |
| Liabilities and Stockholders’ Equity (Deficit) | ||
| Current liabilities: | ||
| Accounts payable | $1,830,099 | $2,199,215 |
| Accrued liabilities | 15,372,602 | 14,958,628 |
| Current portion of long-term debt | 671,266 | 30,914,625 |
| Total current liabilities | 17,873,967 | 48,072,468 |
| Long-term debt, net | 30,572,648 | 418,575 |
| Long-term liabilities | 109,706 | 164,487 |
| Total liabilities | 48,556,321 | 48,655,530 |
| Commitments and contingencies (Note 16 and Note 23) | ||
| Stockholders’ equity (deficit): | ||
| Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,414,150 shares outstanding, respectively | 1,141 | 1,141 |
| Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding | - | �� - |
| Paid in capital | 302,270,242 | 302,270,242 |
| Accumulated deficit | (300,947,439) | (302,270,933) |
| Accumulated other comprehensive loss | (603,238) | (921,073) |
| Total equity (deficit) | 720,706 | (920,623) |
| Total liabilities and stockholders’ equity (deficit) | $49,277,027 | $47,734,907 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP,GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended December 31, | ||||||||
2021 | 2020 | |||||||
Revenue: | ||||||||
Monitoring and other related services | $ | 9,469,729 | $ | 9,271,729 | ||||
Product sales and other | 125,927 | 130,176 | ||||||
Total revenue | 9,595,656 | 9,401,905 | ||||||
Cost of revenue: | ||||||||
Monitoring, products and other related services | 3,931,578 | 3,700,426 | ||||||
Depreciation & amortization included in cost of revenue | 863,849 | 488,675 | ||||||
Total cost of revenue | 4,795,427 | 4,189,101 | ||||||
Gross profit | 4,800,229 | 5,212,804 | ||||||
Operating expense: | ||||||||
General & administrative | 2,498,359 | 2,400,735 | ||||||
Selling & marketing | 697,872 | 550,457 | ||||||
Research & development | 590,852 | 307,294 | ||||||
Depreciation & amortization | 416,801 | 531,763 | ||||||
Total operating expense | 4,203,884 | 3,790,249 | ||||||
Operating income | 596,345 | 1,422,555 | ||||||
Other income (expense): | ||||||||
Interest expense, net | (481,560 | ) | (640,022 | ) | ||||
Currency exchange rate gain (loss) | (106,278 | ) | 818,626 | |||||
Other income (loss) | 0 | 26 | ||||||
Total other income (expense) | (587,838 | ) | 178,630 | |||||
Income before income taxes | 8,507 | 1,601,185 | ||||||
Income tax expense | 313,829 | 277,691 | ||||||
Net income (loss) attributable to common stockholders | (305,322 | ) | 1,323,494 | |||||
Foreign currency translation adjustments | (22,858 | ) | 317,835 | |||||
Comprehensive income (loss) | $ | (328,180 | ) | $ | 1,641,329 | |||
Net income (loss) per share – basic and diluted | ||||||||
Net income (loss) per common share, basic and diluted | $ | (0.03 | ) | $ | 0.12 | |||
Weighted average common shares outstanding, basic and diluted | 11,525,315 | 11,414,150 | ||||||
Three Months Ended December 31, | ||
2020 | 2019 | |
| Revenue: | ||
| Monitoring and other related services | $9,271,729 | $8,268,423 |
| Product sales and other | 130,176 | 152,408 |
| Total revenue | 9,401,905 | 8,420,831 |
| Cost of revenue: | ||
| Monitoring, products and other related services | 3,700,426 | 3,266,909 |
| Depreciation & amortization included in cost of revenue | 488,675 | 487,442 |
| Total cost of revenue | 4,189,101 | 3,754,351 |
| Gross profit | 5,212,804 | 4,666,480 |
| Operating expense: | ||
| General & administrative | 2,400,735 | 3,011,854 |
| Selling & marketing | 550,457 | 541,549 |
| Research & development | 307,294 | 296,155 |
| Depreciation & amortization | 531,763 | 515,939 |
| Total operating expense | 3,790,249 | 4,365,497 |
| Operating income | 1,422,555 | 300,983 |
| Other income (expense): | ||
| Interest expense, net | (640,022) | (602,533) |
| Currency exchange gain | 818,626 | 143,308 |
| Other income/expense, net | 26 | - |
| Total other income (expense) | 178,630 | (459,225) |
| Income (loss) before income taxes | 1,601,185 | (158,242) |
| Income tax expense | 277,691 | 74,383 |
| Net income (loss) attributable to common stockholders | 1,323,494 | (232,625) |
| Foreign currency translation adjustments | 317,835 | (64,098) |
| Comprehensive income (loss) | $1,641,329 | $(296,723) |
| Net income (loss) per common share, basic and diluted | $0.12 | $(0.02) |
| Weighted average common shares outstanding, basic and diluted | 11,414,150 | 11,411,704 |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
Balance September 30, 2021 | 11,524,978 | $ | 1,152 | $ | 302,250,954 | $ | (298,828,527 | ) | $ | (1,054,349 | ) | $ | 2,369,230 | |||||||||||
Issuance of Common Stock for options/warrants exercised | 16,474 | 2 | (2 | ) | 0 | 0 | 0 | |||||||||||||||||
Cash received for options/warrants exercised | - | 0 | 10,570 | 0 | 0 | 10,570 | ||||||||||||||||||
Tax withheld on issuance of Common Stock | - | 0 | (3,076 | ) | 0 | 0 | (3,076 | ) | ||||||||||||||||
Foreign currency translation adjustments | - | 0 | 0 | 0 | (22,858 | ) | (22,858 | ) | ||||||||||||||||
Net loss | - | 0 | 0 | (305,322 | ) | 0 | (305,322 | ) | ||||||||||||||||
Balance December 31, 2021 | 11,541,452 | $ | 1,154 | $ | 302,258,446 | $ | (299,133,849 | ) | $ | (1,077,207 | ) | $ | 2,048,544 | |||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Total | |||||||||||||||||||
Balance September 30, 2020 | 11,414,150 | $ | 1,141 | $ | 302,270,242 | $ | (302,270,933 | ) | $ | (921,073 | ) | $ | (920,623 | ) | ||||||||||
Foreign currency translation adjustments | - | 0 | 0 | 0 | 317,835 | 317,835 | ||||||||||||||||||
Net income | - | 0 | 0 | 1,323,494 | 0 | 1,323,494 | ||||||||||||||||||
Balance December 31, 2020 | 11,414,150 | $ | 1,141 | $ | 302,270,242 | $ | (300,947,439 | ) | $ | (603,238 | ) | $ | 720,706 | |||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | |||
Shares | Amount | Capital | Deficit | Income (Loss) | Total | |
| Balance September 30, 2020 | 11,414,150 | $1,141 | $302,270,242 | $(302,270,933) | $(921,073) | $(920,623) |
| Foreign currency translation adjustments | - | - | - | - | 317,835 | 317,835 |
| Net income | - | - | - | 1,323,494 | - | 1,323,494 |
| Balance December 31, 2020 | 11,414,150 | $1,141 | $302,270,242 | $(300,947,439) | $(603,238) | $720,706 |
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) |
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP,GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (305,322 | ) | $ | 1,323,494 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,280,650 | 1,020,438 | ||||||
Bad debt recovery | (100,286 | ) | (16,986 | ) | ||||
Loss on monitoring equipment included in cost of revenue | 99,297 | 110,123 | ||||||
Amortization of debt issuance costs | 35,275 | 0 | ||||||
Amortization of monitoring center assets included in cost of revenue | 75,947 | 0 | ||||||
Foreign currency exchange (gain)/loss | 106,278 | (818,626 | ) | |||||
Change in assets and liabilities: | ||||||||
Accounts receivable, net | 688,994 | (759,838 | ) | |||||
Inventories | 0 | 4,200 | ||||||
Prepaid expense, deposits, deferred tax assets and other assets | (82,817 | ) | (125,864 | ) | ||||
Accounts payable | (195,522 | ) | (379,272 | ) | ||||
Accrued liabilities | (320,857 | ) | 224,333 | |||||
Net cash provided by operating activities | 1,281,637 | 582,002 | ||||||
Cash flow from investing activities: | ||||||||
Purchase of property and equipment | (35,903 | ) | (81,183 | ) | ||||
Capitalized software | (88,607 | ) | (397,402 | ) | ||||
Purchase of monitoring equipment and parts | (751,030 | ) | (1,054,807 | ) | ||||
Net cash used in investing activities | (875,540 | ) | (1,533,392 | ) | ||||
Cash flow from financing activities: | ||||||||
Payment of deferred financing fees | 0 | (89,286 | ) | |||||
Principal payments on long-term debt | (125,356 | ) | 0 | |||||
Employee tax withholdings related to net share settlement of equity-based awards | (3,076 | ) | 0 | |||||
Proceeds from exercise of employee stock options | 10,570 | 0 | ||||||
Net cash used in financing activities | (117,862 | ) | (89,286 | ) | ||||
Effect of exchange rate changes on cash | (110,101 | ) | 141,019 | |||||
Net increase (decrease) in cash | 178,134 | (899,657 | ) | |||||
Cash, beginning of period | 8,421,162 | 6,762,099 | ||||||
Cash, end of period | $ | 8,599,296 | $ | 5,862,442 | ||||
Cash paid for interest | $ | 62,323 | $ | 2,629 | ||||
| Cash paid for taxes | $ | 236,785 | $ | 236,033 | ||||
Three Months Ended December 31, | ||
2020 | 2019 | |
| Cash flows from operating activities: | ||
| Net income (loss) | $1,323,494 | $(232,625) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||
| Depreciation and amortization | 1,020,438 | 1,003,381 |
| Bad debt expense | (16,986) | 109,161 |
| Stock based compensation | - | 19,687 |
| Loss on monitoring equipment included in cost of revenue | 110,123 | 134,047 |
| Foreign currency exchange gain | (818,626) | (143,308) |
| Change in assets and liabilities: | ||
| Accounts receivable, net | (759,838) | 1,155,606 |
| Inventories | 4,200 | - |
| Prepaid expense and deposits | (121,864) | (179,203) |
| Accounts payable | (379,272) | (9,101) |
| Accrued liabilities | 224,333 | 793,323 |
| Net cash provided by operating activities | 582,002 | 2,650,968 |
| Cash flows from investing activities: | ||
| Purchase of property and equipment | (81,183) | (54,581) |
| Capitalized software | (397,402) | (341,622) |
| Purchase of monitoring equipment and parts | (1,054,807) | (606,225) |
| Net cash used in investing activities | (1,533,392) | (1,002,428) |
| Cash flows from financing activities: | ||
| Principal payments on long-term debt | - | (9,552) |
| Payment of deferred financing costs | (89,286) | - |
| Net cash used in financing activities | (89,286) | (9,552) |
| Effect of exchange rate changes on cash | 141,019 | (42,149) |
| Net increase (decrease) in cash | (899,657) | 1,596,839 |
| Cash, beginning of period | 6,762,099 | 6,896,711 |
| Cash, end of period | $5,862,442 | $8,493,550 |
| Cash paid for interest | $2,629 | $6,856 |
The accompanying notes are an integral part of these condensed consolidated statements.
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 FormAs of December 31, 2020 2021 and 2019, September 30, 2021, the Company had an accumulated deficit of $300,947,439$299,133,849 and $302,384,917,$298,828,527, respectively. The Company incurredhad a net loss of $(305,322) and a net income of $1,323,494 and net loss of $(232,625) for the three months ended December 31, 2020 2021 and 2019,2020, respectively. The Company may continue to incur losses and require additional financial resources. TheAs of December 31, 2021, the Company also hashad $42,864,000 of debt maturing in July 2024 and a potentially forgivable PPP loan which maturessix notes payable maturing between January 2, 2024 and February 17, 2025 related to the construction of two monitoring centers in May 2022. SeeChile totaling $1,306,136 (See Note 24.19). The Company’s transition tocontinuation of profitable operations is dependent upon generating a level of revenue adequate to support its cost structure, which it has achieved on an operating basis, although the Company needs to resolve its debt obligation which matures on July 1, 2024. Management has evaluated the significance of these 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 Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,2017-04, “
In June 2016, the FASB issued ASU 2016-13,2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-132016-13 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 is2016-13 became effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which will be effective for fiscal years beginning after December 15, 2022. The Company will adopt ASU 2016-132016-13 in fiscal year 2022.2023. 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,
“BusinessAcquired Assets and Assumed Liabilities
Pursuant to ASC No. 805-10-25,805-10-25, 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 sellersthe seller 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 December 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 both December 31, 2020, 2021 and 2019,2020, there were 15,000 and 685,259 outstanding common share equivalents that were not included in the computation of Basic EPS and Diluted EPS for the three months ended December 31, 2020 2021 and 2019,2020, respectively, as their effect would be anti-dilutive. The common
At December 31, 2021, 415,511 stock equivalents outstanding asoptions and warrants had exercise prices that were below the market price of $2.28, and have been included in the basic and diluted earnings per share calculations. At December 31, 2020, and December 31, 2019 consisted of the following:
December 31, | December 31, | |
2020 | 2019 | |
| Exercisable common stock options and warrants | 685,259 | 685,259 |
| Total common stock equivalents | 685,259 | 685,259 |
The common stock equivalents outstanding as of December 31, 2021 and 2020 consisted of the following:
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Exercisable common stock options and warrants | 430,511 | 685,259 | ||||||
Total common stock equivalents | 430,511 | 685,259 | ||||||
(8) REVENUE RECOGNITION
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 asProduct 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 December 31, 2021 | Three Months Ended December 31, 2020 | |||||||||||||||
Total Revenue | % of Total Revenue | Total Revenue | % of Total Revenue | |||||||||||||
United States | $ | 6,907,260 | 72 | % | $ | 6,797,758 | 72 | % | ||||||||
Latin America | 2,551,722 | 27 | % | 2,506,412 | 27 | % | ||||||||||
Other | 136,674 | 1 | % | 97,735 | 1 | % | ||||||||||
Total | $ | 9,595,656 | 100 | % | $ | 9,401,905 | 100 | % | ||||||||
Three months ended December 31, 2020 | Three months ended December 31, 2019 | |||
Total Revenue | % of Total Revenue | Total Revenue | % of Total Revenue | |
| United States | $6,797,758 | 72% | $5,567,858 | 66% |
| Latin America | 2,506,412 | 27% | 2,737,593 | 33% |
| Other | 97,735 | 1% | 115,380 | 1% |
| Total | $9,401,905 | 100% | $8,420,831 | 100% |
The above table includes total revenue for the Company, of which monitoring and other related services is the majority (approximately 99% for the three months ended December 31, 2021, and 2020) of the Company’s revenue. Latin America includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin Islands. Other includes Canada and Saudi Arabia in the three months ended December 31, 2020 2021, and Canada, Mexico and Saudi Arabia South Africa and Vietnam in the three months ended December 31, 2019.
(9) PREPAID EXPENSE AND DEPOSITS
As of December 31, 2020, 2021, and September 30, 2020, 2021, the outstanding balance of prepaid expense and deposits was $817,774$1,040,711 and $866,389,$998,589, respectively. These balances are comprised largely of tax deposits, prepaid bond insurance, 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 customersprinted circuit boards and other parts used in the assembly of monitoring equipment and for minor repairs of ReliAlert™ReliAlert®, Shadow, and other tracking devices. Completed and shipped ReliAlert™ReliAlert® and other tracking devices are reflected in Monitoring Equipment. As of December 31, 2020, 2021 and September 30, 2020, 2021, inventory consisted of the following:
December 31, 2020 | September 30, 2020 | |
| Finished goods inventory | $124,902 | $131,089 |
| Reserve for damaged or obsolete inventory | (6,392) | (6,483) |
| Total inventory, net of reserves | $118,510 | $124,606 |
December 31, 2021 | September 30, 2021 | |||||||
Finished goods inventory | $ | 647,070 | $ | 305,210 | ||||
Reserve for damaged or obsolete inventory | 0 | 0 | ||||||
Total inventory, net of reserves | $ | 647,070 | $ | 305,210 | ||||
The Company uses a third-partythird-party fulfillment service provider.
(11) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2020 2021 and September 30, 2020, respectively:
December 31, 2020 | September 30, 2020 | |
| Equipment, software and tooling | $1,360,582 | $1,272,635 |
| Automobiles | 5,687 | 5,156 |
| Leasehold improvements | 1,386,831 | 1,290,708 |
| Furniture and fixtures | 352,932 | 341,896 |
| Total property and equipment before accumulated depreciation | 3,106,032 | 2,910,395 |
| Accumulated depreciation | (2,746,715) | (2,531,631) |
| Property and equipment, net of accumulated depreciation | $359,317 | $378,764 |
December 31, 2021 | September 30, 2021 | |||||||
Equipment, software and tooling | $ | 1,363,524 | $ | 1,332,379 | ||||
Automobiles | 4,757 | 5,034 | ||||||
Leasehold improvements | 1,218,469 | 1,268,486 | ||||||
Furniture and fixtures | 213,181 | 212,294 | ||||||
Total property and equipment | 2,799,931 | 2,818,193 | ||||||
Accumulated depreciation | (2,601,242 | ) | (2,615,967 | ) | ||||
Property and equipment, net of accumulated depreciation | $ | 198,689 | $ | 202,226 | ||||
Property and equipment depreciation expense for the three months ended December 31, 2020 2021 and 20192020 was $38,627 and $112,209, and $83,432, respectively.
(12) MONITORING EQUIPMENT
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is amortized using the straight-line method over an estimated useful life of between one and five years. Monitoring equipment as of December 31, 2020 2021 and September 30, 2020 2021 was as follows:
December 31, 2020 | September 30, 2020 | |
| Monitoring equipment | $8,345,234 | $8,705,830 |
| Less: accumulated depreciation | (5,589,903) | (6,639,883) |
| Monitoring equipment, net of accumulated depreciation | $2,755,331 | $2,065,947 |
December 31, 2021 | September 30, 2021 | |||||||
Monitoring equipment | $ | 9,173,861 | $ | 9,045,193 | ||||
Less: Accumulated depreciation | (6,153,405 | ) | (5,977,093 | ) | ||||
Monitoring equipment, net of accumulated depreciation | $ | 3,020,456 | $ | 3,068,100 | ||||
Depreciation of monitoring equipment for the three months ended December 31, 2020 2021 and 20192020 was $337,560$393,781 and $360,630,$337,560, respectively. Depreciation expense for monitoring devices is recognized in cost of revenue. During the three months ended December 31, 2020 2021 and December 31, 2019,2020, the Company recorded charges of $110,123$99,297 and $98,834,$110,123, respectively, for devices that were lost, stolen or damaged. Lost, stolen and damaged items are included in Monitoring, products & other related servicesservice costs in the Condensed Consolidated Statement of Operations.
(13) INTANGIBLE ASSETS
The following table summarizes intangible assets at December 31, 2020 2021 and September 30, 2020, 2021, respectively:
| Intangible assets: | December 31, 2020 | September 30, 2020 |
| Patent & royalty agreements | $21,170,565 | $21,170,565 |
| Developed technology | 15,003,573 | 14,134,562 |
| Customer relationships | 1,860,000 | 1,860,000 |
| Trade name | 319,900 | 318,438 |
| Website | 78,201 | 78,201 |
| Total intangible assets | 38,432,239 | 37,561,766 |
| Accumulated amortization | (17,019,421) | (16,390,721) |
| Intangible assets, net of accumulated amortization | $21,412,818 | $21,171,045 |
December 31, 2021 | September 30, 2021 | |||||||
Patent & royalty agreements | $ | 21,120,565 | $ | 21,120,565 | ||||
Developed technology | 15,017,631 | 14,919,562 | ||||||
Customer relationships | 1,860,000 | 1,860,000 | ||||||
Trade name | 141,503 | 141,473 | ||||||
Total intangible assets | 38,139,699 | 38,041,600 | ||||||
Accumulated amortization | (18,453,714 | ) | (17,607,457 | ) | ||||
Intangible assets, net of accumulated amortization | $ | 19,685,985 | $ | 20,434,143 | ||||
The intangible assets summarized above were purchased or developed on various dates from January 2010 July 2011 through December 31, 2020. The assets have useful lives ranging from three to twenty years. 2021. Amortization expense for the three months ended December 31, 2020 2021 and 20192020 was $848,242 and $570,669, and $559,319, respectively.
(14) GOODWILL
The following table summarizes the activity of goodwill at December 31, 2020 2021 and September 30, 2020, 2021, respectively:
December 31, | September 30, | |
2020 | 2020 | |
Balance - beginning of period | $8,220,380 | $8,187,911 |
| Effect of foreign currency translation on goodwill | 306,877 | 32,469 |
| Balance - end of period | $8,527,257 | $8,220,380 |
December 31, 2021 | September 30, 2021 | |||||||
Balance - beginning of year | $ | 8,519,998 | $ | 8,220,380 | ||||
Effect of foreign currency translation on goodwill | 138,774 | 299,618 | ||||||
Balance - end of year | $ | 8,658,772 | $ | 8,519,998 | ||||
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. NoNaN impairment of goodwill was recognized through December 31, 2020.
(15) OTHER ASSETS
As of December 31, 2020 2021 and September 30, 2020, 2021, respectively, the outstanding balance of other assets was $2,577,659$4,131,835 and $2,166,743,$4,309,040, respectively. Other assets at December 31, 2020 2021 are comprised largely of cash collateralizedused as collateral for Performance Bonds (as defined in Note 23) for an international customer, as well as contractually required monitoring center and other equipment, right of use assets, lease deposits insurance costs and other long-term assets. The Company anticipates these Performance Bondsperformance bonds will be reimbursed to the Company upon completion of its contracts with the customer. See Note 23.
The Company adoptedis contractually obligated to construct and equip two monitoring centers for an international customer, as well as supply equipment for the new lease standard utilizingcustomer’s satellite locations, which will be owned by the modified retrospective transaction method, undercustomer when construction is completed. The Company has incurred approximately $1.7 million in costs for two monitoring centers and related equipment at December 31, 2021, and estimates the total to construct and equip the locations will be approximately $2.0 million. The Santiago monitoring center, which amountswas completed in prior periods were not restated. For contracts existing atJune 2021 cost approximately $1.1 million and began monthly amortization in Monitoring, products and other related services on the timeCondensed Consolidated Statement of Operations over 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 adoptionlife of the new standard did not impactcontract in June 2021. Amortization of costs related to the Company’s StatementsSantiago monitoring center for the three months ended December 31, 2021 were $75,947. The Company will record revenue from the customer based on a contractually agreed upon unit per day amount during the contract period. See Note 19 for details of Operations or Statements of Cash Flows.
(16) LEASES
The following table shows right of use assets and lease liabilities and the associated financial statement line items as of December 31, 2020 2021 and September 30, 2020.
December 31, 2020 | September 30, 2020 | |||
Operating lease asset | Operating lease liability | Operating lease asset | Operating lease liability | |
| Other assets | $330,899 | $- | $375,397 | $- |
| Accrued liabilities | - | 221,194 | - | 210,910 |
| Long-term liabilities | - | 109,705 | - | 164,487 |
December 31, 2021 | September 30, 2021 | |||||||||||||||
Operating lease asset | Operating lease liability | Operating lease asset | Operating lease liability | |||||||||||||
Other assets | $ | 174,322 | $ | - | $ | 165,963 | $ | - | ||||||||
Accrued liabilities | 142,859 | - | 162,313 | |||||||||||||
Long-term liabilities | 31,463 | - | 3,650 | |||||||||||||
The following table summarizes the supplemental cash flow information for the three months ended December 31, 2020 2021 and December 31 2019:
December 31, 2020 | December 31, 2019 | |
| Cash paid for noncancelable operating leases included in operating cash flows | $75,890 | $116,411 |
| Right of use assets obtained in exchange for operating lease liabilities: | $- | $- |
December 31, 2021 | December 31, 2020 | |||||||
Cash paid for noncancelable operating leases included in operating cash flows | $ | 67,276 | $ | 75,890 | ||||
Right of use assets obtained in exchange for operating lease liabilities | $ | 78,458 | $ | 0 | ||||
The future minimum lease payments under noncancelable operating leases with terms greater than one year as of December 31, 2020 2021 are:
Operating Leases | ||||
From January 2022 to December 2022 | 147,554 | |||
From January 2023 to December 2023 | 31,862 | |||
From January 2024 to December 2024 | 57 | |||
Undiscounted cash flow | 179,473 | |||
Less: imputed interest | (5,151 | ) | ||
Total | $ | 174,322 | ||
Reconciliation to lease liabilities: | ||||
Lease liabilities - current | $ | 142,859 | ||
Lease liabilities - long-term | 31,463 | |||
Total lease liabilities | $ | 174,322 |
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of December 31, 2020 2021 were 1.51.1 years and 8%7.0%, respectively. The Company’s lease discount rates are generally based on the estimates of its incremental borrowing rate as the discount rates implicit in the Company’s leases cannot be readily determined.
(17) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of December 31, 2020 2021 and September 30, 2020, respectively:
December 31, 2021 | September 30, 2021 | |||||||
Accrued payroll, taxes and employee benefits | $ | 1,481,626 | $ | 2,279,454 | ||||
Deferred revenue | 96,790 | 22,500 | ||||||
Accrued taxes - foreign and domestic | 107,861 | 23,022 | ||||||
Accrued other expense | 89,401 | 236,386 | ||||||
Accrued legal and other professional costs | 736,339 | 738,306 | ||||||
Accrued costs of revenue | 282,021 | 248,963 | ||||||
Right of use liability | 142,859 | 162,313 | ||||||
Deferred financing fees | 88,685 | 180,000 | ||||||
Deferred tax liability | 55,894 | 0 | ||||||
Accrued interest | 880,206 | 459,086 | ||||||
Total accrued liabilities | $ | 3,961,682 | $ | 4,350,030 | ||||
December 31, 2020 | September 30, 2020 | |
| Accrued payroll, taxes and employee benefits | $1,229,245 | $1,607,920 |
| Deferred revenue | 99,202 | 147,921 |
| Accrued taxes - foreign and domestic | 525,234 | 324,221 |
| Accrued other expense | 99,095 | 117,264 |
| Accrued legal and other professional costs | 663,547 | 725,547 |
| Accrued costs of revenue | 396,176 | 309,470 |
| Right of use liability | 221,194 | 210,910 |
| Accrued interest | 12,138,909 | 11,515,375 |
| Total accrued liabilities | $15,372,602 | $14,958,628 |
(18) RELATED PARTIES
ETS Limited is currently the beneficial owner of 4,871,745 shares of the Company's Common Stock (“
Track Group Shares”) held by ADS Securities LLC (“ADS”) under an agreement dated September 28, 2017 pursuant to which ADS transferred all of the Track Group Shares to ETS Limited in exchange for all of the outstanding shares of ETS Limited. A Director of ETS Limited was elected to the Company's current Board of Directors on February 7,(19) DEBT OBLIGATIONS
Debt obligations, net of debt issuance costs, as of December 31, 2021 and between Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On September 30, 2020, the Company and ADS settled the outstanding amount due under the Sapinda Loan Agreement for $2.7 million. The Company recorded a gain of approximately $0.7 million during the fiscal year ended September 30, 2020.
December 31, 2021 | September 30, 2021 | |||||||
The unsecured loan (the “Amended Facility Agreement”) from Conrent Invest S.A. (“Conrent”) whereby, as of March 1, 2021, the Company had borrowed $42,864,000, net of unamortized issuance costs of $300,501, bearing interest at a rate of 4% per annum, payable in arrears annually beginning July 1, 2021, with all principal and accrued and unpaid interest due on July 1, 2024. The Company paid $581,045 interest on this loan during the year ended September 30, 2021 and intends to make its interest payments every six months going forward. | $ | 42,563,499 | $ | 42,533,449 | ||||
Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of 6.56% per annum, with a maturity date of February 6, 2024. | 59,940 | 70,176 | ||||||
Note Payable Agreement with Banco Santander, net of unamortized issuance costs of $18,701, bearing interest at a rate of 5.04% per annum, with a maturity date of May 11, 2024. | 286,556 | 332,354 | ||||||
Note Payable Agreement with Banco Estado, net of unamortized issuance costs of $13,170, bearing interest at a rate of 3.50% per annum, with a maturity date of January 2, 2024. | 237,258 | 279,869 | ||||||
Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of 6.61% per annum, with a maturity date of March 4, 2024. | 132,036 | 153,984 | ||||||
Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $275, bearing interest at a rate of 2.54% per annum, with a maturity date of March 4, 2024. | 86,564 | 101,447 | ||||||
Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $25,766, bearing interest at a rate of 3.12% per annum, with a maturity date of February 17, 2025. | 445,870 | 507,071 | ||||||
Total debt obligations | 43,811,723 | 43,978,350 | ||||||
Less: current portion | (502,463 | ) | (526,134 | ) | ||||
Long-term debt, less current portion | $ | 43,309,260 | $ | 43,452,216 | ||||
December 31, 2020 | September 30, 2020 | |
| The unsecured Amended Facility Agreement with Conrent whereby, as of June 30, 2015, the Company had borrowed $30.4 million, net of unamortized issuance costs of $89,286 at December 31, 2020, bearing interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on July 1, 2024. The Company did not pay interest on this loan during the three months ended December 31, 2020. | $30,310,714 | $30,400,000 |
Note payable with BMO Harris Bank for a Paycheck Protection Program ("PPP") loan with the U.S. Small Business Administration ("SBA"), bearing interest at a rate of 1% per annum, with a maturity of May 19, 2022. | 933,200 | 933,200 |
| Total debt obligations | 31,243,914 | 31,333,200 |
| Less: current portion | (671,266) | (30,914,625) |
| Long-term debt, less current portion and unamortized issuance costs | $30,572,648 | $418,575 |
On September 8, 2020, the Company received a letter from ADS informing the Company that ADS had been assigned the right to payment under that certain Loan Facility dated September 14, 2015, by and between Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On September 30, 2020, the Company and ADS settled the outstanding amount due under the Sapinda Loan Agreement for $2.7 million. The Company recorded a gain of approximately $0.7 million which is included in Other income/expense, net on the Consolidated Statement of Operations in the twelve months ended September 30, 2020.
On May 19, 2020, January 6, 2021, the Company received net proceeds of $933,200borrowed 70,443,375 Chilean Pesos (“CLP”) ($101,186USD) from a potentially forgivable loan from the SBA pursuant to the PPP enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "
On January 12, 2021, the Company and will mature on May 19, 2022. However, underborrowed 347,198,500CLP ($482,965USD), net of 2,801,500CLP fees ($3,897USD), from Banco Santander. To facilitate the CARES Act and the PPP Loan, Agreement, scheduled payments of both principal and interest would have begun December 19, 2020; however, payments were deferred because the Company filed its forgiveness application.entered into a Note Payable Agreement with Banco Santander as lender. The PPP Loan will accrueloan was used to comply with the construction of Gendarmeria de Chile monitoring center in Santiago, Chile and remodeling a temporary monitoring center. The loan bears an interest at a rate of 1.00%5.04% per annum, payable monthly with principal beginning February 2021, and interest will continue to accrue throughouta maturity of May 11, 2024. The Company also paid 19,607,843CLP ($27,275USD) in broker fees which are amortized over the period the PPP Loan is outstanding, or until it is forgiven. The CARES Act (including the guidance issued by SBA and U.S. Departmentlife of the Treasury related thereto) provides that all orloan.
On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of 2,000,700CLP fees ($2,734USD), from Banco Estado. To facilitate the Loan, the Company entered into a portionNote Payable Agreement with Banco Estado as lender. The loan provided was used for the construction of the PPP Loan may be forgiven upon request from Gendarmeria de Chile monitoring center in Santiago, Chile and computer equipment for Gendarmeria branch offices. The loan bears an interest rate of 3.50% per annum, initially having a 6-month grace period with the first payment including the 6 months of interest plus 1 month of principal on August 2, 2021, then monthly interest with principal, and a maturity date of January 2, 2024. The Company also paid 14,124,294CLP ($19,304USD) in broker fees which are amortized over the life of the loan.
On February 4, 2021, the Company to Lender, subject to requirements inborrowed 149,794,432CLP ($205,330USD) from HP Financial Services Chile Limitada. To facilitate the PPP Loan, Agreement and the CARES Act. On December 8, 2020, the Company filedentered into a Note Payable Agreement with HP Financial Services Chile Limitada as lender. The loan was used to purchase computer equipment for the application for forgivenessGendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest at a rate of 6.61% per annum, payable monthly with the Lender and
On February 5, 2021, the Company receivedborrowed of 99,808,328CLP ($136,564USD), net of 210,485CLP fees ($286USD), from Banco de Chile. To facilitate the Loan, the Company entered into a notificationNote Payable Agreement with Banco de Chile as lender. The loan provided was used to purchase HVAC equipment for Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest rate of 2.54% per annum, payable monthly with principal beginning March 2021, and a maturity date of March 4, 2024.
On February 15, 2021, the Company borrowed 500,000,000CLP ($678,214USD) from Banco de Chile. To facilitate the Lender thatLoan, the SBA remitted fundsCompany entered into a Note Payable Agreement with Banco de Chile as lender. The loan proceeds were used as working capital and to fully repaycomplete the PPP Loan, construction of the Gendarmeria monitoring center in Puerto Montt, Chile. The loan bears an interest at a rate of 3.12% per annum, payable monthly with principal beginning March 2021, and thata maturity of February 17, 2025. The Company also paid 28,248,588CLP ($38,317USD) in broker fees which are amortized over the funds were utilized to pay-off and closelife of the PPP Loan and that the PPP Loan was fully forgiven
The following table summarizes our future maturities of debt obligations, net of the amortization of debt discounts as of December 31, 2020:
Twelve months ended December 31: | Total | |||
2022 | $ | 502,463 | ||
2023 | 533,390 | |||
2024 | 43,108,267 | |||
2025 | 26,016 | |||
Total | 44,170,136 | |||
Issuance costs | (358,413 | ) | ||
Debt obligations, net of unamortized issuance costs | $ | 43,811,723 | ||
| Twelve months ended December 31, | Total |
| 2021 | $671,266 |
| 2022 | 261,934 |
| 2023 | - |
| 2024 | 30,400,000 |
| Thereafter | - |
| Total | $31,333,200 |
(20) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to 30,000,000 shares of common stock, $0.0001 par value per share.
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 December 31, 2020, 2021, there were no0 shares of preferred stock outstanding.
NaN dividends were paid during the three-month periodthree months ended December 31, 2020 2021 or 2019,2020, respectively.
Series A Convertible 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 December 31, 2020, no2021, 0 shares of Series A Preferred were issued and outstanding.
(21) 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 orAs of December 11, 2018, June 30, 2020, the Board of Directors suspended further awards under the 2012 Plan until further notice. Plan. The Company recorded expense of $0 and $19,687$0 for the three months ended December 31, 2020 2021 and 2019,2020, 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 December 31, 2020.2021.
All Options and Warrants
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. During the three months ended December 31, 2020 and 2019, the Company granted no options and warrants to purchase shares of common stock under the 2012 Plan. The warrantsWarrants 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-yearthree-year period and expire five years after the final vesting date of the grant. The Company recorded expense of $0 and $0 for both the three months ended December 31, 2020 2021 and 2019,2020, respectively, related to the issuance and vesting of outstanding stock options and warrants.
All options and warrants have vested and are exercisable at December 31, 2020 2021 and no0 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 three months ended December 31, 2020 2021 is presented below:
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |
| Outstanding as of September 30, 2020 | 685,259 | $1.56 | 1.90 years | $- |
| Granted | - | - | - | - |
| Expired/Cancelled | - | - | - | - |
| Exercised | - | - | - | - |
| Outstanding as of December 31, 2020 | 685,259 | $1.56 | 1.65 | $- |
| Exercisable as of December 31, 2020 | 685,259 | $1.56 | 1.65 | $- |
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding as of September 30, 2021 | 457,075 | $ | 1.74 | 1.04 | $ | 779,977 | ||||||||||
Granted | - | - | ||||||||||||||
Expired/Cancelled | - | - | ||||||||||||||
Exercised | (26,564 | ) | 1.21 | |||||||||||||
Outstanding as of December 31, 2021 | 430,511 | $ | 1.77 | 0.83 | $ | 433,229 | ||||||||||
Exercisable as of December 31, 2021 | 430,511 | $ | 1.77 | 0.83 | $ | 433,229 | ||||||||||
The intrinsic value of options and warrants outstanding and exercisable is based on the Company’s share price of $0.34$2.28 at December 31, 2020.
(22) INCOME TAXES
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the three months ended December 31, 2020 2021 and 2019,2020, the Company incurred net income (loss) for income tax purposes of $1,323,494$(305,322) and $(232,625),$1,323,494, 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.
(23) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is, from time to time, claims are made againstinvolved in various legal proceedings incidental to the Companyconduct of our business. Historically, the outcome of all such legal proceedings has not, 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 haveaggregate, had a material adverse impacteffect on the Company’sour business, financial position orcondition, results of operations.operations or liquidity. 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 (“OADPRS”) of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. 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 CompanyCommonwealth of Puerto Rico, through its Trustees v. International Surveillance Services Corporation
. On January 23, 2020, the Company was served with a summons for an Adversary Action pending against International Surveillance Services Corporation (“ISS”), a subsidiary of the Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to avoid and recover allegedly constructive fraudulent transfers and to disallow claims pursuant to United States Bankruptcy and Puerto Rican law. The allegations stem from payments made to ISS between 2014 and 2017, which the Company believes were properly made in accordance with a contract between ISS and the government of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in 2011. The Company is confident that all payments it received were earned and due under applicable law and has produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6,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 NumberJeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the State of California in Case No.21 STCV 21345, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the Company. The Company was served on October 15, 2021 and filed its Answer and Affirmative Defenses on November 12, 2021. On January 11, 2022 the Company issued discovery, and the discovery process remains ongoing. The Company disputes Abed’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is deemed remote by management,remote.
Track Group Chile SpA. v. Republic of Chile. On January 24, 2022, Track Group Chile SpA. initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile. The Company asserts that it has complied with its contractual obligations and that any delays in so doing were not attributable to the Company. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with outside legal counsel.
Monitoring Equipment
The Company leases monitoring equipment to its customers with contract terms varying from month-to-month to several years and each daily contract price varies. Devices supplied to customers are not serial number unique and a single device may be used by multiple customers over its useful life. If a leased device is returned for repair, it will likely be replaced with a different device from a different customer or possibly a new device.
The Company’s tracking devices are considered operating leases under ASC 842 as transfer of control of the asset does not occur at the end of the lease, a single device is not specific to a customer and devices may be used by multiple customers throughout their life cycle. Due to the movement of devices from customer to customer, relatively few long-term contracts, the measurement of the equipment life and the present value of the equipment’s fair values would not be a measurement to qualify the devices as sales-type leases. No change to the Company’s accounting treatment of devices occurred with the adoption of ASC 842.
Operating lease revenue associated with the Company’s monitoring equipment for the three months ended December 31, 2021 and 2020 are shown in the table below:
Three months ended December 31, | ||||||||
2021 | 2020 | |||||||
Monitoring equipment operating revenue | $ | 7,994,457 | $ | 7,960,206 | ||||
Performance Bonds
As of December 31, 2020, 2021, Company has two performance bonds in connection with a foreign customer totaling $2,593,377,$2,169,380 (“Performance Bonds”), of which $1,815,329$1,518,537 is held in an interest-bearing account on behalf of the customer and is recorded in Other Assets on the Consolidated Balance Sheet. The remaining amount of $778,048$650,843 is guaranteed by a foreign financial institution on behalf of the Company. The amounts held on the two Performance Bonds will be released approximately 90 days after the expiration of the Performance Bonds, which expire as follows: $339,029$283,601 on January 18, 2022 and $1,476,300$1,234,937 on July 2, 2024.
In March 2021, the Company placed a $617,483 deposit into an interest-bearing account with a financial institution to replace the performance bond expiring on July 2, 2024, whereby the portion guaranteed by the financial institution will increase from 30% to 65% of the total bond. The current bond expiring July 2, 2024 will be released following completion of the transaction.
The Company pays interest on the full amount of the Performance Bonds to the financial institution providing the guarantee at 3.5% interest per annum for the Performance Bond expiring in January 2022 and 2.8% interest per annum for the Performance Bond expiring in July 2024. RelatedThe Company recorded interest expense recorded for the three months ended December 31, 2021 and December 31, 2020 of $18,462. During the three months ended December 31, 2019 $32,145 and $18,462, respectively.
(24) SUBSEQUENT EVENTS
On January 5, 2022, the Company expensed $5,256 relatedmade a payment to the Performance Bond which expires on January 18, 2022.
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted that,no subsequent events other than as disclosedthose noted above no additional subsequent events have occurred that are reasonably likely to impact the financial statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”, or, this “Report”) contains information that constitutes “forward-looking statements”“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”“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”“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”“believes”, “expects”“expects”, “intends”“intends”, “anticipates”“anticipates”, “should”“should”, “plans”“plans”, “estimates”“estimates”, “projects”“projects”, “potential”“potential”, and “will”“will” among others. Forward-looking statements include, but are not limited to, statements contained in Management’sManagement’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”“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”(“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, 2020,2021, 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
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 ReliAlert
ReliAlert
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,Data Analytics Services
. OurOther 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 along with knowledgeableCritical 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, 2020
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.
The COVID-19 pandemic has adversely impacted both the Company’s revenue and costs by disrupting its operations in Chile, causing shortages within the supply chain and postponing sales opportunities as some government agencies delay new RFP (Request for Proposal) processes.processes or decisions. (See Item 1A - Risk Factors). Notwithstanding the challenges, the monitoring being performed by the Company’s significant customers across the globe have remained operational as have key business partners providing manufacturing and call center services. Furthermore,services and at this time, the Company has not experienced unusual payment interruptions from any large customerscustomers. As the conditions have improved with respect to COVID-19, both our Chile office and the majority of Company employees are effectively working from home to mitigatecorporate headquarters in the challenges created by COVID-19.greater-Chicago area have recently reopened. However, the Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the development of widespread testing or a vaccine; the ability of our supply chain to meet the Company’s need for equipment; the ability to sell and provide services and solutions if shelter in place restrictions and people working from home are extended to ensure employee safety; the volatility of foreign currency exchange rates and the subsequent effect on international transactions; and any closures of clients’ offices or the courts on which they rely.
Results of Operations
Three Months Ended December 31, 20202021 Compared to Three Months Ended December 31, 2019
Revenue
For the three months ended December 31, 2020,2021, the Company recognized total revenue from operations of $9,401,905$9,595,656 compared to $8,420,831$9,401,905 for the three months ended December 31, 2019,2020, an increase of $981,074$193,751 or approximately 12%2%. The $981,074$193,751 increase in total revenue was largely the result of an increase in domestic monitoring revenue and other related services, partially offset by lower revenue from our international customers.services. For the three months ended December 31, 2020,2021, the Company recognized revenue from monitoring and other related services of $9,271,729$9,469,729 compared to $8,268,423$9,271,729 for the three months ended December 31, 2019,2020, an increase of $1,003,306$198,000 or approximately 12%2%. This growth in monitoring and other related services revenue is more predictable than product sales. Monitoring and other related service revenue, which comprises the substantial majority of total revenue, increased due to growth in North America largely by clients in Illinois, Michigan, Puerto Rico, BahamasCanada, Chile and Ohio,Michigan, partially offset by a decreasedecreases in revenue in Chile due a reduction in the number of offenders monitored caused by the impact of COVID-19, when compared to the first fiscal quarter of 2019.
Product sales and other revenue for the three months ended December 31, 20202021 decreased to $130,176$125,927 from $152,408$130,176 in the same period in 2019,2020, a decrease of $22,232$4,249 or 15%approximately 3%.
The industry in which the Company operates, as well as many other industries (automotive, consumer products and medical devices), have been impacted by the global semiconductor shortage initially caused by the slowdown of many chip makers and logistics companies due to COVID-19. The shortage, which could last through at least the remainder of 2022, has been exacerbated by the surge in demand for a wide variety of products across several industries, all of which require varying amounts of semiconductors. As a result, until such time as chip manufacturers are able to meet global demand, our future operating results may be negatively impacted.
Cost of Revenue
During the three months ended December 31, 2020,2021, cost of revenue totaled $4,189,101$4,795,427 compared to cost of revenue during the three months ended December 31, 20192020 of $3,754,351,$4,189,101, an increase of $434,750$606,326 or approximately 12%14%.
Depreciation and amortization included in cost of revenue for the three months ended December 31, 2021 and 2020 totaled $863,849 and 2019 totaled $488,675, and $487,442, respectively, a decreasean increase of $1,233.$375,174. These costs represent the depreciation of ReliAlert™
Gross Profit and Margin
During the three months ended December 31, 2021, gross profit totaled $4,800,229, resulting in a gross margin of approximately 50%. During the three months ended December 31, 2020, gross profit totaled $5,212,804, representing an increase of $546,324 or approximately 12% compared to the same period last year, resulting in a gross margin of approximately 55%. The decrease in absolute gross profit of $412,575 or approximately 8% is due to increases in certain costs of revenue, including depreciation and amortization, server costs, monitoring costs and software maintenance, partially offset by an increase in revenue and lower repair costs.
General and Administrative Expense
During the three months ended December 31, 2021, general and administrative expense totaled $2,498,359 compared to $4,666,480$2,400,735 for the three months ended December 31, 2020. The increase of $97,624 or approximately 4% in general and administrative expense resulted largely from higher training and recruiting costs of $60,721, higher insurance costs of $34,219, higher legal and professional fees of $30,907, higher payroll and payroll taxes of $26,098 and higher Board of Director expenses of $17,068. These costs were offset by lower bad debt expense of $83,299.
Selling and Marketing Expense
During the three months ended December 31, 2021, selling and marketing expense totaled $697,872 compared to $550,457 for the three months ended December 31, 2020. The increase in expense of $147,415 or approximately 27% is principally the result of higher payroll and taxes of $71,081, higher consulting and outside service expenses of $35,557, higher travel and entertainment cots of $19,051 and higher trade show costs of $15,215.
Research and Development Expense
During the three months ended December 31, 2021, research and development expense totaled $590,852 compared to $307,294 for the three months ended December 31, 2020. The increase in expense of $283,558 or approximately 92% resulted largely from continuous improvements of our existing software, resulting in increased expense of $265,713 after our implementation of our new monitoring software. As a gross marginresult of approximately 55%the implementation of our new monitoring software on July 1, 2021, capitalization of developed technology decreased to $88,607 during the three months ended December 31, 2019.
Depreciation and Amortization Expense
During the three months ended December 31, 2020,2021, depreciation and amortization expense totaled $531,763$416,801 compared to $515,939$531,763 for the three months ended December 31, 2019, an increase2020, a decrease of $15,824$114,962 or approximately 3%.
Total Operating Expense
During the three months ended December 31, 2020,2021, total operating expense decreased to $3,790,249$4,203,884 compared to $4,365,497$3,790,249 for the three months ended December 31, 2019, a decrease2020, an increase of $575,248$413,635 or approximately 13%11%.
Operating Income
During the three months ended December 31, 2020,2021, operating income was $1,422,555$596,345 compared to operating income of $300,983$1,422,555 for the three months ended December 31, 2019, an improvement2020, a reduction of $1,121,572$826,210 or approximately 373%58%. This improvementreduction was due to a decrease in operating expense of $575,248, primarily due to lower general and administrative expense. and an increase in gross profit of $546,324, largely due to an increase in revenue of $981,074, partially offset by the$412,575, which resulted from higher cost of revenue directly related to additionalthe amortization of our new monitoring devices.
Other Income (Expense)
For the three months ended December 31, 2020,2021, other income (expense) totaled $178,630expense of ($587,838) compared to other expenseincome of $(459,225)$178,630 for the three months ended December 31, 2019, a decrease2020, an increase in net expense of $637,855.
Net Income (Loss) Attributable to Common Stockholders
The Company had net loss attributable to common stockholders of $305,322 for the three months ended December 31, 2021, compared to a net income attributable to common stockholders of $1,323,494 for the three months ended December 31, 2020, compared to a net loss attributable to common stockholdersreduction of $(232,625) for the three months ended December 31, 2019, an improvement of $1,556,119.
Liquidity and Capital Resources
The Company is currently self-funded through net cash provided by operating activities. As of December 31,
On May 19, 2020,
On October 21, 2020, the Company requested, in writing, an additional extension to the Consolidatedmaturity date of that certain facility agreement between the Company and Conrent Invest, S.A. (Conrent"), dated December 30, 2013, as amended on February 24, 2019, and further amended on January 7, 2020 (the "Amended Facility Agreement"), which previously provided for a $30.4 million unsecured debt facility. On November 25, 2020, the investors who owned the securities from Conrent used to finance the facility (the "Noteholders") held a meeting to address the Company’s request and approved a new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement (the "Amended Facility") which extends the maturity date of the agreement to July 1, 2024, capitalizes the accrued and unpaid interest increasing the outstanding principal amount and reduces the interest rate of the Amended Facility from 8% to 4%. On March 1, 2021, Conrent completed their documentation and the updated registration process to implement these changes and the Company transferred $12,531,556 of accrued interest to the Amended Facility for total principal of $42,931,556. Conrent forgave $67,556 of the aggregate amount due under the Amended Facility and the principal and interest due under the Amended Facility became $42,864,000. Interest payments are scheduled to be made on June 30 and December 31 each year, which began on June 30, 2021. We began amortizing deferred financing fees of approximately $360,000 on July 1, 2021. As of December 31, 2021, $42,864,000 of principal and $876,331 of interest was owed to Conrent. The Company paid Conrent the $876,331 interest due on January 5, 2022.
On January 6, 2021, the Company borrowed 70,443,375 Chilean Pesos (“CLP”) ($101,186USD) from HP Financial Statements.
On January 12, 2021, the Company borrowed 347,198,500CLP ($482,965USD), net of 2,801,500CLP fees ($3,897USD), from Banco Santander. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco Santander as lender. The loan was used to comply with the construction of Gendarmeria de Chile monitoring center in Santiago, Chile and remodeling a temporary monitoring center. The loan bears an interest at a rate of 5.04% per annum, payable monthly with principal beginning February 2021, and a maturity of May 11, 2024. The Company also paid 19,607,843CLP ($27,275USD) in broker fees which are amortized over the life of the loan.
On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of 2,000,700CLP fees ($2,734USD), from Banco Estado. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco Estado as lender. The loan provided was used for the construction of the Gendarmeria de Chile monitoring center in Santiago, Chile and computer equipment for Gendarmeria branch offices. The loan bears an interest rate of 3.50% per annum, initially having a 6-month grace period with the first payment including the 6 months of interest plus 1 month of principal on August 2, 2021, then monthly interest with principal, and a maturity date of January 2, 2024. The Company also paid 14,124,294CLP ($19,304USD) in broker fees which are amortized over the life of the loan.
On February 4, 2021, the Company borrowed 149,794,432CLP ($205,330USD) from HP Financial Services Chile Limitada. To facilitate the PPP Loan, the Company entered into a Note Payable Agreement with HP Financial Services Chile Limitada as lender. The loan was used to purchase computer equipment for the Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest at a rate of 6.61% per annum, payable monthly with principal beginning March 2021, and a maturity of March 4, 2024.
On February 5, 2021, the Company borrowed of 99,808,328CLP ($136,564USD), net of 210,485CLP fees ($286USD), from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan provided was used to purchase HVAC equipment for Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest rate of 2.54% per annum, payable monthly with principal beginning March 2021, and a maturity date of March 4, 2024.
On February 15, 2021, the Company borrowed 500,000,000CLP ($678,214USD) from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan proceeds were used as working capital and to complete the construction of the Gendarmeria monitoring center in Puerto Montt, Chile. The loan bears an interest at a rate of 3.12% per annum, payable monthly with principal beginning March 2021, and a maturity of February 17, 2025. The Company also paid 28,248,588CLP ($38,317USD) in broker fees which are amortized over the life of the loan.
Management will continue to seek other sources of capital, refinancing options, prepayment of debt at a discount and potentially other transactions including the exchange of some debt for an equity related security to reduce its total debt and assist in meeting all of its future obligations. While management believes it will be successful in completing one of these alternatives prior to the maturity of the Amended Facility Agreement in July 2024, no assurances can be given.
Other than the above-mentioned items, no borrowings or sales of equity securities occurred during the three months ended December 31, 20202021 or during the year ended September 30, 2020.
Net Cash Flows from Operating Activities.
During the
three months ended December 31,Net Cash Flows from Investing Activities.
The Company used $875,540 of cash from investing activities during the three months ended December 31, 2021, compared to $1,533,392 of cash used for investing activities during the
three months ended December 31,Net Cash Flows from Financing Activities.
The Company used $89,286$117,862 of cash from financing activities during the
Liquidity, Working Capital and Management’sManagement’s Plan
As of
December 31,On October 21, 2020, the Company requested, in writing, an additional extension to the maturity date of the Amended Facility Agreement. On November 25, 2020, the Noteholders held a meeting to address the Company’s request and approved a new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company signed an Amendment to the Amended Facility Agreement which extends the maturity date of the Amended Facility Agreementagreement to July 1, 2024, (“Amended Facility”). Pursuant tocapitalizes the Amended Facility, previously accrued and unpaid interest will be capitalized and added toincreasing the originaloutstanding principal of $30.4 million after Conrent updates an agreement with its bondholders, which we currently expect to occur in the second fiscal quarter of 2021,amount and reduces the interest rate of the Amended Facility from 8% to 4%. At December 31, 2020, accrued and unpaidOn June 28, 2021, the Company restarted interest is approximately $12.1 million.payments to Conrent which will be made semi-annually going forward. See Note 19 to the Consolidated Financial Statements.
During the fiscal year ended September 30, 2021, the Company borrowed approximately $2.0 million though six notes payable to fund the construction of monitoring centers in Chile required by our new contract. These six notes mature between January 2024 to February 2025, and the principal repayments on these six notes have all commenced. See Note 19 to the Consolidated Financial Statements.
The Company believes it will be able to continue to fund future operations using cash on hand and through operational cash flows.
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.
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 $2,604,147$1,530,147 and $2,852,973$1,460,567 in foreign currency revenue from sources outside of the United States for the three-monthsthree months ended December 31, 20202021 and 2019,2020, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in foreign exchange gains(loss) gain of $818,626$(106,278) and $143,308$818,626 in the three months ended December 31, 20202021 and 2019,2020, 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.COVID-19 and government policies issued as a result of COVID-19. 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.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20202021 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of December 31, 2020.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There was no change in our internal control over financial reporting during our quarter ended December 31, 20202021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
RTPART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, claims are made againstinvolved in various legal proceedings incidental to the Companyconduct of our business. Historically, the outcome of all such legal proceedings has not, 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 haveaggregate, had a material adverse impacteffect on the Company’sour business, financial position orcondition, results of operations.
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 (“OADPRS”) of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. 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 CompanyCommonwealth of Puerto Rico, through its Trustees v. International Surveillance Services Corporation
. On January 23, 2020, the Company was served with a summons for an Adversary Action pending against International Surveillance Services Corporation (“ISS”), a subsidiary of the Company, now known as Track Group – Puerto Rico Inc., in the United States District Court for the District of Puerto Rico seeking to avoid and recover allegedly constructive fraudulent transfers and to disallow claims pursuant to United States Bankruptcy and Puerto Rican law. The allegations stem from payments made to ISS between 2014 and 2017, which the Company believes were properly made in accordance with a contract between ISS and the government of Puerto Rico, through the Oficina de Servicios con Antelacion a Juicio, originally signed in 2011. The Company is confident that all payments it received were earned and due under applicable law and has produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6,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 (“Jeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the State of California in Case No. 21 STCV 21345, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the Company. The Company was served on October 15, 2021 and filed its Answer and Affirmative Defenses on November 12, 2021. On January 11, 2022 the Company issued discovery, and the discovery process remains ongoing. The Company disputes Abed’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is deemed remote by management,remote.
Track Group Chile SpA. v. Republic of Chile. On January 24, 2022, Track Group Chile SpA. initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile. The Company asserts that it has complied with its contractual obligations and that any delays in so doing were not attributable to the Company. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with outside legal counsel.
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, 2020,2021, filed on December 23, 2020.16, 2021. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report and other reports we file with the SEC. Should any of these risks materialize or deteriorate further, our business, financial condition and future prospects could be negatively impacted. As of
None.
Item 3. Defaults Upon Senior Securities
None.
Not applicable.
None.
(a)Exhibits Required by Item 601 of Regulation S-K
Exhibit Number | Title of Document | |
| 10.2 | Amendment No. 1 to Employment Agreement by and Between Track Group Inc. and Matthew Swando dated April 23, 2018. | |
| Amendment No.2 to Employment Agreement by and Between Track Group Inc. and Matthew Swando dated January 15, 2022. | ||
Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). | ||
Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith). | ||
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). | ||
101.INS | Inline XBRL | |
101.SCH | Inline XBRL | |
101.CAL | Inline XBRL | |
101.DEF | Inline XBRL | |
101.LAB | Inline XBRL | |
101.PRE | Inline XBRL | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
RES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Track Group, Inc. | |||
Date: February 10, | By: | /s/ Derek Cassell | |
Derek Cassell, Chief Executive Officer Principal Executive Officer | |||
Date: February 10, | By: | /s/ Peter K. Poli | |
Peter K. Poli, Chief Financial Officer (Principal Accounting Officer) | |||