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EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Track Group, Inc.ex32.htm
EX-31 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Track Group, Inc.ex31-2.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Track Group, Inc.ex31-1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
 
[X]
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the fiscal year ended September 30, 2019
or
 
[  ]
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from ____________  to  ___________
 
Commission file number: 000-23153 
 
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 No.)
 
200 E. 5th Avenue Suite 100 Naperville, Illinois 60563
(Address of principal executive offices, Zip Code)
 
(877) 260-2010
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.0001
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [   ]   No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes [   ]   No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   [   ]
Accelerated filer                     [   ]
Non-accelerated filer     [   ]
Smaller reporting company    [X]
 
Emerging growth company    [   ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [  ]   No [X]
 
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant computed by reference to the closing price on March 31, 2019 was $2.4 million. As of December 3, 2019, there were 11,414,150 shares of Common Stock issued and outstanding.
 
 Documents Incorporated by Reference
 
The registrant incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to portions of the registrant’s definitive proxy statement with respect to its 2019 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended September 30, 2019, pursuant to Regulation 14A. 
 
 
 

 
 
 
 Track Group, Inc. 
FORM 10-K
For the Fiscal Year Ended September 30, 2019 
INDEX 
 
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-i-
 
 
FORWARD LOOKING STATEMENTS
 
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as “may” “will”, “should”, “likely”, “anticipates”, “expects”, “intends”, “plans”, “projects”, “believes”, “estimates”, and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate. Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to the factors discussed under the section of this Annual Report entitled “Risk Factors”.
 
 
 
-ii-
 
 
PART I
 
Item 1.       Business
 
Track Group, Inc., (the “Company”, “we”, “us”, and “our”), a Delaware corporation since 2016 and previously incorporated in 1995 as a Utah corporation, has its principal place of business at 200 E. 5th Avenue Suite 100, Naperville, Illinois 60563. Our telephone number is (877) 260-2010. We maintain a corporate website at www.trackgrp.com. Our common stock, par value $0.0001 per share (“Common Stock”), is currently listed for quotation on the OTCQX Premier Marketplace (“OTCQX”) under the symbol “TRCK”. Unless specified otherwise, as used in this Annual Report, references to Track Group, Inc. include the Company and its subsidiaries.
 
Company Background
 
The Company designs, manufactures, and markets location tracking devices and develops and sells a variety of related software, services, accessories, networking solutions, and monitoring applications. Our products and services include a full-range of one-piece GPS tracking devices, a device-agnostic operating system, a portfolio of software applications including smartphone, alcohol and predictive analytics, and a variety of accessory, service and support offerings. Our products and services are currently available worldwide and are sold through our direct sales force, as well as through value-added resellers. The Company sells to government customers on federal, state and local levels in the U.S. and to members of the Ministry of Justice (MOJ) internationally. Track Group’s device-agnostic platform and expanded portfolio of integrated and complimentary monitoring-related services help reduce risk and make the administration of justice better, faster, and less expensive for taxpayers. As of September 30, 2019, the Company’s products and platform were used to monitor over 37,000 individuals globally.
 
Business Strategy
 
We are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software, and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. Accordingly, rather than receiving a payment just for a piece of manufactured equipment, the Company receives a recurring stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, we continue to expand our device-agnostic platform to not only collect, but also store, analyze, assess and correlate location data for both accountability and auditing reasons, as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience with knowledgeable salespersons who can convey the value of our products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related-service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development (“R&D”), including smartphone applications and other monitoring services is critical to the development and sale of innovative technologies and integrated solutions today and in the future.
 
Recent Developments
 
Conrent Facility Agreement
 
On February 24, 2019 the Company and Conrent Invest S.A. (“Conrent”), acting on behalf of its compartment, Safety 2, amended the facility agreement originally entered into by and between the parties on December 30, 2013 (the “Amended Facility Agreement”), which Amended Facility Agreement alters certain provisions of the Company’s existing $30.4 million unsecured debt facility. Effective February 24, 2019, the Amended Facility Agreement (I) extended the Maturity Date to the earlier of either April 1, 2020 or the date upon which the Outstanding Principal Amount, as defined therein, is repaid by the Company, and (ii) provided that in the event of a Change of Control, as defined therein, Conrent shall immediately cancel the facility and declare the Outstanding Principal Amount, together with unpaid interest, immediately due and payable. On December 4, 2019, the Company requested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020 the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
 
Products and Services
 
Devices
 
ReliAlert™XC 3
ReliAlert™XC3 is our flagship GPS device that sets the standard for reliability and performance in the offender monitoring industry. Advanced features enable agencies to more effectively track offender movements and communicate directly with offenders in real-time, through a patented, on-board two/three-way voice communication technology. This device includes an enhanced GPS antenna and GPS module for higher sensitivity GPS, enhanced voice audio quality, increased battery performance of 50+ hours, 3G cellular capabilities, improved tamper sensory, and durability enhancements.
 
 
 
 
Shadow™
Driven by customer demand to improve the performance and affordability of offender tracking devices, Shadow™ is the smallest and lightest device of its kind with a sleek, modern design featuring an enhanced mobile charging capability that makes it easier to use. The device is 3G compliant and fully supported by all global mobility providers.
 
Operating System Software
 
TrackerPAL™
TrackerPAL™ is a secure, cloud-based monitoring system that gives customers the ability to not only collect, but also store, analyze, assess and correlate offender data for both accountability and auditing reasons, as well as to use with predictive analytics applications and assess criminal behavior and rehabilitation opportunities. The Company is working on a successor software platform, IntelliTrackTM that will be introduced to customers in a controlled manner throughout the upcoming fiscal year.
 
Application Software
 
TrackerPAL™ Mobile
A mobile application of the TrackerPAL™ software is available for Android and iOS devices. The Company is also developing a similar application for IntelliTrackTM.
 
Data Analytics
Our data analytics services help facilitate the discovery and communication of meaningful patterns in diverse location and behavioral data that helps agencies reduce risks and improve decision making. Our analytics applications use various combinations of statistical analysis procedures, data and text mining, and predictive modeling to proactively analyze information on community-released offenders to discover hidden relationships and patterns in their behaviors and to predict future outcomes.
 
Real-Time Alcohol Monitoring
BACtrack is the world’s first smartphone-based remote alcohol monitoring system. The award-winning BACtrack Mobile integrates a smartphone app and police-grade breathalyzer branded for the Company to bring blood-alcohol content (“BAC”) wirelessly to a mobile device. We can quickly and easily estimate an enrollee’s BAC and track the results over time. The smartphone monitoring application allows supervisors to send scheduled or random notifications to enrollees to take BAC tests, providing photo/location-verified and time stamped results. It also includes an onboard calendar, reminding an enrollee of court dates, testing dates, medications to take, mandatory events to attend, and other matters.
 
Victim and Survivor Support
Our Domestic Violence Smartphone Application creates a mobile geo-zone around a survivor of domestic abuse and communicates with the offender’s tracking device – providing an early-warning notification to the survivor if he or she is in proximity of the offender or group of offenders.
 
InTouch
InTouch is a smartphone monitoring and supervision application specifically designed for the criminal justice market to compliment traditional Electronic Monitoring Solutions; offering a “step-up”/“step-down” option from location monitoring bracelets for community supervised populations.
 
Accessories
 
SecureCuff™
The SecureCuff™ is a patented, optional accessory available exclusively for ReliAlert™XC3 and is the only uncuttable strap in the industry specifically made for high-risk offenders. SecureCuff™ has encased, hardened steel bands that provide extreme cut-resistance and includes the same fiber-optic technology as the standard strap for tampering notification.
 
RF Beacon™
The RF Beacon™ is a completely self-contained, short-range transmitting station that provides a Radio Frequency (RF) signal communicating with assigned offender GPS devices to increase the ability to maintain critical offender location information and provide agencies with an effective way to more accurately “tether” an offender to a specific location.
 
 
 
 
Product Support and Services
 
Monitoring Centers
Our monitoring centers 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, are staffed with highly trained, bi-lingual individuals. These operators act as an extension of agency resources receiving alarms, communicating and intervening with offenders regarding violations, and interacting with supervision staff, all pursuant to agency-established protocols. The facilities have redundant power source, battery backup and triple redundancy in voice, data, and IP. We have assisted in the establishment of monitoring centers for customers and local partners in the United States, Chile and other global locations.
 
Customer Care
We offer a range of support options for our customers. These include assistance that is built into software products, printed and electronic product manuals, online support including comprehensive product information, as well as technical assistance.
 
Research and Development Program
 
During the fiscal year ended September 30, 2019, we incurred research and development expense of $1,313,499, compared to $862,142 recognized during fiscal year 2018. The $451,357 increase in research and development cost reflects higher wages and taxes of $323,321 higher travel expense of $109,052 and higher dues and subscriptions of $23,485. The Company is completing its new technology platform, which we currently intend to rollout to customers in the upcoming fiscal year. The Company is significantly enhancing its technology platform to improve the efficiency of its software, firmware, user interface, and automation. As a result of these improvements, $1,181,308 was capitalized as developed technology during the year ended September 30, 2019. A portion of this expense would have been recognized as research and development expense, absent the significant enhancements to the technology. This represented an increase of $97,563 compared to the $1,083,745 capitalized as developed technology during the year ended September 30, 2018.
 
Competition
 
The markets for our products and services are highly competitive and we are confronted by aggressive competition in all areas of our business. These markets are characterized by frequent product introductions and technological advances. Our competitors selling tracking devices have aggressively cut prices and lowered their product margins to gain or maintain market share. Our financial condition and operating results could be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to us include price, product features, relative price/performance, product quality and reliability, design innovation, a strong software ecosystem, service and support, and corporate reputation.
 
Our specific competitors vary from market to market and we compete against other international, national and regional companies, some of whom use local partners that may have more knowledge of the local markets and the government decision making process. Some of our competitors are owned by large public companies with broader resources, while others are backed by private equity firms with large funds, or in some cases, work as part of a consortium with extensive international experience. We expect competition in these markets to intensify as competitors attempt to imitate some of the features of our products and applications within their own products or, alternatively, collaborate with third-party providers to offer solutions that are more competitive than those they currently offer.
 
Competitive Strengths
 
Relationships with High-Quality Government Customers. We have developed strong relationships with federal, state and county customers within the United States and with Ministries of Justice internationally and managed to bring in new, sizable customers in the past year.
 
Industry Leading Analytics Software. Our software remains a leader with fully functioning, revenue-generating analytics on the market today, specifically designed for the offender monitoring market. State departments of corrections, county probation agencies and Sheriff’s offices have utilized this solution for multiple years.
 
Device Agnostic Software Platform. Our software platform is device agnostic and currently accommodates offender monitoring of new products that we introduce, integrates with case management software utilized by sheriff, probation and pre-trial departments, and adds devices manufactured by competitors.
 
 
 
 
Smartphone Monitoring Pioneers in Criminal Justice. Today’s prison system incarcerates too many individuals who pose little threat to public safety, at far too great a cost. They serve their sentences in overcrowded, outdated institutions that expose them to hardened criminals. Upon release, their opportunities and lives have changed forever. Now, low-risk offender populations can serve their sentences virtually, holding jobs and taking care of family members, yet still feeling the weight of their punishment while seeing a clear path to avoiding trouble in the future. Further, taxpayers gain a clear cost advantage. To date, we have developed apps targeting alcohol monitoring, domestic violence and our core monitoring platform.
 
Experienced Senior Management Team. Our top executives have extensive experience in both the offender monitoring marketplace and their specific fields of expertise, whether that be sales, customer care and/or technology. We also benefit from a diverse and experienced Board of Directors.
 
Recurring Revenue. Our revenue is generated in large part by long-term customer contracts based on the size of the offender monitoring program throughout each month, which creates a predictable, recurring revenue stream.
 
Extensive Product Suite. We have a large variety of products that appeal to a broad range of government customers and greatly enhance our ability to attract and retain clients. These products include different GPS devices, alcohol monitoring devices and applications, and new smartphone applications including those that address adjacent market opportunities in both the public and private sectors and analytics software.
 
National Footprint with International Presence. We operate in approximately 39 states as well as select international locations, including Chile, Puerto Rico, Mexico, Saudi Arabia and Bahamas. Our presence both within the United States and abroad better positions us to compete for new and expiring government contracts.
 
Sources and Availability of Raw Materials
 
We use various suppliers and contract manufacturers to supply parts and components for the manufacture and support of our product lines. Although our intention is to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements. We may not be able to procure these components from alternative sources at acceptable prices and quality within a reasonable time, or at all; therefore, the risk of loss or interruption of such arrangements could impact our ability to deliver certain products on a timely basis.
 
Dependence on Major Customers
 
We had sales to entities, two of which each represent 10% or more of our gross revenue, as follows for the years ended September 30, 2019 and 2018, respectively:
 
 
 
2019
 
 
%
 
 
2018
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer A
 $8,570,404 
  25%
 $9,201,502 
  30%
Customer B
 $3,549,273 
  10%
 $3,772,540 
  12%
Customer C
 $2,507,577 
  7%
 $2,468,472 
  8%
 
No other customer represented more than 10% of our total revenue for the fiscal years ended September 30, 2019 or 2018.
 
Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2019 and 2018, respectively, are shown in the table below: 
 
 
 
2019
 
 
%
 
 
2018
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer A
 $1,538,775 
  23%
 $1,689,976 
  28%
Customer B
 $844,241 
  12%
 $594,626 
  10%
Customer C
 $410,033 
  6%
 $428,560 
  7%
 
Dependence on Major Suppliers
 
We purchase cellular services from several major suppliers. The cost to us for these services during the fiscal years ended September 30, 2019 and 2018 was $2,323,491 and $2,075,671, respectively. The 12% increase in cellular service expense in 2019 compared to 2018 resulted from increased costs associated with higher revenue.
 
During the years ended September 30, 2019 and 2018, we also purchased a significant portion of our inventory and monitoring equipment from certain suppliers. The cost of these purchases during the fiscal years ended September 30, 2019 and 2018 was $1,782,049 and $1,305,586, respectively. The increase in monitoring equipment was due to the growth in the number of individuals monitored globally from over 34,000 at September 30, 2018 to over 37,000 at September 30, 2019.
 
 
 
 
Intellectual Property
 
We currently hold rights to patents and copyrights relating to certain aspects of our hardware devices, accessories, software and services. We have registered or applied for trademarks and service marks in the U.S. and a number of foreign countries. Although we believe the ownership of such patents, copyrights, trademarks and service marks is an important factor in our business and that our success does depend in part on the ownership thereof, we rely primarily on the innovative skills, technical competence and marketing abilities of our personnel.
 
We file patent applications as needed to protect innovations arising from our research, development and design, and are currently pursuing numerous patent applications around the world. Over time, we have accumulated a large portfolio of issued patents around the world. We hold copyrights relating to certain aspects of our products and services. No single patent or copyright is solely responsible for protecting our products. We believe that the duration of our patents is adequate relative to the expected lives of our products.
 
Many of our products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of our products, processes and services. Although we have generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses can be obtained in the future on reasonable terms, or at all. Because of technological changes in the industries in which we compete, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of our products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, we have been notified that we may be infringing certain patents or other intellectual property rights of third parties. 
 
Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own ten trademarks that are registered with the United States Patent and Trademark Office, plus one trademark registered in Mexico and one in Canada. In addition, we have the Track Group trademark and design registered in various countries around the world.
 
We will file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States.
 
The following table summarizes our trademark registrations:
 
Trademark
 
Application
Number
 
 
Registration
Number
 
 
Status/
Next Action
 
Mobile911 Siren with 2-Way Voice Communication & Design®
  76/013,886 
  2,595,328 
Registered
TrackerPAL®
  78/843,035 
  3,345,878 
Registered
Mobile911®
  78/851,384 
  3,212,937 
Registered
TrackerPAL®
 
CA 1,315,487
 
  749,417 
Registered
TrackerPAL®
 
MX 805,365
 
  960954 
Registered
ReliAlert™
  85/238,049 
  4200738 
Registered
SecureCuff™
  85/626037 
  4271621 
Registered
SecureAlert™
  86/031,550 
  4623370 
Registered
TrackGroup™
  86/301716 
  4701636 
Registered
Track Group™ and Design
  86/469103 
  4793747 
Registered
Track Group™ and Design*
  
MP 1257077
 
  1257077 
Registered
V-TRCK®
  87/151142 
  5330916 
Registered
 
 * Track Group™ and Design is also a registered trademark in the following countries: Europe, Switzerland, Mexico, Canada and Chile and is pending in Brazil. HomeAware™ is a registered trademark owned by the Company; however, it is no longer in use.
 
Patents. We have 12 patents issued in the United States. At foreign patent offices, we have 8 patents issued and 3 patents pending. 
 
 
 
 
The following tables summarize information regarding our patents and patent applications. There are no assurances given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications.
 
 
US Patents
 
Application
Serial No.
 
 
Date Filed
 
 
Patent No.
 
 
Issue Date
 
Remote Tracking and Communication Device
  11/202427 
10-Aug-05
  7330122 
12-Feb-08
Remote Tracking and Communications Device
  12/028088 
8-Feb-08
  7804412 
28-Sep-10
Remote Tracking and Communications Device
  12/875,988 
3-Sep-10
  8031077 
4-Oct-11
Alarm and Alarm Management System for Remote Tracking Devices
  11/486992 
14-Jul-06
  7737841 
15-Jun-10
Alarm and Alarm Management System for Remote Tracking Devices
  12/792,572 
2-Jun-10
  8013736 
6-Sep-11
A Remote Tracking Device and a System and Method for
Two-Way Voice Communication Between the Device and a Monitoring Center
  11/486989 
14-Jul-06
  8797210 
5-Aug-14
A Remote Tracking Device and a System and Method for
Two-Way Voice Communication Between the Device and a Monitoring Center
  14/323,831 
3-Jul-14
  9491289 
8-Nov-16
A Remote Tracking System with a Dedicated Monitoring Center
  11/486976 
14-Jul-06
  7936262 
3-May-11
Remote Tracking System and Device with Variable Sampling
and Sending Capabilities Based on Environmental Factors
  11/486991 
14-Jul-06
  7545318 
9-Jun-09
Tracking Device Incorporating Enhanced Security Mounting Strap
  12/818,453 
18-Jun-10
  8,514,070 
20-Aug-13
Tracking Device Incorporating Cuff with Cut Resistant Materials
  14/307,260 
17-Jun-14
  9129504 
8-Sep-15
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device
  12/399151 
6-Mar-09
  8232876 
31-Jul-12
 
 
International Patents
 
Application
Serial No.
 
 
Date Filed
 
 
Patent No.
 
 
Issue Date
 
Remote Tracking and Communication Device - Canada
  2617923 
4-Aug-06
  2617923 
7-Jun-16
Remote Tracking and Communication Device - Mexico
 
MX/a/2008/001932
 
4-Aug-06
  278405 
24-Aug-10
Secure Strap Mounting System for an Offender Tracking
Device - EPO
  10009091.9 
9-Jan-10
    
Pending
Secure Strap Mounting System for an Offender Tracking
Device - Brazil
 
PI11001593
 
28-Feb-11
    
Pending
Secure Strap Mounting System for an Offender Tracking
Device - Mexico
 
MX/a/2011/002283
 
28-Feb-11
  319057 
4-Apr-14
Secure Strap Mounting System for an Offender Tracking
Device - Canada
  2732654 
25-Oct-13
  2732654 
1-May-18
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device - Brazil
 
PI0909172-6
 
1-Sep-10
    
Pending
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device - Canada
  2717866 
3-Sep-10
  2717866 
17-May-16
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device - EPO
  09 716 860.3 
6-Oct-10
  2260482 
9-Jan-13
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device - United Kingdom
 
Refer to EP Patent # 2260482
 
A System and Method for Monitoring Individuals Using a
Beacon and Intelligent Remote Tracking Device - Mexico
  
MX/a/2010/009680
 
2-Sep-10
  306920 
22-Jan-13
 
Trade Secrets.  We own certain intellectual property, including trade secrets, which we seek to protect, in part, through confidentiality agreements with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
 
We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
 
 
 
 
Government Regulation
 
Our operations are subject to various federal, state, local and international laws and regulations.
 
In October 2018, through an internal review of our export compliance, it came to our attention that some of our products may not have been properly classified in the past, and that our export of certain products, software and technology may be subject to export licensing requirements of which we were not previously aware. As a result of these findings, we hired independent counsel to assist in, among other things, an investigation with respect to our past export practices and analyzing our classification of products, software and technology. On October 16, 2018, we voluntarily self-disclosed the information above to the Bureau of Industry and Security (“BIS”), followed by additional details sent to the BIS on April 1, 2019, and we have obtained licenses for the export of our products, software and technology to all of the Company’s international customers.
 
On February 7, 2019, the Company received authorization from BIS for all of its internal customers, contractors and subsidiaries requiring approval in addition to its Swedish and Mexican foreign national employees to continue using electronic devices and the associated software and technology. On April 22, 2019, the Company received a letter (the “Warning Letter”) from the BIS in response to the aforementioned self-disclosure, indicating that although violations of certain export regulations had occurred, the BIS Office of Export Enforcement closed this matter with the issuance of the Warning Letter in lieu of prosecution or fines given the facts and circumstances.
 
Currently, 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.
 
Seasonality
 
Given the consistency in recurring domestic monitoring revenue by customers throughout fiscal 2019, we detected no apparent seasonality in our business. However, as in previous years, incremental domestic device deployment opportunities typically slow down in the months of July and August. We believe this is due to the unavailability of judicial and corrections officials who observe a traditional vacation season during this period.
 
Employees
 
As of December 1, 2019, we had 164 full-time employees and 2 part-time employees. None of the employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and management believes that relations with employees are good.
 
Additional Available Information
 
We make available, free of charge, at our corporate website (www.trackgrp.com) copies of our annual reports filed with the United States Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements at no charge to investors upon request.
 
All reports filed by us with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov.
 
Item 1A.    Risk Factors
 
Our business is subject to significant risks. You should carefully consider the risks described below and the other information in this Annual Report, including our financial statements and related notes, before you decide to invest in our Common Stock. If any of the following risks or uncertainties actually occur, our business, results of operations or financial condition could be materially harmed, the trading price of our Common Stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.
 
 
 
 
Risks Related to Our Business, Operations and Industry 
 
We face risks related to our substantial indebtedness, including risk related to the repayment of our short-term indebtedness.
 
As of September 30, 2019, we had $33,827,689 of indebtedness outstanding, all of which becomes due and payable within the next 12 months, including $30,400,000 which matures on April 1, 2020 and $3,399,644 which matures September 30, 2020. Our significant indebtedness could adversely affect our ability to raise additional capital to fund our operations, make interest payments as they come due, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under our outstanding debt instruments. As a result, we will have to raise additional capital or restructure such indebtedness during the next six months, and no assurances can be given that we may be successful in that regard. See “Recent Developments” and Note 13 to the Consolidated Financial Statements.
 
Our high degree of leverage could have adverse consequences to us, including:
 
making it more difficult for us to make payments on our debt;
 
 
increasing our vulnerability to general economic and industry conditions;
 
 
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
 
 
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
 
 
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
 
 
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.
 
We will not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
 
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. While we are currently reviewing all options regarding our indebtedness, no assurances can be given that we will be successful in refinancing, extending or restructuring the debt, and we cannot assure you that we will maintain a level of cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
 
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness.
 
These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity difficulties and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or the proceeds that we realize from them may not be adequate to meet the debt service obligations then due.
 
There is no certainty that the market will continue to accept or expand the use of our products and services.
 
Our targeted markets may be slow to, or may never, expand the use of our products or services. Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that our products are a preferable alternative to other available methods of tracking or incarceration. In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside of our control. No assurance can be given that key decision-makers will continue to accept or expand the use of our products, and if they do not, it could have a material adverse effect on our business, financial condition and results of operations.
 
 
 
 
Budgetary issues faced by government agencies could adversely impact our future revenue. 
 
Our revenue is primarily derived from contracts with state, local and county government agencies in the United States and governments of Caribbean and Latin American nations. Many of these government agencies are experiencing budget deficits and may continue to do so. As a result, we may experience delays in payment on customer invoices, the amount spent by our current clients on equipment and services that we supply may be reduced or grow at rates slower than anticipated, and it may be more difficult to attract additional government clients. In light of the recent hurricanes, and the destruction sustained by many Caribbean countries, this is of increasing risk. Furthermore, the industry has experienced a general decline in average daily lease rates for GPS tracking devices. As a result of these factors, our ability to maintain or increase our revenue may be negatively affected.
 
We rely on significant suppliers for key products and cellular access. If we do not renew these agreements when they expire, we may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as we have in the past, which could adversely affect our results of operations or financial condition. 
 
We have entered into agreements with several national providers for cellular services. We also currently rely on a single source for the large majority of the manufacturing of our devices. If any of these significant suppliers were to cease providing products or services to us, we would be required to seek alternative sources. No assurances can be given that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.
 
Our research, development, marketing and export activities are subject to government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. 
 
In October 2018, through an internal review of our export compliance, it came to our attention that some of our products may not have been properly classified in the past, and that our export of certain products, software and technology may be subject to export licensing requirements of which we were not previously aware. As a result of these findings, we hired independent counsel to assist in, among other things, an investigation with respect to our past export practices and analyzing our classification of products, software and technology. On October 16, 2018, we voluntarily self-disclosed our potential former violation of the applicable export licensing requirements to the Bureau of Industry and Security (“BIS”), followed by additional details sent to the BIS on April 1, 2019, and have obtained licenses for the export of certain of our products, software and technology to all of the Company’s international customers.
 
On February 7, 2019, the Company received authorization from BIS for all of its internal customers, contractors and subsidiaries requiring approval in addition to its Swedish and Mexican foreign national employees to continue using electronic devices and the associated software and technology. On April 22, 2019, the Company received a letter (the “Warning Letter”) from the BIS in response to the aforementioned self-disclosure, indicating that although violations of certain export regulations had occurred, the BIS Office of Export Enforcement closed this matter with the issuance of the Warning Letter in lieu of prosecution or fines given the facts and circumstances.
 
In addition, there can be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations. We are required to comply with regulations for manufacturing and export practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions. 
 
We face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence.
 
Our current and expected markets are rapidly changing. Although we believe our technology has advantages over competing systems, there can be no assurance that those advantages are significant. Many of our competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field. Moreover, competitors may be in the process of developing technology that could be developed more quickly or ultimately be more effective than our products. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
 
 
 
 
We are dependent upon certain customers, the loss of which may adversely affect our results of operations and business condition.
 
During fiscal year 2019, our three top customers accounted for an aggregate of 43% of total sales. One of these contracts expires within the next fiscal year. Failure to renew the expiring contract, resulting in the loss of this customer, may have an adverse effect on our business. See Note 2 to the Consolidated Financial Statements.
 
Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets.
 
There can be no assurance that our research and development efforts will be successful. In addition, the technology that we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets. GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user, which, under some circumstances, may limit the effectiveness of GPS tracking.
 
We face risks of litigation and regulatory investigation and actions in connection with our operations.
 
Lawsuits, including regulatory actions, may seek recovery of large, indeterminate amounts or otherwise limit our operations, and their existence and magnitude may remain unknown for substantial periods of time. Relevant authorities in the markets in which we operate may investigate us in the future. These investigations may result in significant penalties in multiple jurisdictions, and we may become involved in disputes with private parties seeking compensation for damages resulting from the relevant violations. Such legal liability or regulatory action could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and credibility. In addition, our business activities are subject to various governmental regulations in countries where we operate, which include investment approvals, export regulations, tariffs, antitrust, anti-bribery, intellectual property, consumer and business taxation, foreign trade, exchange controls, and environmental and recycling requirements. These regulations limit, and other new or amended regulations may further limit, our business activities or increase operating costs. In addition, the enforcement of such regulations, including the imposition of fines or surcharges for violation of such regulations, may adversely affect our results of operations, financial condition, cash flows, reputation and credibility.
 
Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights.
 
We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. Our inability to obtain or to maintain patents on our key products could adversely affect our business. We currently own 20 patents issued and have filed and may file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies, and for specific products we may develop. There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented. The enforcement of patent rights can be uncertain and involves complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.
 
Our success will also depend, in part, on our ability to avoid infringing the patent rights of others. We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services. Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities. If patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance given that we will be able to obtain any necessary licenses on commercially favorable terms, if at all. Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition.
 
 
 
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We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable. These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers, and customer names and addresses. We seek to protect this un-patentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants, and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
 
We conduct business internationally with a variety of sovereign governments.
 
Our business is subject to a variety of regulations and political interests that could affect the timing of payment for services and the duration of our contracts. We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust. The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. In addition, because our customers in these foreign jurisdictions are sovereign governments or governmental departments or agencies, it may be difficult for us to enforce our agreements with them in the event of a breach of those agreements, including, but not limited to, the failure to pay for services rendered or to complete projects that we have commenced.
 
We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, civil unrest, computer bugs or viruses, malicious cyber-attacks or hardware failures.
 
Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services. Historically, we have experienced temporary interruptions of telecommunications or power outages, which were promptly mitigated, although Hurricane Maria in 2017 presented even greater challenges in Puerto Rico, including into the 2018 fiscal year. Such instances may result in loss of customer accounts or similar problems if they occur again in the future. Given rapidly changing technologies, we are not certain that we will be able to adapt the use of our services to permit, upgrade, and expand our systems or to integrate smoothly with new technologies. Network and information systems and other technologies are critical to our business activities. Network and information systems-related events, including those caused by us, our service providers or by third parties, such as computer hacking, cyber-attacks, computer viruses, or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing could result in a degradation or disruption of our services. These types of events could result in a loss of customers and large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar events.
 
We currently have two independent directors sitting on our Board of Directors.
 
Our Board of Directors is currently comprised of three members, one of which would not be considered independent under the rules of the Nasdaq Capital Market and the OTC Markets. Additionally, we no longer maintain separate audit, compensation or nominating and governance committees, the duties of which are fulfilled by our entire Board of Directors. The rules of the OTC Markets require that companies whose securities are listed for quotation on the OTCQX have a board of directors comprised of at least two independent directors. In the event that one of our two independent directors resigns, and we fail to appoint an additional independent director on or before May 31, 2020, our Common Stock would no longer be eligible for quotation on the OTCQX, resulting in the quotation of our Common Stock on an alternative market, such as the OTC Pink Marketplace. Such change may affect the number and type of investors eligible to purchase our Common Stock. As a result, the price of our Common Stock may be adversely affected.
 
Risks Related to Acquisitions
 
The success of our business depends on achieving our strategic objectives, including acquisitions, dispositions and restructurings.
 
Our acquisitions, as well as potential restructuring actions, may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges, such as personnel and technology. In addition, we may not achieve anticipated cost savings from restructuring actions, which could result in lower operating margins. If we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. After reaching an agreement with a buyer or seller for the acquisition or disposition of a business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing the transaction.
 
 
 
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We may not be able to grow successfully through our recent acquisitions or through future acquisitions, we may not successfully manage future growth, and we may not be able to effectively integrate businesses that we may acquire.
 
We plan to continue to grow organically as well as through strategic acquisitions of other businesses. In order to complete acquisitions, we would expect to require additional debt and/or equity financing, which may increase our interest expense, leverage, and the number of shares of our Common Stock or other securities outstanding. Businesses that we acquire may not perform as expected. Future revenue, profits and cash flows of an acquired business may not materialize due to the failure or inability to capture expected synergies, increased competition, regulatory issues, changes in market conditions, or other factors beyond our control. In addition, we may not be successful in integrating these acquisitions into our existing operations. Competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions. Additional risks related to acquisitions include, but are not limited to:
 
the potential disruption of our existing business;
 
 
entering new markets or industries in which we have limited prior experience;
 
 
difficulties integrating and retaining key management, sales, research and development, production and other personnel or diversion of management attention from ongoing business concerns to integration matters;
 
 
difficulties integrating or expanding information technology systems and other business processes or administrative infrastructures to accommodate the acquired businesses;
 
 
complexities associated with managing the combined businesses due to multiple physical locations;
 
 
risks associated with integrating financial reporting and internal control systems; and
 
 
whether any necessary additional debt or equity financing will be available on terms acceptable to us, or at all, and the impact of such financing on our operating performance and results of operations.
 
Risks Related to International Operations
 
We are exposed to fluctuations in currency exchange rates.
 
Our financial results are reported in U.S. dollars, but operations are conducted internationally. Currency exchange rates have, and may continue to have, a significant impact on our operating results. We do not utilize hedging techniques to minimize our exposure. As a result, an investment in our Common Stock may expose stockholders to fluctuations in exchange rates.
 
The dollar cost of our operations internationally could increase as a result of increases or decreases in the rate of inflation or devaluation of the local currency in relation to the dollar, which may harm our results of operations.
 
The dollar cost of our international operations is expected to be influenced by any increase in inflation that is not offset by the devaluation of the local currency in relation to the dollar. As a result, we are exposed to the risk that foreign currencies will appreciate in relation to the dollar. We cannot predict whether the foreign currencies will appreciate or depreciate against the dollar in the future.
 
International political, economic and military instability may impede our ability to execute our plan of operations. 
 
Political, economic and military conditions, both domestic and abroad, may affect our business. We cannot predict whether or in what manner these problems may occur. Acts of random terrorism periodically occur, which could affect our operations or personnel. Ongoing or revived hostilities or other factors could harm our operations and could impede our ability to execute our plan of operations. Natural disasters, such as the hurricanes in the Caribbean in 2017, could render our affected customers financially unable to continue making payments or using our services. Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products. In addition, our business insurance may not cover losses that may occur as a result of events associated with the security situation. Any losses or damages incurred by us could have a material adverse effect on our business and financial condition.
 
 
 
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Risks Related to Our Common Stock
 
Certain individuals and groups own or control a significant number of our outstanding shares. 
 
Certain groups or persons, and in particular ETS Limited, who owned approximately 43% of our issued and outstanding Common Stock as of December 3, 2019, beneficially own a substantial number of shares of our outstanding Common Stock or securities and debt instruments. As a result, these persons have the ability, acting as a group, to influence substantially our affairs and business, including the election of our directors and, subject to certain limitations, of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve significant risk to us or our other stockholders. Additionally, they may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. 
 
Our Board of Directors may authorize the issuance of preferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing stockholders without their approval.
 
Our Certificate of Incorporation authorizes us to issue up to 20,000,000 shares of preferred stock, par value $0.0001 per share, of which 1,200,000 shares have been designated as Series A Convertible Preferred Stock (“Series A Preferred”). Our Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of preferred stock, and may designate additional shares of preferred stock in the future. The Board of Directors may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to our Common Stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or Common Stock. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the Common Stock and reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation. The issuance of shares of preferred stock may also adversely affect an acquisition or change in control of the Company. As of December 3, 2019, there were no outstanding shares of Series A Preferred issued and outstanding.
 
Sales by certain of our stockholders of a substantial number of shares of our Common Stock in the public market could adversely affect the market price of our Common Stock. 
 
A large number of outstanding shares of our Common Stock are held by several of our principal stockholders. If any of these principal stockholders were to decide to sell large amounts of stock over a short period of time, such sales could cause the market price of our Common Stock to decline.
 
A decline in the price of our Common Stock could affect our ability to raise additional working capital and adversely impact our operations and would severely dilute existing or future investors if we were to raise funds at lower prices.
 
A prolonged decline in the price of our Common Stock could result in a reduction of our ability to raise capital. Because our operations have been financed in part through the sale of equity securities, a decline in the price of our Common Stock could be especially detrimental to our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. We believe the following factors could cause the market price of our Common Stock to fluctuate widely:
 
actual or anticipated variations in our interim or annual results;
 
 
announcements of new services, products, acquisitions or strategic relationships within the industry;
 
 
changes in accounting treatments or principles;
 
 
changes in earnings estimates by securities analysts and in analyst recommendations; and
 
 
general political, economic, regulatory and market conditions.
 
Any failure to meet these expectations, even if minor, could materially adversely affect the market price of our Common Stock.
 
 
 
-13-
 
 
If we issue additional shares of Common Stock in the future, it will result in the dilution of our existing stockholders.
 
Our Certificate of Incorporation authorizes the issuance of 30,000,000 shares of Common Stock. Our Board of Directors has the authority to issue additional shares of Common Stock up to the authorized capital stated in the Certificate of Incorporation. The issuance of any such shares of Common Stock will result in a reduction in value of our outstanding Common Stock. If we do issue any such additional shares of Common Stock, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. Further, any such issuance may result in a change of control of the Company.
 
Trading of our Common Stock may be volatile and sporadic, which could depress the market price of our Common Stock and make it difficult for our stockholders to resell their shares. 
 
There is currently a limited market for our Common Stock and the volume of our Common Stock traded on any day may vary significantly from one day to the other. Our Common Stock is quoted on the OTCQX. Trading in stock quoted on the OTCQX is often thin, volatile, and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the issuer’s operations, results or business prospects. The availability of buyers and sellers represented by this volatility could lead to a market price for our Common Stock that is unrelated to operating performance. Moreover, the OTCQX is not a stock exchange, and trading of securities quoted on the OTCQX is often more volatile than the trading of securities listed on a stock exchange like NASDAQ or NYSE: MKT.
 
Item 2.       Properties
 
Our headquarters is approximately 5,600 square feet of commercial office space located at 200 E. 5th Avenue Suite 100, Naperville, Illinois. The lease for this office space began on September 1, 2017 and expires on August 31, 2022. Lease payments are approximately $11,000 per month.
 
We lease commercial office space in Indianapolis, Indiana of approximately 5,751 square feet. This lease began on September 1, 2018 and terminates on August 31, 2022. Lease payments were approximately $3,100 per month through December 31, 2018 and increased to approximately $5,900 on January 1, 2019 as additional space was occupied.
 
Track Group Analytics, Inc. operations are conducted in approximately 4,200 square feet of office space in Bedford, Nova Scotia, Canada. The lease for this office space began on July 1, 2015 and expires on June 30, 2020. Monthly lease payments are approximately $5,700.
 
Our Chile operations are conducted in approximately 3,500 square feet of commercial office space located in Santiago, Chile. The lease for this office space began on December 31, 2016 and expires on December 31, 2021. Lease payments are approximately $6,500 per month.
 
We lease commercial office space in Sandy, Utah of approximately 1,500 square feet. The lease for this office space began on September 1, 2017 and expired on August 31, 2018. We are currently leasing this property on a month to month basis. Lease payments are $1,500 per month.
 
Item 3.       Legal Proceedings
 
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
 
Lazar Leybovich et al. v. SecureAlert, Inc. On March 29, 2012, Lazar Leybovich, Dovie Leybovich and Ben Leybovich filed a complaint in the 11th Circuit Court in and for Miami-Dade County, Florida alleging breach of contract with regard to certain Stock Redemption Agreements. The plaintiffs alleged $1,587,604 in combined damages. On May 2, 2016, the Court resolved this case in favor of the Company by granting the Company’s motion for Summary Judgment. The plaintiffs filed an Appeal on June 1, 2016 challenging the Court’s ruling on the motion for Summary Judgment. The Appellate court ruled in favor of the plaintiffs, finding that factual issues remain, reversing the Summary Judgment and remanding the case back to the trial court. On February 21, 2019, a trial concluded and a jury returned a verdict in plaintiffs’ favor; awarding the plaintiffs $336,000 before interest. The Company filed a motion to reverse the verdict in its entirety, which was denied on July 30, 2019. The Court entered a judgment on August 1, 2019 in the amount of $553,115.84, inclusive of pre-judgment interest. Subsequently, the parties reached a mutually agreeable settlement of $450,000, which is accrued at September 30, 2019, and the case was dismissed with prejudice on October 22, 2019 as a result.
 
 
 
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John Merrill v. Track Group, Inc. and Guy Dubois. On November 30, 2016, the Company was served with a complaint filed by John Merrill, the former Chief Financial Officer of the Company, in District Court of the Third Judicial District in Salt Lake County, Utah alleging breach of contract, among other causes of action, related to Mr. Merrill’s termination of employment effective September 27, 2016. Mr. Merrill sought not less than $590,577 plus interest, attorney fees and costs. At a hearing on April 25, 2018, the court dismissed the plaintiff’s claims related to existence of an oral look-back agreement and a separation agreement. In an order entered July 25, 2019, the court granted the defendants’ motion to strike plaintiff’s damages’ expert report and barred plaintiff’s expert from testifying at trial, if any. Plaintiff’s motion to reconsider the court’s July 25, 2019 order was denied on August 21, 2019. Subsequently, the parties reached an immaterial mutually agreeable settlement, and as a result, the case was dismissed with prejudice on November 1, 2019.
 
SecureAlert, Inc. v. Federal Government of Mexico (Department of the Interior). On March 24, 2017, SecureAlert Inc. filed a complaint before the Federal Administrative Tribunal, asserting the failure by defendants to pay claimant amounts agreed to, and due under, the Pluri Annual Contract for the Rendering of Monitoring Services of Internees, through Electric Bracelets, in the Islas Marias Penitentiary Complex dated July 15, 2011, entered into by and between the Organo Administrativo Desconcentrado Prevencion y Readaptacion Social of the then Public Security Department, and presently, an agency of the National Security Commission of the Department of the Interior, and SecureAlert, Inc., presently Track Group, Inc. The Company’s claim amount is upwards of $6.0 million. The Supreme Court took action to resolve previous, conflicting decisions regarding the jurisdiction of such claims and determined that such claims will be resolved by the Federal Administrative Tribunal. Subsequently, plaintiff filed an Amparo action before the Collegiate Court, seeking an appeal of the Federal Administrative Court’s earlier decision against plaintiff. The Collegiate Court issued a ruling in August 2019 that the matter of dispute was previously resolved by a lower court in 2016. The Company disagrees with this ruling and is exploring its options going forward. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expense will be minimal.
 
Eli Sabag v. Track Group, Inc., Sapinda Asia Limited and Lars Windhorst. On May 4, 2018, Eli Sabag filed a complaint before the Marion Superior Court in Marion County Indiana for damages and declaratory Judgment against the Company. The complaint sought to enforce an “earn-out” clause in a Share Purchase Agreement (“SPA”) between the Company and Sabag. In addition, Sabag sued the Company for breach of fiduciary duty and tortious interference, alleging that the Company avoided selling sufficient GPS devices so as to not trigger the issuance of contingent stock under the “earn-out” clause in the SPA. Finally, Sabag alleged that the Company was unjustly enriched because it failed to pay full value for his shares under the SPA. The Company believes the allegations are unfounded and without merit, and furthermore, according to the SPA, any disputes are to be resolved through binding arbitration held in New York. The Company filed a motion to dismiss the complaint and compel arbitration on September 5, 2018. On March 29, 2019, the Marion Superior Court ruled in favor of the Company and dismissed all claims against the Company without prejudice.
 
Erick Cerda v. Track Group, Inc. On July 25, 2018, former employee Erick Cerda, the plaintiff, filed a complaint against the Company in the United States District Court for the Northern District of Illinois, Case No. 18-CV-05075, alleging violations of Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act. Plaintiff sought injunctive relief and monetary damages in an unspecified amount. To avoid the costs and uncertainties of prolonged litigation, the parties reached a settlement, which was finalized on June 4, 2019 and paid in June 2019. On July 22, 2019, the case was dismissed with prejudice as a result of the settlement.
 
Blaike Anderson v. Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson filed a complaint seeking unspecified damages in the State Court of Marion County, Indiana, alleging liability on the part of defendants for providing a defective ankle monitoring device and failure to warn plaintiff regarding the condition thereof. The Company removed the matter to federal court and subsequently filed its answer denying Plaintiff’s allegations in August 2019. Discovery is currently ongoing. The Company intends to vigorously defend the case.
 
 
 
 
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PART II
 
Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our Common Stock is traded on the OTCQX under the symbol “TRCK”. The following table sets forth the range of high and low sales prices of our Common Stock as reported on the OTCQX for the periods indicated.
 
 Fiscal Year Ended September 30, 2019
 
High
 
 
Low
 
 First Quarter ended December 31, 2018
 $0.95 
 $0.47 
 Second Quarter ended March 31, 2019
 $0.69 
 $0.50 
 Third Quarter ended June 30, 2019
 $0.57 
 $0.52 
 Fourth Quarter ended September 30, 2019
 $0.53 
 $0.51 
 
 Fiscal Year Ended September 30, 2018
 
High
 
 
Low
 
 First Quarter ended December 31, 2017
 $1.47 
 $1.05 
 Second Quarter ended March 31, 2018
 $1.22 
 $1.01 
 Third Quarter ended June 30, 2018
 $1.13 
 $0.99 
 Fourth Quarter ended September 30, 2018
 $1.02 
 $0.90 
 
Holders
 
As of December 3, 2019, we had 175 holders of record of our Common Stock and 11,414,150 shares of Common Stock outstanding. We also have granted options and warrants for the purchase of 685,259 shares of Common Stock.
 
Dividends
 
Since incorporation, we have not declared any cash dividends on our Common Stock. We do not anticipate declaring cash dividends on our Common Stock for the foreseeable future. 
 
Dilution
 
The Board of Directors determines when, under what conditions and at what prices to issue shares of Company stock. In addition, a significant number of shares of Common Stock are reserved for issuance upon exercise of outstanding options and warrants.
 
The issuance of any shares of Common Stock for any reason will result in dilution of the equity and voting interests of existing stockholders.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, which is located at 6201 15th Avenue, Brooklyn, New York, 11219.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The 2012 Stock Incentive Plan
 
The Company’s 2012 Equity Compensation Plan, as amended (the “2012 Plan”), was first approved by our Board of Directors and stockholders at the Annual Meeting of Stockholders held on December 21, 2011, and amended following our Annual Meeting of Stockholders on May 19, 2015. We believe that incentives and stock-based awards focus and align employees on the objective of creating stockholder value and promoting the success of the Company, and that incentive compensation plans like the 2012 Plan are an important attraction, retention and motivation tool for participants in the plan.
 
Under the 2012 Plan, up to 803,262 shares of Common Stock or options to purchase Common Stock may be awarded. As of the date of this report, 258,408 shares of Common Stock and options for the purchase of 517,636 shares of Common Stock have been awarded under the 2012 Plan. The 2012 Plan was suspended by the Board of Directors in December 2018.
 
 
 
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The following table includes information as of September 30, 2019 for our equity compensation plans:
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
 
Weighted-average 
exercise price
of outstanding options, warrants
and rights
 
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
 
 
 
(a)
 
 
 
 
 
 
 
Equity compensation plans approved by security holders
  616,655 
 $1.61 
  27,218 
Equity compensation approved by Board of Directors outside of 2012 Plan
  68,604 
  1.15 
  - 
Total
  685,259 
 $1.56 
  27,218 
 
Recent Sales of Unregistered Securities
 
No securities were issued without registration under the Securities Act during the fiscal year ended September 30, 2019, nor were any securities issued subsequent to September 30, 2019, that were not reported in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K filed with the Securities and Exchange Commission.
 
Item 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. All statements contained in this Annual Report on Form 10-K (“Annual Report”) other than statements of historical fact are forward-looking statements. When used in this report or elsewhere by management from time to time, the words “believe”, “anticipate”, “intend”, “plan”, “estimate”, “expect”, “may”, “will”, “should”, “seeks” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see Item 1A entitled “Risk Factors” in Part I of this Annual Report and the “Overview” and “Liquidity and Capital Resources” sections of this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand Track Group, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to fiscal year 2019 refers to the year ended September 30, 2019. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2019 and 2018 and the accompanying notes thereto contained in this Annual Report. This introduction summarizes MD&A, which includes the following sections:
 
Overview – a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business.
 
Results of Operations – an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements.
 
Liquidity and Capital Resources – an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; and the impact of inflation and changing prices.
 
Off-Balance Sheet Arrangements
 
Critical Accounting Policies – a discussion of accounting policies that require critical judgments and estimates.
 
 
 
-17-
 
 
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
 
Overview
 
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.
 
Recent Developments
 
Conrent Facility Agreement
 
On February 24, 2019 the Company and Conrent Invest S.A. (“Conrent”), acting on behalf of its compartment, Safety 2, amended the facility agreement originally entered into by and between the parties on December 30, 2013 (the “Amended Facility Agreement”), which Amended Facility Agreement alters certain provisions of the Company’s existing $30.4 million unsecured debt facility. Effective February 24, 2019, the Amended Facility Agreement (i) extended the Maturity Date to the earlier of either April 1, 2020 or the date upon which the Outstanding Principal Amount, as defined therein, is repaid by the Company, and (ii) provided that in the event of a Change of Control, as defined therein, Conrent shall immediately cancel the facility and declare the Outstanding Principal Amount, together with unpaid interest, immediately due and payable. On December 4, 2019, the Company requested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021 On January 6, 2020 the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
  
Results of Operations
 
Continuing Operations - Fiscal Year 2019 Compared to Fiscal Year 2018
 
Revenue
 
During the fiscal year ended September 30, 2019, we had revenue of $34,019,152 compared to revenue of $30,570,219 for the fiscal year ended September 30, 2018, an increase of $3,448,933, or approximately 11%. Of this revenue, $32,100,370 and $29,943,563 was from monitoring and other related services during the 2019 and 2018 fiscal years, respectively, representing an increase of $2,156,807 or approximately 7%. Growth in revenue during the year ended September 30, 2019 was principally the result of an increase in total growth of our monitoring operations driven by clients in Puerto Rico, Nevada, Bahamas and Michigan and the establishment of new relationships in Mexico and Saudi Arabia. The increase in revenue for the fiscal year ended September 30, 2019 compared to the comparable period in 2018 was partially offset by nominally lower revenue in Chile and Indiana.
 
Product and other revenue for the year ended September 30, 2019 increased to $1,918,782 from $626,656 in the same period in 2018 largely due to higher product sales of $1,287,917 and slightly higher net sales of consumable items and other non-monitoring revenue items. The increase in product sales was due to international product sales. We continue to largely focus on recurring subscription-based opportunities as opposed to equipment sales.
 
Cost of Revenue
 
During the year ended September 30, 2019, cost of revenue totaled $15,002,161 compared to cost of revenue during the year ended September 30, 2018 of $13,368,075, an increase of $1,634,086 or approximately 11%. The increase in cost of revenue was largely the result of higher cost of product sales of $482,155, higher device repair costs of $331,637, higher communication costs of $247,820, higher monitoring costs of $241,993, higher service commissions of $86,334, higher server costs of $61,349 and higher depreciation and amortization of $156,241 due to depreciation for additional devices. Increased costs of revenue were due to additional customers and devices in fiscal 2019.
 
Depreciation and amortization included in cost of revenue for the fiscal years ended September 30, 2019 and 2018, totaled $2,012,975 and $1,856,734, respectively. These costs represent the depreciation of ReliAlert™ and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. We believe the amortization periods are appropriate due to changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness. Amortization of a patent related to GPS and satellite tracking is also included in cost of sales. 
 
 
 
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Gross Profit and Margin
 
During the fiscal year ended September 30, 2019, gross profit totaled $19,016,991, resulting in a 56% gross margin, compared to $17,202,144, or a 56% gross margin, during the fiscal year ended September 30, 2018, an increase of $1,814,847. The increase in gross profit is largely due to higher revenue and a slightly lower increase in cost of revenue. Gross margin remained at 56%.
 
Gain / Loss on Sale of Assets
 
During the year ended September 30, 2019, we sold fully depreciated non-core assets for cash of $10,563. During the year ended September 30, 2018, we sold a fully depreciated non-core asset for cash of $8,500.
 
General and Administrative Expense
 
During the fiscal year ended September 30, 2019, our general and administrative expense totaled $12,243,459, compared to $13,983,924 for the fiscal year ended September 30, 2018. The decrease of $1,740,465 or approximately 14%, in general and administrative cost resulted largely from lower employee non-cash stock-based compensation of $1,383,657, lower wage and tax expense of $269,046, lower board of director fees of $264,722, lower outside services and contract labor of $175,129, lower expense related to entitlements from the Canadian government of $147,059, lower fees and licenses of $106,591, and lower travel and entertainment expenses of $59,994. These savings were partially offset by higher bad debt expense of $473,435, higher legal and professional costs of $137,629, and higher insurance costs of $127,383.
 
Selling and Marketing Expense
 
For the fiscal year ended September 30, 2019, our selling and marketing expense was $2,257,101 compared to $1,895,452 for the year ended September 30, 2018. The $361,649, or approximately 19%, increase resulted largely from wages and taxes of $183,399, higher travel expense of $140,268 and higher outside services of $30,156.
 
Research and Development Expense
 
During the fiscal year ended September 30, 2019, we incurred research and development expense of $1,313,499 compared to those costs recognized during fiscal year 2018 totaling $862,142, an increase of $451,357 or approximately 52%. The increase is largely due to higher wages and taxes of $323,321, higher travel expense of $109,052 and higher dues and subscriptions of $23,485. The Company is significantly enhancing its technology platform to improve the efficiency of its software, firmware, user interface, and automation. As a result of these improvements, $1,782,049 was capitalized as developed technology during the year ended September 30, 2019, and $1,083,745 was capitalized during the year ended September 30, 2018. A portion of this expense would have been recognized as research and development expense, absent the significant enhancements to the technology.
 
Depreciation and Amortization Expense
 
We maintain a significant portion of our tangible and intangible assets that are amortized or depreciated. During the fiscal year ended September 30, 2019, depreciation and amortization included in operating expense totaled $2,047,980, compared to $2,120,746 for the fiscal year ended September 30, 2018. This decrease of $72,766, or approximately 3%, was largely the result of certain intangible assets becoming fully amortized and certain property and equipment assets becoming fully depreciated. 
 
Other Income (Expense)
 
During the fiscal year ended September 30, 2019, other income (expense) totaled $2,845,115 of expense compared to other expense of $3,183,696 during fiscal 2018. The decrease of $338,581 in net other expense resulted primarily from income related to lower interest expense of $601,936, due to interest paid to a vendor and deferred financing costs in fiscal 2018, partially offset by lower interest income from interest received on an international performance bond in 2018.
 
Income taxes
 
During the fiscal year ended September 30, 2019, income tax expense totaled $884,353 compared to $592,725 during the fiscal year ended September 30, 2018. Tax expense in both fiscal years are income taxes largely relate to a foreign jurisdiction.
 
Net Loss
 
We had a net loss for the fiscal year ended September 30, 2019 totaling $2,563,953 or ($0.23) loss per common share, compared to a net loss of $5,428,041 or ($0.51) per common share for the fiscal year ended September 30, 2018. This decrease in net loss is largely due to higher gross profit, lower general and administrative expense, lower income tax expense and lower depreciation and amortization, partially offset by higher selling and marketing expense and higher research and development costs in fiscal year ended September 30, 2019.
 
 
 
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Liquidity and Capital Resources
 
Historically, we have been unable to finance our business solely from cash flows from operating activities. During and prior to the fiscal year ended September 30, 2017, we supplemented cash flows by financing the business from borrowings under a credit facility, a revolving line of credit from one of our stockholders, receipt of certain disgorgement funds, and from the sale and issuance of debt securities. As of September 30, 2019, excluding interest, approximately $3.4 million was owed to Sapinda (the Sapinda Loan Agreement”) that matures on September 30, 2020 and $30.4 million was owed to Conrent Invest S.A. (“Conrent”) (the Conrent Loan Agreement”). No borrowings or sales of equity securities occurred during the years ended September 30, 2019 or 2018. See Note 13 to the Consolidated Financial Statements.
 
On February 24, 2019 the Company and Conrent, acting on behalf of its compartment, Safety 2, amended the facility agreement originally entered into by and between the parties on December 30, 2013 (the “Amended Facility Agreement”), which Amended Facility Agreement alters certain provisions of the Company’s existing $30.4 million unsecured debt facility. Effective February 24, 2019, the Amended Facility Agreement (i) extended the Maturity Date to the earlier of either April 1, 2020 or the date upon which the Outstanding Principal Amount, as defined therein, is repaid by the Company, and (ii) provided that in the event of a Change of Control, as defined therein, Conrent shall immediately cancel the facility and declare the Outstanding Principal Amount, together with unpaid interest, immediately due and payable. On December 4, 2019, the Company requested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020 the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
 
Management will continue to seek additional extensions of debt maturities, other sources of capital, refinancing options, and potentially other transactions to meet all of its future obligations. While management believes it will be successful in completing one of these alternatives prior to the maturity of the Amended Facility Agreement, no assurances can be given.
 
Net Cash Flows from Operating Activities.
 
During the fiscal year ended September 30, 2019, we incurred a net loss of $2,563,953 and we had cash flows from operating activities of $5,071,650, compared to a net loss from continuing operations of $5,428,041 and cash flows from operating activities of $6,030,592 for fiscal year 2018. The decrease of cash from operations in fiscal year 2019 compared to fiscal year 2018 was largely the result of a repayment of an international performance bond in the year-ended September, 30 2018 and higher accounts receivables, largely due to new customers in fiscal year 2019, and increase in prepaid expense and other assets partially offset by higher accrued expenses and improved results from operations.
 
Net Cash Flows from Investing Activities.
 
The Company used $3,268,283 of cash for investing activities during the fiscal year ended September 30, 2019, compared to $2,535,204 of cash used during fiscal year 2018. Cash used for investing activities was used for significant enhancements of our software platform and used for purchases of monitoring and other equipment to meet demand during the twelve months ended September 30, 2019. Purchases of monitoring equipment increased $514,620 due to new and growing customers and purchases of property and equipment increased $122,959, compared to the prior period, largely due to increases in leasehold improvements and computer equipment.
 
Net Cash Flows from Financing Activities.
 
The Company used $65,317 of cash for financing activities during the fiscal year ended September 30, 2019, compared to $66,252 of cash used by financing activities during fiscal year 2018. During the fiscal years ended September 30, 2019 and September 30, 2018, we made principal payments of $65,317 and $66,252 on notes payable, respectively.
 
Liquidity, Working Capital and Management’s Plan
 
As of September 30, 2019, we had unrestricted cash of $6,896,711, compared to unrestricted cash of $5,446,557 as of September 30, 2018. As of September 30, 2019, we had a working capital deficit of $35,010,475, compared to a working capital deficit of $30,316,328 as of September 30, 2018. This increase in working capital deficit of $4,694,147 is principally due to an increase the current portion of notes payable of $3,389,879, an increase in accrued liabilities of $3,495,593, cash used for additional capitalized software of $1,181,308, purchases of monitoring equipment of $1,820,206 and purchases of property and equipment of $277,332. These items were partially offset by cash provided by operations. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Facility to July 1, 2021. We currently believe that our cash on hand, in addition to cash derived from our operating activities, will be sufficient to sustain operations through the next twelve months. In the event we need to obtain additional funding, the Company may obtain additional financing from outside sources.
 
 
 
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On March 13, 2017, the Company successfully extended the Sapinda Loan Agreement from September 30, 2017 to September 30, 2020. On February 24, 2019, the Company successfully extended the Conrent Loan Agreement to the earlier of either April 1, 2020 or the date upon which the outstanding principal amount is repaid by the Company.
 
On December 4, 2019, the Company requested that Conrent extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 6, 2020 the investors who owned the securities from Conrent used to finance the debt (the “Noteholders”) held a meeting to address the Company’s request. On January 7, 2020, Conrent notified the Company in writing that the Noteholders agreed to extend the maturity of the Amended Facility Agreement from April 1, 2020 to July 1, 2021. On January 10, 2020, the Company and Conrent entered into an amendment to the Facility Agreement which extends the maturity of the Facility to July 1, 2021.
 
Inflation
 
We do not believe that inflation has had a material impact on our historical operations or profitability.
 
Off-Balance Sheet Financial Arrangements
 
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company, except as described below.
 
 
 
Payments
due in less than 1 year
 
 
Payments
due in
1 – 3 years
 
 
Payments
due in
3 – 5 years
 
 
Total
 
Operating leases
 $257,450 
 $407,411 
 $3,612 
 $668,473 
 
As of September 30, 2019, the Company’s total future minimum lease payments under noncancelable operating leases were $668,473. The Company’s facility leases typically have original terms not exceeding five years and generally contain multi-year renewal options.
 
The Company will adopt ASU No. 2016-02 Leases (Topic 842) effective October 1, 2019 and anticipates recording a right of use asset and corresponding lease liability of approximately $0.6 million upon adoption.
 
Critical Accounting Policies
 
In Note 2, “Summary of Significant Accounting Policies” to the audited Consolidated Financial Statements included in this Annual Report, we discuss those accounting policies we consider to be significant in determining the results of operations and our financial position.
 
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 estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
 
With respect to revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivable, we apply critical accounting policies discussed below in the preparation of our financial statements.
 
 
 
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Revenue Recognition
 
 Our revenue is predominantly derived from two sources: (i) monitoring services, and (ii) product sales.
 
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/or 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. The rates for leased devices and monitoring services are considered to be stated at their individual stand-alone selling prices. The Company recognizes revenue on leased devices and monitoring services at the end of each month the services have been provided and payment terms are 30 days from invoice date. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
 
Product Sales and Other
 
The Company sells devices and replacement parts to customers under certain contracts, as well as law enforcement software licenses and maintenance, and analytical software. The Company recognizes device and other product sales in the period when: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. The Company recognizes revenue from other services as the customer receives services and the Company has the right to payment. When purchasing products (such as ReliAlert™ and Shadow™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with us. The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
 
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.
 
 
 
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Other Matters
 
The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days. The Company sells devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors may not have price protection or stock protection rights with respect to devices sold to them by us. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
 
The Company estimates product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
 
Shipping and handling fees charged to customers are included as part of net revenue. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenue. Our revenue is predominantly derived from two sources: (i) monitoring services, and (ii) product sales.
 
Impairment of Long-Lived Assets and Goodwill
 
We review our long-lived assets including goodwill and intangibles 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. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market 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 are an identifiable fair market value that is independent of other groups of assets.
 
Allowance for Doubtful Accounts
 
We must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current macroeconomic and geopolitical trends, and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
 
Recent Accounting Pronouncements 
 
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 us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
 
Accounting for Stock-Based Compensation
 
We recognize compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. We estimate the fair value of stock options using a Black-Scholes option pricing model which requires us to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock, and expected dividend yield of stock.
 
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
 
Our business extends to countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, 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.
 
We had $13,536,967 and $10,984,263 in revenue from sources outside the United States for the fiscal years ended September 30, 2019 and 2018, respectively. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange expense of $466,140 and $445,426 in fiscal years 2019 and 2018, respectively. 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 given our substantial expenses in local currency. 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.
 
 
 
-23-
 
 
Item 8.       Financial Statements and Supplementary Data
 
The Financial Statements and Supplementary Data required by this Item are set forth on the pages indicated under Item 15 below.
 
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.    Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019 was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of September 30, 2019. 
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
 
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO”) issued in May 2013 and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2019.
 
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fourth fiscal quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
 
Item 9B.    Other Information
 
None.
 
 
 
 
-24-
 
 
PART III
 
Item 10.    Directors, Executive Officers and Corporate Governance
 
The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 29, 2020.
 
Item 11.    Executive Compensation
 
The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 29, 2020.
 
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 29, 2020.
 
Item 13.    Certain Relationships and Related Transactions, and Director Independence
 
The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 29, 2020.
 
Item 14.    Principal Accounting Fees and Services
 
The information required by this item will be incorporated by reference from the Company’s definitive proxy statement, to be filed with the Securities and Exchange Commission on or before January 29, 2020.
 
 
 
 
-25-
 
 
PART IV
 
Item 15.    Exhibits and Financial Statement Schedules
 
(a) The following documents are filed as part of this report:
 
1. Financial Statements
 
Report of Eide Bailly LLP
  F-2 
Consolidated Balance Sheets
  F-3 
Consolidated Statements of Operations and Comprehensive Loss
  F-4 
Consolidated Statements of Stockholders’ Equity (Deficit)
  F-5 
Consolidated Statements of Cash Flows
  F-7 
Notes to the Consolidated Financial Statements
  F-9 
 
2.   Financial Statement Schedules.
 
3. Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:
  
Exhibit Number
  Title of Document
 
 
Articles of Transfer of Track Group, Inc., a Utah corporation, dated August 5, 2016 (previously filed on August 9, 2016 as Exhibit 3(i)(3) to the Form 10-Q for the quarter ended June 30, 2016).
Certificate of Conversion Converting Track Group, Inc., a Utah corporation, to Track Group, Inc., a Delaware corporation, dated August 5, 2016 (previously filed on August 9, 2016 as Exhibit 3(i)(4) to the Form 10-Q for the quarter ended June 30, 2016).
Certificate of Incorporation of Track Group, Inc., a Delaware corporation (previously filed on August 9, 2016 as Exhibit 3(i)(5) to the Form 10-Q for the quarter ended June 30, 2016).
Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock, dated October 12, 2017 (previously filed as Exhibit 3.1 to our Current Report on Form 8-K, filed on October 13, 2017).
Bylaws of Track Group, Inc., a Delaware corporation (previously filed on August 9, 2016 as Exhibit 3(ii)(2) to the Form 10-Q for the quarter ended June 30, 2016).
2012 Equity Incentive Award Plan (previously filed as Exhibit to Definitive Proxy Statement, filed October 25, 2011, and amended in accordance with the Company’s Definitive Proxy Statement, filed April 9, 2015).
Amended and Restated Facility Agreement, dated June 30, 2015, by and between Track Group, Inc. and Conrent Invest S.A, acting on behalf of its compartment “Safety 2” (incorporated by reference to our Current Report on Form 8-K, filed on July 15, 2015).
Loan Agreement between Sapinda Asia Limited and Track Group, Inc., dated September 14, 2015 (incorporated by reference to our Current Report on Form 8-K, filed on September 28, 2015).
Loan Agreement, by and between Conrent Invest S.A., acting with respect to its Compartment Safety III, and Track Group, Inc., dated May 1, 2016 (previously filed in August 2016 as an Exhibit to the Form 10-Q for the nine months ended June 30, 2016).
Employment agreement, by and between Track Group Inc. and Peter Poli, dated December 12, 2016 (incorporated by reference to our Current Report on Form 8-K, filed December 16, 2016).
Employment Agreement by and between Track Group, Inc. and Derek Cassell dated, December 1, 2016 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
Services Agreement, dated December 7, 2016 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
Amendment No. 1 to Employment Agreement by and between Track Group Inc. and Derek Cassell, dated February 13, 2017 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed February 14, 2017).
Amendment No. 1 to Loan Agreement between Sapinda Asia Limited and Track Group, Inc., dated March 13, 2017 (incorporated by reference to our Current Report on Form 8-K, filed on March 20, 2017).
Debt Exchange Agreement between Track Group, Inc. and Conrent Invest S.A., dated October 9, 2017 (incorporated by reference to our Current Report on Form 8-K, filed on October 13, 2017).
Amendment No. 1 to Employment Agreement by and between Track Group, Inc. and Peter K. Poli dated, January 3, 2018 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed January 5, 2018).
 
 
 
-26-
 
 
 
Amendment No. 2 to Employment Agreement by and between Track Group Inc. and Derek Cassell, dated January 3, 2018 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed January 5, 2018).
Monitoring Services Agreement by and between Track Group, Inc. and Marion County Community Corrections Agency, dated December 18, 2017 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed February 8, 2018).
Monitoring Services Agreement by and between Track Group, Inc. and Gendarmeria of Chile, dated January 18, 2018 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed May 11, 2018).
Amendment Agreement by and between Track Group, Inc. and Conrent Invest S.A., dated July 19, 2018 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed July 19, 2018).
Amendment Agreement by and between Track Group, Inc. and Conrent Invest S.A., dated February 24, 2019 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed February 28, 2019).
Code of Business Conduct & Ethics (incorporated by reference to our Annual Report on Form 10-K, filed January 28, 2019).
Subsidiaries of the Registrant (incorporated by reference to Amendment No. 1 to our Annual Report on Form 10-K, filed January 28, 2019).
Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith).
 
101.INS
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-27-
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
By: 
/s/ Derek Cassell
 
 
Derek Cassell
 
 
Chief Executive Officer (Principal Executive Officer)
 
 
 
 
By:
/s/ Peter K. Poli
 
 
Peter K. Poli
Chief Financial Officer (Principal Accounting Officer)
Date: January 10, 2020
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Guy Dubois
 
Chairman of the Board
 
January 10, 2020
Guy Dubois
 
 
 
 
 
 
 
 
 
/s/ Karen Macleod
 
Director
 
January 10, 2020
Karen Macleod
 
 
 
 
 
 
 
 
 
/s/ Karim Sehnaoui
 
Director
 
January 10, 2020
Karim Sehnaoui
 
 
 
-28-
 
 
Index to Consolidated Financial Statements
 
 
 
  
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors
Track Group, Inc.
Naperville, IL
 
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Track Group, Inc. as of September 30, 2019 and 2018, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Track Group, Inc. as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to Track Group, Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Track Group, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risk of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
 
/s/ Eide Bailly LLP
 
We have served as Track Group, Inc.’s auditor since 2013.
 
Salt Lake City, Utah
January 10, 2020
 
 
 
 
 
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2019 AND 2018
 
Assets
 
2019
 
 
2018
 
Current assets:
 
 
 
 
 
 
Cash
 $6,896,711 
 $5,446,557 
Accounts receivable, net of allowance for doubtful accounts of $2,454,281 and $3,152,966, respectively
  6,763,236 
  5,978,896 
Note receivable, net of allowances for doubtful accounts of $234,733, at September 30, 2018
  - 
  - 
Prepaid expense and other
  1,339,465 
  1,270,043 
Inventory, net of reserves of $26,934, respectively
  274,501 
  277,119 
Total current assets
  15,273,913 
  12,972,615 
Property and equipment, net of accumulated depreciation of $2,248,913 and $1,999,222, respectively
  675,037 
  745,475 
Monitoring equipment, net of accumulated amortization of $6,322,768 and $5,325,654, respectively
  2,624,900 
  3,162,542 
Intangible assets, net of accumulated amortization of $14,157,090 and $12,016,512, respectively
  21,955,679 
  23,253,054 
Goodwill
  8,187,911 
  8,076,759 
Deferred tax asset
  540,563 
  - 
Other assets
  124,187 
  145,839 
Total assets
 $49,382,190 
 $48,356,284 
 
    
    
Liabilities and Stockholders’ Equity (Deficit)
    
    
Current liabilities:
    
    
Accounts payable
  2,628,003 
  2,518,030 
Accrued liabilities
  13,828,696 
  10,333,103 
Current portion of long-term debt
  33,827,689 
  30,437,810 
Total current liabilities
  50,284,388 
  43,288,943 
Long-term debt, net of current portion
  - 
  3,428,975 
Total liabilities
  50,284,388 
  46,717,918 
 
    
    
  Commitments and contingencies (Note 11)
  - 
  - 
 
    
    
Stockholders’ equity (deficit):
    
    
Common stock, $0.0001 par value: 30,000,000 shares authorized; 11,401,650 shares outstanding, respectively
  1,140 
  1,140 
Series A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares authorized; 0 shares outstanding
  - 
  - 
Paid in capital
  302,250,556 
  302,102,866 
Accumulated deficit
  (302,152,292)
  (299,495,370)
Accumulated other comprehensive loss
  (1,001,602)
  (970,270)
Total equity (deficit)
  (902,198)
  1,638,366 
Total liabilities and stockholders’ equity (deficit)
 $49,382,190 
 $48,356,284 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
 
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2019 AND 2018
 
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
Monitoring and other related services
 $32,100,370 
 $29,943,563 
Product sales and other
  1,918,782 
  626,656 
Total revenue
  34,019,152 
  30,570,219 
 
    
    
Cost of revenue:
    
    
Monitoring, products and other related services
  12,989,186 
  11,511,341 
Depreciation and amortization
  2,012,975 
  1,856,734 
Total cost of revenue
  15,002,161 
  13,368,075 
 
    
    
Gross profit
  19,016,991 
  17,202,144 
 
    
    
Operating expense: 
    
    
General & administrative
  12,243,459 
  13,983,924 
(Gain) / loss on sale of asset
  (10,563)
  (8,500)
Selling & marketing
  2,257,101 
  1,895,452 
Research & development
  1,313,499 
  862,142 
Depreciation & amortization
  2,047,980 
  2,120,746 
Total operating expense
  17,851,476 
  18,853,764 
 
    
    
Income (loss) from operations
  1,165,515 
  (1,651,620)
 
    
    
Other income (expense):
    
    
Interest income
  23,929 
  242,973 
Interest expense
  (2,403,047)
  (3,004,983)
Currency exchange rate gain (loss)
  (466,140)
  (445,426)
Other income/expense, net
  143 
  23,740 
Total other income (expense)
  (2,845,115)
  (3,183,696)
Net loss before income taxes
  (1,679,600)
  (4,835,316)
Income tax expense
  884,353 
  592,725 
Net loss attributable to common stockholders
  (2,563,953)
  (5,428,041)
Foreign currency translation adjustments
  (31,332)
  (294,719)
Comprehensive loss
 $(2,595,285)
 $(5,722,760)
Net loss per common share, basic and diluted
 $(0.23)
 $(0.51)
Weighted average common shares outstanding, basic and diluted
  11,213,431 
  10,732,523 
 
 
  The accompanying notes are an integral part of the financial statements.
 
 
 
 
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2018 AND 2019
 
 
 
Shares 
 
 
Amount 
 
 
Capital 
 
 
Deficit 
 
 
Comprehensive Loss 
 
 
Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 1, 2018
  11,401,650 
 $1,140 
 $302,102,866 
 $(299,495,370)
 $(970,270)
 $1,638,366 
 
    
    
    
    
    
    
ASC 606 modified retrospective adjustment
  - 
  - 
  - 
  (92,969)
  - 
  (92,969)
 
    
    
    
    
    
    
Amortization of equity-based compensation granted to employees
  - 
  - 
  147,690 
  - 
  - 
  147,690 
 
    
    
    
    
    
    
Foreign currency translation adjustments
  - 
  - 
  - 
  - 
  (31,332)
  (31,332)
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  (2,563,953)
  - 
  (2,563,953)
 
    
    
    
    
    
    
Balance as of September 30, 2019
  11,401,650 
 $1,140 
 $302,250,556 
 $(302,152,292)
 $(1,001,602)
 $(902,198)
 
 
The accompanying notes are an integral part of the financial statements. 
 
 
 
TRACK GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2017 AND 2018
 
 
 
Shares 
 
 
Amount 
 
 
Capital 
 
 
Deficit 
 
 
Comprehensive Loss 
 
 
Total 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 1, 2017
  10,480,984 
 $1,048 
 $300,717,861 
 $(294,067,329)
 $(675,822)
 $5,975,758 
 
    
    
    
    
    
    
Modification of warrants
  - 
  - 
  162,418 
  - 
  - 
  162,418 
 
    
    
    
    
    
    
Cancellation of Common Stock issued to Board Member
  (18,551)
  (2)
  2 
  - 
  - 
  - 
 
    
    
    
    
    
    
Issuance of Common Stock for Board of Director fees
  266,358 
  27 
  364,696 
  - 
  - 
  364,723 
 
    
    
    
    
    
    
Issuance of Common Stock to employees for services
  672,859 
  67 
  638,848 
  - 
  - 
  638,915 
 
    
    
    
    
    
    
Issuance of Common Stock Warrants for Board of Director fees
  - 
  - 
  75,000 
  - 
  - 
  75,000 
 
    
    
    
    
    
    
Amortization of equity-based compensation granted to employees
  - 
  - 
  144,041 
  - 
  - 
  144,041 
 
    
    
    
    
    
    
Foreign currency translation adjustments
  - 
  - 
  - 
  - 
  (294,448)
  (294,448)
 
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  (5,428,041)
  - 
  (5,428,041)
 
    
    
    
    
    
    
Balance as of September 30, 2018
  11,401,650 
 $1,140 
 $302,102,866 
 $(299,495,370)
 $(970,270)
 $1,638,366 
 
 
The accompanying notes are an integral part of the financial statements. 
 
 

 

TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2019 AND 2018
 
 
 
2019 
 
 
2018 
 
Cash flows from operating activities: 
 
 
 
 
 
 
Net loss
 $(2,563,953)
 $(5,428,041)
Adjustments to reconcile net loss to net cash provided by operating activities:
    
    
Depreciation and amortization
  4,060,955 
  3,977,480 
Bad debt expense
  655,480 
  182,045 
Accretion of debt discount
  - 
  185,811 
Stock based compensation
  21,465 
  1,719,844 
(Gain) / loss on disposal of property and equipment
  (10,563)
  (8,500)
Loss on monitoring equipment included on cost of sales
  355,117 
  390,098 
Foreign currency exchange loss
  466,140 
  445,426 
Change in assets and liabilities:
    
    
Accounts receivable, net
  (1,418,487)
  (556,160)
Inventories
  498,936 
  - 
Prepaid expense and other assets
  (755,050)
  2,187,162 
Accounts payable and accrued expense
  3,761,610 
  2,935,427 
Net cash provided by operating activities
  5,071,650 
  6,030,592 
 
    
    
Cash flow from investing activities:
    
    
Purchase of property and equipment
  (277,332)
  (154,373)
Capitalized software
  (1,181,308)
  (1,083,745)
Purchase of monitoring equipment and parts
  (1,820,206)
  (1,305,586)
Proceeds from sale of assets
  10,563 
  8,500 
Net cash used in investing activities
  (3,268,283)
  (2,535,204)
 
    
    
Cash flow from financing activities:
    
    
Principal payments on notes payable
  (65,317)
  (66,252)
Net cash used in financing activities
  (65,317)
  (66,252)
 
    
    
Effect of exchange rate changes on cash
  (287,896)
  (9,900)
 
    
    
Net increase in cash
  1,450,154 
  3,419,236 
Cash, beginning of year
  5,446,557 
  2,027,321 
Cash, end of year
 $6,896,711 
 $5,446,557 
 
 
The accompanying notes are an integral part of the financial statements. 
 
 
 
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2019 AND 2018
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Cash paid for interest
 $27,215 
 $226,079 
 
    
    
Supplemental schedule of non-cash investing and financing activities:
    
    
Issuance of warrants for accrued Board of Director fees
  - 
  75,000 
Non-cash transfer of inventory to monitoring equipment
  733,617 
  305,481 
 
 
  The accompanying notes are an integral part of the financial statements.
 
 
 
 
TRACK GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) 
Organization and Nature of Operations
 
General
 
The Company’s 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, the Company deploys offender-based management services that combine patented GPS tracking technologies, full-time 24/7/365 global monitoring capabilities, case management, and proprietary data analytics. The Company offers customizable tracking solutions that leverage real-time tracking data, best-practices monitoring, and analytics capabilities to create complete, end-to-end tracking solutions.
 
Business Condition. As of September 30, 2019 and 2018 the Company had an accumulated deficit of $302,152,292 and $299,495,370, respectively. The Company incurred a net loss of $2,563,953 and $5,428,041 for the years ended September 30, 2019 and 2018, respectively. The Company may continue to incur losses and require additional financial resources. Also, as of September 30, 2019 the Company has reported debt maturing in the next 12 months. The Company’s successful development and transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. 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. The Company has also been successful in negotiating an extension of its existing debt agreement (see Note 13). Management of the Company believes that the availability of financing from these sources is adequate to fund operations through the upcoming twelve months.
 
Certain reclassifications of amounts previously reported have been made in the accompanying financial statements. The Company considers these reclassifications to be immaterial and they have no impact on total operating expense or net loss before income taxes.
 
(2)   
Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Track Group, Inc. and its 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.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the period presented. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, certain assumptions related to the recoverability of intangible and long-lived assets.
 
Business Combinations
 
Business combinations are accounted for under the provisions of ASC 805-10, Business Combinations (ASC 805-10), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed at the date of acquisition are recorded at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expense is recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the contingent consideration is recorded at its probable fair value at the acquisition date. Any changes in fair value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information about facts and circumstances that existed at the acquisition date and that the Company obtained during the measurement period. Changes in fair value of contingent consideration resulting from events after the acquisition date, such as performance measures, are recognized in earnings.
 
Goodwill represents costs in excess of purchase price over the fair value of the assets of businesses acquired, including other identifiable intangible assets.
 
 
 
 
Foreign Currency Translation
 
The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars (“USD”) at the exchange rate prevailing at September 30, 2019. Their respective statements of operations have been translated into USD using the average exchange rates prevailing during the periods of each statement. The corresponding translation adjustments are part of accumulated other comprehensive income and are shown as part of stockholders’ equity.
 
Other Intangible Assets
 
Other intangible assets principally consist of patents, royalty purchase agreements, developed technology acquired, customer relationships, trade name, capitalized software development costs, and capitalized website development costs. The Company accounts for other intangible assets in accordance with generally accepted accounting principles and does not amortize intangible assets with indefinite lives. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, which range from three to twenty years. Intangible assets are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate possible impairment.
 
Fair Value of Financial Investments
 
The carrying amounts reported in the accompanying consolidated financial statements for accounts receivable, accounts payable, accrued liabilities and debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of our debt obligations approximate fair value as the interest rates approximate market interest rates.
 
Concentration of Credit Risk
 
In the normal course of business, the Company provides credit terms to its customers and requires no collateral. Accordingly, the Company performs credit evaluations of our customers' financial condition.
 
The Company had sales to entities, two of which each represent 10% or more of our gross revenue, as follows for the years ended September 30, 2019 and 2018.
 
 
 
2019
 
 
%
 
 
2018
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer A
 $8,570,404 
  25%
 $9,201,502 
  30%
Customer B
 $3,549,273 
  10%
 $3,772,540 
  12%
Customer C
 $2,507,577 
  7%
 $2,468,472 
  8%
 
No other customer represented more than 10% of the Company’s total revenue for the fiscal years ended September 30, 2019 or 2018.
 
Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2019 and 2018, respectively, are shown in the table below:
 
 
 
2019
 
 
%
 
 
2018
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer A
 $1,537,775 
  23%
 $1,689,976 
  28%
Customer B
 $844,241 
  12%
 $594,626 
  10%
Customer C
 $410,033 
  6%
 $428,560 
  7%
 
Based upon the expected collectability of our accounts receivable, the Company maintains an allowance for doubtful accounts.
 
Cash Equivalents
 
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company has cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had $5,688,493 and $2,900,105 of cash deposits in excess of federally insured limits as of September 30, 2019 and 2018, respectively.
 
 
 
F-10
 
 
Accounts Receivable
 
Accounts receivable, which is made up of trade receivables for monitoring and other related services, are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The allowance is estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within its normal terms. Interest income is not recorded on trade receivables that are past due, unless that interest is collected.
 
Note Receivable
 
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but entered into an agreement with one of its customers during the fiscal year ended September 30, 2012. Payments under the note are recorded as they are received and are immediately offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective note. The note requires monthly payments of $15,000, and matured in May 2014. The note is currently in default and accrues interest at a rate of 17% per annum. As of June 30, 2016, the Company no longer accrues interest on the note. As of September 30, 2019, the fully reserved principal and interest due of $234,733 was determined to be uncollectable and was written off.
 
Prepaid Expense and Other
 
Prepaid assets and other is comprised largely of performance bond deposits, tax deposits, vendor deposits and other prepaid supplier expenses. We generally expect deposits to be returned to the Company as cash within 12 months and prepaid expenses to be allocated over the commitment.
 
Inventory
 
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the standard costing method. Net realizable value is determined based on the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. The Company did not record impairment of inventory during the fiscal years ended September 30, 2019 and 2018, respectively.
 
Inventory consists of finished goods that are to be shipped to customers and parts used for minor repairs of ReliAlert™, Shadow, and other tracking devices. Completed and shipped ReliAlert™ and other tracking devices are reflected in Monitoring Equipment. As of September 30, 2019 and September 30, 2018, inventory consisted of the following: 
 
 
 
2019
 
 
2018
 
Finished goods inventory
 $301,435 
 $304,053 
Reserve for damaged or obsolete inventory
  (26,934)
  (26,934)
Total inventory, net of reserves
 $274,501 
 $277,119 
 
The Company uses a third-party fulfillment service provider. As a result of this service, the Company’s employees do not actively assemble new product or repair damaged inventory or monitoring equipment shipped directly from suppliers. Purchases of monitoring equipment are recognized directly. Management believes this process reduces maintenance and fulfillment costs associated with inventory and monitoring equipment.
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized.
 
 
 
F-11
 
 
Property and equipment consisted of the following as of September 30, 2019 and 2018, respectively:
 
 
 
2019
 
 
2018
 
Equipment, software and tooling
 $1,210,583 
 $1,074,471 
Automobiles
  5,574 
  6,153 
Leasehold improvements
  1,393,976 
  1,358,984 
Furniture and fixtures
  313,817 
  305,089 
Total property and equipment before accumulated depreciation
  2,923,950 
  2,744,697 
Accumulated depreciation
  (2,248,913)
  (1,999,222)
Property and equipment, net of accumulated depreciation
 $675,037 
 $745,475 
 
Property and equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are included in the results of operations. During the fiscal years ended September 30, 2019 and 2018, the Company recognized a $10,563 and $8,500 gain, respectively on the disposal of property and equipment. Internally developed software costs related to the Company’s monitoring platform are recorded as intangible assets on the Consolidated Balance Sheet.
 
Depreciation expense recognized for property and equipment for the fiscal years ended September 30, 2019 and 2018 was $315,380 and $348,162, respectively.
 
Monitoring Equipment
 
The Company leases monitoring equipment to agencies for offender tracking under contractual service agreements. The monitoring equipment is depreciated using the straight-line method over an estimated useful life of between one and five years. Monitoring equipment as of September 30, 2019 and 2018 is as follows:
 
 
 
2019
 
 
2018
 
Monitoring equipment
 $8,947,668 
 $8,488,196 
Less: accumulated amortization
  (6,322,768)
  (5,325,654)
Monitoring equipment, net of accumulated amortization
 $2,624,900 
 $3,162,542 
 
Amortization expense for the fiscal years ended September 30, 2019 and 2018 was $1,509,166 and $1,360,753, respectively. This expense was classified as a cost of revenue.
 
Monitoring equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell.
 
During the fiscal years ended September 30, 2019 and 2018, the Company disposed of leased monitoring equipment and parts of $355,117 and $390,098, respectively.
 
Impairment of Long-Lived Assets and Goodwill
 
The Company reviews 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. See Note 12.
 
Revenue Recognition
 
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 and related amendments “Revenue from Contracts with Customers (Topic 606), which superseded all prior revenue recognition methods and industry-specific guidance. The principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (i.e., either over time or at a point in time). ASU 2014-09 further requires that companies disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On October 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method, whereby the adoption does not impact any prior periods.
 
 Our revenue is predominantly derived from two sources: (i) monitoring services, and (ii) product sales.
 
 
 
F-12
 
 
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. The rates for leased devices and monitoring services are considered to be stated at their individual stand-alone selling prices. The Company recognizes revenue on leased devices and monitoring services at the end of each month the services have been provided and payment terms are 30 days from invoice date. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
 
Product Sales and Other
 
The Company sells devices and replacement parts to customers under certain contracts, as well as law enforcement software licenses and maintenance, and analytical software. The Company recognizes device and other product sales in the period when: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. The Company recognizes revenue from other services as the customer receives services and the Company has the right to payment. When purchasing products (such as ReliAlert™ and Shadow™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with us. The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
 
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.
 
Other Matters
 
The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days. The Company sells devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by us. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
 
The Company estimates product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
 
Shipping and handling fees charged to customers are included as part of net revenue. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenue.
 
Research and Development Costs
 
During the fiscal year ended September 30, 2019 and September 30, 2018, the Company incurred research and development expense of $1,313,499 and $862,142, respectively.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 2019 and 2018 was $19,642 and $8,264, respectively.
 
Stock-Based Compensation
 
The Company recognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The fair value of stock options is estimated using a Black-Scholes option pricing model, which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.
 
 
 
F-13
 
 
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.
 
The tax effects from uncertain tax positions can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefits of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing accounting standard to all of our tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements.
 
The Company's policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense. As of September 30, 2019 and September 30, 2018, we did not record a liability for uncertain tax positions.
 
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 options and warrants to purchase shares of the Company’s Common Stock, par value $0.0001 per share (“Common Stock”). As of September 30, 2019 and 2018, there were 628,592 outstanding common share equivalents that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive. The Common Stock equivalents outstanding as of September 30, 2019 and 2018 consisted of the following:
 
 
 
2019
 
 
2018
 
Issuable Common Stock options and warrants
 685,259
  628,592 
Total Common Stock equivalents
 685,259
  628,592 
 
At September 30, 2019 and September 30, 2018, all stock option and warrant exercise prices were above the market price of $0.51 and $0.90, respectively, and thus have not been included in the basic earnings per share calculation.
 
Recent Accounting Pronouncements
 
Recently Adopted Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) Revenue from Contracts with Customers (Topic 606) or ASU No. 2014-09, which superseded all prior revenue recognition methods and industry-specific guidance. The principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange