Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2020
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition
period from ____________
to ___________
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Commission file number:
000-23153
TRACK GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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87-0543981
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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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.
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Large accelerated filer [ ]
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Accelerated
filer [
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Non-accelerated filer [
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Smaller reporting company [X]
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Emerging growth company [ ]
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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 has filed a report on
and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report. [ ]
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, 2020 was approximately $0.9 million.
As of December 1, 2020, there were 11,414,150 shares of Common
Stock issued and outstanding.
Documents Incorporated by
Reference
None.
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Track Group, Inc.
FORM 10-K
For the Fiscal Year Ended September 30,
2020
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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”.
-1-
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: Track Group Americas, Inc., a Utah
corporation; Track Group – Puerto Rico, Inc., a Puerto Rico
corporation; Emerge Monitoring, Inc., a Florida corporation; Emerge
Monitoring II LLC, a Florida limited liability company; Integrated
Monitoring Systems, LLC, a Colorado limited liability company;
Track Group Chile S.p.A, a corporation formed under the laws of the
Republic of Chile; Track Group Analytics Limited, a corporation
formed under the laws of Canada; and, Track Group International
Ltd., a company formed under the laws of Israel (collectively, the
“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, 2020, the
Company’s products and platform were used to monitor over
41,000 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
COVID-19
The
ramifications of the outbreak of the novel strain of coronavirus
(“COVID-19”),
reported to have started in December 2019 and spread globally, are
filled with uncertainty and changing quickly. As of December 23,
2020, the COVID-19 pandemic has adversely impacted both the
Company’s revenue and costs by disrupting the operations of
Chile, causing shortages within the supply chain and postponing
sales opportunities as some government agencies delay new RFP
(Request for Proposal) processes. Notwithstanding the challenges,
the monitoring being performed by the Company’s customers
across the globe are considered essential services and remain
operational. Furthermore, at this time, the Company has not
experienced unusual payment interruptions from any large customers
and the Company’s employees are largely working from
home.
-2-
The
Company is operating in a rapidly changing environment so the
extent to which COVID-19 impacts its business, operations and
financial results from this point forward will depend on numerous
evolving factors that the Company cannot accurately predict. Those
factors include the following: the duration and scope of the
pandemic; governmental, business and individuals’ actions
that have been and continue to be taken in response to the
pandemic; the development of widespread testing or a vaccine; the
ability of our supply chain to meet the Company’s need for
equipment; the ability to sell and provide services and solutions
if shelter in place restrictions and people working from home are
extended to ensure employee safety; the volatility of foreign
currency exchange rates and the subsequent effect on international
transactions; and any closures of clients’ offices or the
courts on which they rely.
Sapinda Facility Agreement
On
September 8, 2020, the Company received a letter from ADS
Securities LLC (“ADS”) informing the Company that
ADS had been assigned the right to payment under that certain Loan
Facility dated September 14, 2015, by and between Sapinda Asia
Limited and the Company (the “Sapinda Loan Agreement”). On
September 29, 2020, the Company and ADS settled the outstanding
amount of approximately $3.4 million due under the Sapinda Loan
Agreement for $2.7 million, which was paid on September 30,
2020.
Chilean Prison System
The
Company previously disclosed on May 7, 2020 that the Chilean Prison
System (“GENCHI”), which has been our
customer since 2014, had notified the Company of its decision to
award a new contract to a competitor of the Company. Subsequently,
since the competitor did not proceed to sign the contract in due
time, GENCHI rescinded the prior award to the competitor and
re-awarded the Company with a new contract on July 22, 2020, for
forty-one months. The Company signed the new contract on July 30,
2020 and the Contraloria General de la Republica de Chile approved
the new contract on October 1, 2020. As a result, the Company is
working with GENCHI to implement the new contract and has already
selected new vendors to build both the temporary and new monitoring
centers in Santiago required by the new contract.
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. On October 21, 2020, the Company requested, in writing, an
additional extension to the maturity date of the Amended Facility
Agreement. On November 25, 2020, the Noteholders held a meeting to
address the Company’s request and approved a new maturity
date of July 1, 2024. On December 21, 2020, Conrent and the Company
signed an Amendment to the Amended Facility Agreement which extends
the maturity date of the agreement to July 1, 2024, capitalizes the
accrued and unpaid interest increasing the outstanding principal
amount and reduces the interest rate of the Amended Facility
Agreement from 8% to 4%. See Note 14 to the Consolidated Financial
Statements.
The Company’s new flagship device, the ReliAlert™XC4,
has been certified in the fourth quarter of calendar 2020 by the
Federal Communications Commission and PTCRB, which was established
in 1997 as the certification forum by select North American
cellular operators and is designed to operate on both the AT&T
and Verizon networks. The Company commenced deployment of the new
LTE device into certain markets in North
America.
Subsequent to the completion of its fiscal year, the Company
entered into an amendment to extend the term of the CEO’s
employment agreement.
Products and Services
Devices
ReliAlert™XC 4
ReliAlert™XC4 is our flagship GPS device, which is the safest
and most reliable monitoring device ever made. It is the only
one-piece GPS device with patented 3-way voice communication to
assist intervention efforts, now on the LTE network with increased
battery life. This device includes on-board processing, secondary
location technology, a 95db siren, embedded RF technology,
anti-tampering capability, increased battery life and sleep
mode.
-3-
ReliAlert™XC 3
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.
Empower
Our Empower Smartphone Application provides victim and survivor
support by creating 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™ 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.
-4-
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, 2020, we incurred
research and development expense of $1,182,542, compared to
$1,313,499 recognized during fiscal year 2019. The $130,957
decrease in research and development cost reflects lower wages and
taxes of $113,103, lower travel expense of $75,419, partially
offset by higher dues and subscriptions of $29,941. 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, $1,514,482 was
capitalized as developed technology during the year ended September
30, 2020. 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 $333,174 compared
to the $1,181,308 capitalized as developed technology during the
year ended September 30, 2019.
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.
-5-
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 42
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 two entities that each represent 10% or more of our
gross revenue, as follows for the years ended September 30, 2020
and 2019, respectively:
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2020
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%
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2019
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%
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Customer
A
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$6,374,742
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19%
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$8,570,404
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25%
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Customer
B
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$3,710,759
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11%
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$3,549,273
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10%
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No other customer represented more than 10% of our total revenue
for the fiscal years ended September 30, 2020 or
2019.
-6-
Concentration of credit risk associated with our total and
outstanding accounts receivable as of September 30, 2020 and 2019,
respectively, are shown in the table below:
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2020
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%
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2019
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%
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Customer
A
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$536,587
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10%
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$1,538,775
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23%
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Customer
B
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$374,809
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7%
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$844,241
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12%
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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, 2020 and 2019 was $2,033,487 and $2,323,491,
respectively. The 12% decrease in cellular service expense in 2020
compared to 2019 resulted largely due to lower negotiated
communication costs.
During the years ended September 30, 2020 and 2019, 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, 2020 and 2019 was
$1,275,839 and $1,782,049, respectively. The decrease in monitoring
equipment was due to purchases in fiscal 2019 for a large new
customer, partially offset by increases in devices required by
certain large customers in fiscal year 2020. The Company
anticipates of the rollout of new technology devices beginning in
the 1st
fiscal quarter of
2021.
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 nine 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.
-7-
The following table summarizes our trademark
registrations:
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Trademark
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Application
Number
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Registration
Number
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Status/
Next Action
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|
Mobile911
Siren with 2-Way Voice Communication &
Design®
|
76/013886
|
2595328
|
Registered
|
|
TrackerPAL®
|
78/843035
|
3345878
|
Registered
|
|
Mobile911®
|
78/851384
|
3212937
|
Registered
|
|
TrackerPAL®
|
CA
1315487
|
TMA749417
|
Registered
|
|
TrackerPAL®
|
MX
805365
|
960954
|
Registered
|
|
ReliAlert™
|
85/238049
|
4200738
|
Registered
|
|
SecureCuff™
|
85/626037
|
4271621
|
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™
|
90/245541
|
|
Pending
|
*
Track Group™ and Design is also a registered trademark in the
following countries: Europe, Switzerland, Mexico, Canada and Chile
and is pending in Brazil.
Patents. We have 12 patents issued in the United
States. At foreign patent offices, we have 8 patents issued
and 1 patent 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
|
12/875988
|
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
|
12/792572
|
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
|
14/323831
|
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
|
12/818453
|
18-Jun-10
|
8514070
|
20-Aug-13
|
|
Tracking
Device Incorporating Cuff with Cut Resistant Materials
|
14/307260
|
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
|
-8-
|
International Patents
|
Application
Serial No.
|
Date Filed
|
Patent No.
|
Issue Date
|
|
Remote
Tracking and Communication Device - Canada
|
2617923
|
4-Feb-08
|
2617923
|
7-Jun-16
|
|
Remote
Tracking and Communication Device - Mexico
|
MX/a/2008/001932
|
8-Feb-08
|
278405
|
24-Aug-10
|
|
Secure
Strap Mounting System for an Offender Tracking
Device
- EPO
|
10009091.9
|
1-Sep10
|
|
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
|
23-Feb-11
|
2732654
|
1-May-18
|
|
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.
-9-
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 2020, 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. In
addition, the operation in Chile generally lowers around Christmas
time due to the courts willingness to permit offenders being
monitored to visit family.
Employees
As of December 1, 2020, we had 148 full-time employees and 3
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, 2020, we had $31,333,200 of indebtedness
outstanding, of which $30,914,625 becomes due and payable within
the next 12 months, including $31,400,000 which matures on July 1,
2021. In addition, we have $11,515,375 of intertest accrued at
September 30, 2020 related to our outstanding indebtedness. 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 14 to the Consolidated
Financial Statements.
-10-
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 may 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.
-11-
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 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 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 2020, our two top customers accounted for an
aggregate of 30% 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.
-12-
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. In addition, the telecommunications
industry continually updates its networks and technology which then
requires the Company to update its devices to ensure compatibility
with the new networks as will happen in 2021 with the transition
from 3G to 5G technology by telecommunications carriers in the
US.
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.
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.
-13-
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.
Our business is subject to risks arising from epidemic diseases,
such as the recent global outbreak of
the COVID-19 coronavirus.
The recent outbreak of COVID-19, which has been declared by the
World Health Organization to be a pandemic, has spread across the
globe and is impacting worldwide economic activity. A pandemic,
including COVID-19 or other public health epidemic, poses
the risk that we or our employees, contractors, suppliers, and
other partners may be prevented from conducting business activities
for an indefinite period of time, including shutdowns that may be
requested or mandated by governmental authorities. While it is not
possible at this time to estimate the impact
that COVID-19 could have on our business,
the COVID-19 pandemic and mitigation measures have had
and may continue to have an adverse impact on global economic
conditions which could have an adverse effect on our business and
financial condition, including impairing our ability to raise
capital when needed. In addition, for a period of time we were
under a shelter-in-place mandate which may be reinstated at the
discretion of state or local authorities and many of our clients
worldwide may be similarly impacted.
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, 2021 or our market
capitalization falls below a certain level, 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.
-14-
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.
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:
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the potential disruption of our existing business;
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entering new markets or industries in which we have limited prior
experience;
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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;
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difficulties integrating or expanding information technology
systems and other business processes or administrative
infrastructures to accommodate the acquired
businesses;
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complexities associated with managing the combined businesses due
to multiple physical locations;
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risks associated with integrating financial reporting and internal
control systems; and
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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.
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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.
-15-
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.
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 1, 2020, 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
(“Preferred
Stock”), 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 holders of Common Stock 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 1, 2020, 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.
-16-
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:
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actual or anticipated variations in our interim or annual
results;
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announcements of new services, products, acquisitions or strategic
relationships within the industry;
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changes in accounting treatments or principles;
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changes in earnings estimates by securities analysts and in analyst
recommendations; and
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general political, economic, regulatory and market
conditions.
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Any failure to meet these expectations, even if minor, could
materially adversely affect the market price of our Common
Stock.
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.
-17-
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. Since the middle of March 2020, most employees working out
of the headquarters office began working remotely as a result of
COVID-19. As of December 14, 2020, we have not established a date
to reopen the office officially.
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.
The operations of Track Group Analytics Limited are conducted in
approximately 1,157 square feet of office space in Bedford, Nova
Scotia, Canada. The lease for this office space began on July
1, 2020 and expires on June 30, 2021. Monthly lease payments are
approximately $2,000.
The operations of Track Group Chile S.p.A. 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.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social (“OADPRS”) of the then Public
Security Department, and presently, an agency of the National
Security Commission of the Department of the Interior, and
SecureAlert, Inc., presently Track Group, Inc. The Company’s
claim amount is upwards of $6.0 million. The Supreme Court took
action to resolve previous, conflicting decisions regarding the
jurisdiction of such claims and determined that such claims will be
resolved by the Federal Administrative Tribunal. Subsequently,
plaintiff filed an Amparo action before the Collegiate Court,
seeking an appeal of the Federal Administrative Court’s
earlier decision against plaintiff. The Collegiate Court issued a
ruling in August 2019 that the matter of dispute was previously
resolved by a lower court in 2016. The Company disagrees with this
ruling and on November 11, 2020 made a re-demand of the OADPRS for
payment due under the July 15, 2011 contract. The OADPRS has 3
months from November 11, 2020 in which to formally respond. The
Based upon the fee arrangement the Company has with its counsel, we
anticipate the future liabilities attributable to legal expense
will be minimal.
-18-
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, delayed by the Covid-19 crisis, remains ongoing. The
Company continues to vigorously defend the case.
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and has produced documentation supporting
its position in an informal document exchange with the Commonwealth
on July 6, 2020, though the Commonwealth, through its financial
advisory form, in correspondence dated November 13, 2020, requested
additional information and discussion. The Company remains
confident in its current position and continues to defend the
case.
Eli Sabag v. Track
Group, Inc., et al. On March 12, 2020, Eli Sabag commenced
an arbitration with the International Centre for Dispute
Resolution, Case Number 01-20-0003-6931. The arbitration claim, as
it pertains to the Company, alleges breach of the Share Purchase
Agreement (“SPA”) between the Company
and Sabag. Sabag alleges that the Company breached the SPA because
it failed to pay him his earn-out after it sold or leased a
sufficient number of GPS Global Tracking devices to meet the
earn-out milestone, or alternatively, breached the SPA by failing
to act in “good faith” to allow Sabag to achieve his
earn-out. Sabag further claims that the Company fraudulently
induced Sabag to sell GPS Global Tracking and Surveillance System
Ltd. to the Company. The Company has entered its appearance and on
July 17, 2020, filed its Answer denying the allegations of the
claim and asserting numerous defenses. The Company continues to
vigorously defend against the allegations. The Company participated
in mediation discussions on December 15, 2020 with all parties. The
Company has not accrued any potential loss as the probability of
incurring a material loss is deemed remote by management, after
consultation with outside legal counsel.
-19-
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.
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Fiscal Year Ended September 30,
2020
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High
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Low
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First Quarter ended December 31,
2019
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$0.56
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$0.37
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Second
Quarter ended March 31, 2020
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$0.60
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$0.13
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Third
Quarter ended June 30, 2020
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$0.43
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$0.15
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Fourth
Quarter ended September 30, 2020
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$0.40
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$0.25
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Fiscal Year Ended September 30,
2019
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High
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Low
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First Quarter ended December 31,
2018
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$0.95
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$0.47
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Second
Quarter ended March 31, 2019
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$0.69
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$0.50
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Third
Quarter ended June 30, 2019
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$0.57
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$0.52
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Fourth
Quarter ended September 30, 2019
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$0.53
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$0.51
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Holders
As of December 1, 2020, we had 178 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.
-20-
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.
The following table includes information as of September 30, 2020
for our equity compensation plans:
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Plan category
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Number of securities to be issued upon exercise of outstanding
options, warrants and rights
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Weighted-average
exercise price
of outstanding options, warrants
and rights
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Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a)
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(a)
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Equity
compensation plans approved by security holders
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616,655
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$1.61
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27,218
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Equity
compensation approved by Board of Directors outside of 2012
Plan
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68,604
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1.15
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Total
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685,259
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$1.56
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27,218
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Recent Sales of Unregistered Securities
No securities were issued without registration under the Securities
Act during the fiscal year ended September 30, 2020, nor were any
securities issued subsequent to September 30, 2020, 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.
-21-
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 2020 refers to the year ended
September 30, 2020. 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, 2020
and 2019 and the accompanying notes thereto contained in this
Annual Report. This introduction summarizes MD&A, which
includes the following sections:
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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.
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Results of Operations – an analysis of our consolidated
results of operations for the last two fiscal years presented in
our consolidated financial statements.
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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.
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Off-Balance Sheet Arrangements
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Critical Accounting Policies – a discussion of accounting
policies that require critical judgments and
estimates.
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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
PPP Loan
On May 19, 2020, the Company received net proceeds of $933,200 from
a potentially forgivable loan from the U.S. Small Business
Administration ("SBA")
pursuant to the Paycheck Protection Program ("PPP")
enacted by Congress under the Coronavirus Aid, Relief, and Economic
Security Act (15 U.S.C. 636(a)(36)) (the "CARES
Act") administered by the
SBA (the "PPP
Loan"). To facilitate the
PPP Loan, the Company entered into a Note Payable Agreement with
BMO Harris Bank National Association as lender (the
"Lender")
(the "PPP
Loan Agreement"). The PPP Loan
provides for working capital to the Company and will mature on May
19, 2022. However, under the CARES Act and the PPP Loan Agreement,
all payments of both principal and interest will be deferred until
at least December 19, 2020. The PPP Loan will accrue interest at a
rate of 1.00% per annum, and interest will continue to accrue
throughout the period the PPP Loan is outstanding, or until it is
forgiven. The CARES Act (including the guidance issued by SBA and
U.S. Department of the Treasury related thereto) provides that all
or a portion of the PPP Loan may be forgiven upon request from the
Company to Lender, subject to requirements in the PPP Loan
Agreement and the CARES Act. On December 8, 2020, the Company filed
the application for forgiveness with the Lender and believes it
will receive 100% forgiveness for the PPP Loan, however, no
assurance can be given.
-22-
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, as defined therein, 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 Amended
Facility Agreement which extends the maturity of the Amended
Facility Agreement to July 1, 2021. On October 21, 2020, the
Company requested, in writing, an additional extension to the
maturity date of the Amended Facility Agreement. On November 25,
2020, the Noteholders held a meeting to address the Company’s
request and approved a new maturity date of July 1, 2024. On
December 21, 2020, Conrent and the Company signed an Amendment to
the Amended Facility Agreement which extends the maturity date of
the agreement to July 1, 2024, capitalizes the accrued and unpaid
interest increasing the outstanding principal amount and reduces
the interest rate of the Amended Facility Agreement from 8% to 4%.
See Note 14 to the Consolidated Financial Statements.
Sapinda Facility Agreement
On
September 8, 2020, the Company received a letter from ADS
Securities LLC (“ADS”) informing the Company that
ADS had been assigned the right to payment under that certain Loan
Facility dated September 14, 2015, by and between Sapinda Asia
Limited and the Company (the “Sapinda Loan Agreement”). On
September 29, 2020, the Company and ADS settled the outstanding
amount of approximately $3.4 million due under the Sapinda Loan
Agreement for $2.7 million, which was paid on September 30,
2020.
Subsequent to the completion of its fiscal year, the Company
entered into an amendment to extend the term of the CEO’s
employment agreement.
Results of Operations
Continuing Operations - Fiscal Year 2020 Compared to Fiscal Year
2019
Revenue
During the fiscal year ended September 30, 2020, we had revenue of
$33,875,167 compared to revenue of $34,019,152 for the fiscal year
ended September 30, 2019, a decrease of $143,985, or less than
1%. Of this revenue, $33,217,661 and $32,100,370 was from monitoring and other related
services during the 2020 and 2019 fiscal years, respectively,
representing an increase of $1,117,291 or approximately 3%. Growth
in revenue monitoring and other related services during the year
ended September 30, 2020 was principally the result of an increase
in total growth of our North American monitoring
operations driven by clients in Illinois, Washington DC, Michigan,
Puerto Rico, Bahamas and Nevada, partially offset by our Chilean
operation. The decrease in revenue in Chile can be attributed to
the strengthening U.S. dollar and the decline in devices due to the
adverse impact of COVID-19 due to closings of Chilean court system,
when compared to the same period in 2019.
Product and other revenue for the year ended September 30, 2020
decreased to $657,506 from $1,918,782 in the same period in 2019
largely due to lower product sales of $1,248,917, principally in
Mexico, and slightly lower sales of other non-monitoring
revenue items. The decrease in product sales was due to
lower 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, 2020, cost of revenue totaled
$15,229,464 compared to cost of revenue during the year ended
September 30, 2019 of $15,002,161, an increase of $227,303 or
approximately 2%. The increase in cost of
revenue was largely the result of higher monitoring costs of
$514,870, higher fees of $271,472, higher lost stolen and damaged
devices of $201,186 and higher server costs of $171,827. These
increases were offset by lower product sales costs of $418,436,
lower communication costs of $290,004, lower device repair costs of
$131,583 and lower depreciation of
monitoring devices of $89,620, largely due to an increase in fully
depreciated devices.
-23-
Depreciation and amortization included in cost of revenue for the
fiscal years ended September 30, 2020 and 2019, totaled $1,923,356
and $2,012,975, respectively. These costs represent additional
fully depreciated monitoring
devices. Devices are depreciated
over a three-year useful life. Royalty agreements are being
amortized over a ten-year useful life. The Company believes these
lives are appropriate due to changes in electronic monitoring
technology and the corresponding potential for obsolescence.
Management periodically assesses the useful life of the devices for
appropriateness. Amortization
of a patent related to GPS and satellite tracking is also included
in cost of sales.
Gross Profit and Margin
During the fiscal year ended September 30, 2020, gross profit
totaled $18,645,703, resulting in a 55% gross margin, compared to
$19,016,991, or a 56% gross margin, during the fiscal year ended
September 30, 2018, a decrease of $371,288, principally due to the
drop in device sales and subsequent contribution of those
sales.
Gain / Loss on Sale of Assets
During the year ended September 30, 2019, we sold a fully
depreciated non-core asset for cash of $10,563.
General and Administrative Expense
During the fiscal year ended September 30, 2020, our general and
administrative expense totaled $10,381,859, compared to $12,243,459
for the fiscal year ended September 30,
2019. The decrease of
$1,861,600 or approximately 15%, in general and administrative cost
resulted largely from lower
legal costs of $732,582, lower bad debt expense of $420,572, lower
travel and entertainment expense of $254,673, lower payroll and
taxes of $184,118, lower consulting and outside service costs of
$176,817 and lower fees and licenses of $62,470. These savings were
partially offset by higher insurance costs of
$176,365.
Selling and Marketing Expense
For the fiscal year ended September 30, 2020, our selling and
marketing expense was $2,257,667 compared to $2,257,101 for the
year ended September 30, 2019. The nominal $566 increase
resulted largely from higher outside services and consulting of
$222,302, higher wages and related taxes of $40,621, partially
offset by lower COVID-19 induced travel and entertainment expense
of $232,290.
Research and Development Expense
During the fiscal year ended September 30, 2020, we incurred
research and development expense of $1,182,542 compared to those
costs recognized during fiscal year 2019 totaling $1,313,499, a
decrease of $130,957 or approximately 10%. The
decrease resulted
largely from lower payroll and taxes of $113,103, and lower travel
and entertainment expense of $75,419, partially offset by higher
dues and subscriptions of $29,941. 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, $1,514,482 was capitalized as developed
technology during the year ended September 30, 2020, and
$1,181,308 was capitalized 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.
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, 2020, depreciation and amortization included in
operating expense totaled $2,064,097, compared to $2,047,980 for
the fiscal year ended September 30, 2019. This was an increase of
$16,117, or approximately 1%.
Other Income (Expense)
During the fiscal year ended September 30, 2020, other income
(expense) totaled $2,084,982 of expense compared to other expense
of $2,845,115 during fiscal 2019. The decrease of
$760,133 in net other expense resulted primarily from a gain of
$699,644 related to the settlement of a note payable at a discount
(See Note 7 to the Consolidated Financial Statements) and positive
exchange rate movements of $149,810, partially offset by higher
interest expense of $100,495.
-24-
Income taxes
During the fiscal year ended September 30, 2020, income tax expense
totaled $793,197 compared to $884,353 during the fiscal year ended
September 30, 2019. Tax expense in both fiscal years are income
taxes largely related to a foreign jurisdiction.
Net Loss
We had a net loss for the fiscal year ended September 30, 2020
totaling $118,641 or $0.01 loss per common share, compared to a net
loss of $2,563,953 or ($0.23) per common share for the fiscal year
ended September 30, 2019. This reduction in net
loss is largely due to, lower general and administrative expense,
lower research and development costs, lower other income (expense)
and lower income tax expense, partially offset by lower gross
profit, higher selling and marketing expense and higher
depreciation and amortization in fiscal year ended September 30,
2020.
Liquidity and Capital Resources
The
Company is currently self-funded through net cash provided by
operating activities and was able to utilize cash from operations
to fulfill its obligation under the Sapinda Loan Agreement of $3.4
million at the end of September 2020, which was discounted to a
cash payment of $2.7 million made on September 30, 2020.
As of
September 30, 2020, excluding interest, approximately $30.4 million
was still owed to Conrent under the Amended Facility Agreement. No
borrowings or sales of equity securities occurred during the years
ended September 30, 2020 or 2019 other than the funds received
pursuant to the PPP Loan described below. See Note 14 to the
Consolidated Financial Statements.
On May 19, 2020, the Company received net proceeds of $933,200 from
a potentially forgivable loan from the SBA pursuant to the PPP
enacted by Congress under the of the CARES Act. To facilitate the
PPP Loan, the Company entered into a Note Payable Agreement with
the Lender. The PPP Loan provides for working capital to the
Company and will mature on May 19, 2022. However, under the CARES
Act and the PPP Loan Agreement, all payments of both principal and
interest will be deferred until at least December 19, 2020. The PPP
Loan will accrue interest at a rate of 1.00% per annum, and
interest will continue to accrue throughout the period the PPP Loan
is outstanding, or until it is forgiven. The CARES Act (including
the guidance issued by SBA and U.S. Department of the Treasury
related thereto) provides that all or a portion of the PPP Loan may
be forgiven upon request from the Company to the Lender, subject to
requirements in the PPP Loan Agreement and the CARES Act. On
December 8, 2020, the Company filed the application for forgiveness
with the Lender and believes it will receive 100% forgiveness for
the PPP Loan, however, no assurance can be given.
On February 24, 2019 the Company and Conrent, acting on behalf of
its compartment, Safety 2, entered into 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, is repaid by the Company, and (ii) provided that in the
event of a Change of Control, 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 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 Amended Facility Agreement
which extends the maturity of the Amended Facility Agreement to
July 1, 2021. On October 21, 2020, the Company requested, in
writing, an additional extension to the maturity date of the
Amended Facility Agreement. On November 25, 2020, the Noteholders
held a meeting to address the Company’s request and approved
a new maturity date of July 1, 2024. On December 21, 2020,
Conrent and the Company signed an Amendment to the Amended Facility
Agreement which extends the maturity date of the agreement to July
1, 2024, capitalizes the accrued and unpaid interest increasing the
outstanding principal amount and reduces the interest rate of the
Amended Facility Agreement from 8% to 4%. See Note 14 to the
Consolidated Financial Statements.
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.
-25-
Net Cash Flows from Operating Activities.
During the fiscal year ended September 30, 2020, we incurred a net
loss of $118,641 and we had cash flows from operating activities of
$4,725,864, compared to a net loss from continuing operations of
$2,563,953 and cash flows from operating activities of $5,071,650
for fiscal year 2019. The decrease of cash from operations in
fiscal year 2020 compared to fiscal year 2019 was largely the
result of a decline in accounts payable, partially offset by a
decrease in accounts receivable, an increase in accrued liabilities
and an improvement in operating performance.
Net Cash Flows from Investing Activities.
The Company used $2,942,195 of cash for investing activities during
the fiscal year ended September 30, 2020, compared to $3,268,283 of
cash used during fiscal year 2019. Cash used for investing
activities was used for significant enhancements of our software
platform and for purchases of monitoring and other equipment to
meet customer demand during the fiscal year ended September 30,
2020. Purchases of monitoring equipment decreased $459,692 compared
to the prior period, largely due to the reduction in the size of
the Chilean program caused by COVID-19 and purchases of property
and equipment decreased $210,133, compared to the prior period,
largely due to decreases in leasehold improvements and computer
equipment.
Net Cash Flows from Financing Activities.
The Company used $1,794,357 of cash from financing activities
during the fiscal year ended September 30, 2020, compared to
$65,317 of cash used by financing activities during fiscal year
2019. During the fiscal years ended September 30, 2020 and
September 30, 2019, we made principal payments of $2,727,557 and
$65,317 on notes payable, respectively. During the fiscal year
ended September 30, 2020, the Company received
net proceeds of $933,200 from a potentially forgivable loan from
the SBA.
See Note 7 to the Consolidated Financial
Statements.
Liquidity, Working Capital and Management’s Plan
As of September 30, 2020, we had unrestricted cash of $6,762,099,
compared to unrestricted cash of $6,896,711 as of September 30,
2019. As of September 30, 2020, we had a working capital
deficit of $34,773,161, compared to a working capital deficit of
$35,010,475 as of September 30, 2019. This decrease in working
capital deficit of $237,314 is principally due to the settlement of
the Sapinda/ADS note payable, lower accounts payable, purchases of
monitoring equipment and capitalized software and the current
portion PPP loan described in Note 7 to the Consolidated Financial
Statements, partially offset by lower accounts receivable, higher
accrued expenses and lower cash provided by
operations.
On May 19, 2020, the Company received net proceeds of $933,200 from
a potentially forgivable loan from the SBA pursuant to the
PPP
enacted by
Congress under the CARES Act. See Note 7 to the Consolidated
Financial Statements.
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 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 Amended Facility Agreement which extends the maturity of the
Amended Facility Agreement to July 1, 2021. On October 21, 2020,
the Company requested, in writing, an additional extension to the
maturity date of the Amended Facility Agreement. On November 25,
2020, the Noteholders held a meeting to address the Company’s
request and approved a new maturity date of July 1, 2024. On
December 21, 2020, Conrent and the Company signed an Amendment to
the Amended Facility Agreement which extends the maturity date of
the agreement to July 1, 2024, capitalizes the accrued and unpaid
interest increasing the outstanding principal amount and reduces
the interest rate of the Amended Facility Agreement from 8% to 4%.
See Note 14 to the Consolidated Financial Statements.
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
|
$233,107
|
$170,937
|
$-
|
$404,044
|
-26-
As of September 30, 2020, the Company’s total future minimum
lease payments under noncancelable operating leases were $404,044.
The Company’s facility leases typically have original terms
not exceeding five years and generally contain multi-year renewal
options.
Effective
October 1, 2019, the Company adopted the new lease accounting
guidance in ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified
lease accounting for lessees to create transparency and
comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing
arrangements. The Company adopted the new lease standard utilizing
the modified retrospective transaction method, under which amounts
in prior periods were not restated. For contracts existing at the
time of the adoption, the Company elected not to reassess (a)
whether any are or contain leases, (b) lease classification, and
(c) initial direct costs. Upon adoption on October 1, 2019, the
Company recorded $597,289 right of use assets and lease
liabilities. The adoption of the new standard did not impact the
Company’s Statements of Operations or Statements of Cash
Flows.
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, leases, stock-based compensation and allowance for doubtful
accounts receivable, we apply critical accounting policies
discussed below in the preparation of our financial
statements.
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. Monitoring revenue is
recognized ratably over time, as the customer simultaneously
receives and consumes the benefit of these services as they are
performed. Payment due or received from the customers prior to
rendering the associated services are recorded as 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. Revenue from the sale of
devices and parts is recognized upon their transfer of control to
the customer, which is generally upon delivery. Delivery is
considered complete at either the time of shipment or arrival at
destination, based on the agreed upon terms within the contract.
Payment terms are generally 30 days from invoice date. 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.
-27-
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 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 total 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.
In February 2016, FASB issued Accounting Standards Update
(“ASU”) No. 2016-02, “Leases (Topic
842)”.
For lessees, the amendments in this
update require that for all leases not considered to be short term,
a company recognize both a lease liability and right-of-use asset
on its balance sheet, representing the obligation to make payments
and the right to use or control the use of a specified asset for
the lease term. The amendments in this update are effective for
annual periods beginning after December 15, 2018 and interim
periods within those annual periods. The Company adopted ASU
2016-02 on October 1, 2019. See Note 12 for the impact the adoption
had on our consolidated financial position, results of operations
and cash flows.
-28-
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 $10,802,917 and $13,536,967 in revenue from sources outside
the United States for the fiscal years ended September 30, 2020 and
2019, respectively. We made and received payments in a
foreign currency during the periods indicated, which resulted in a
foreign exchange expense of $316,330 and $466,140 in fiscal years
2020 and 2019, 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.
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, 2020 was completed pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act. Based on this evaluation,
our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective and designed to provide reasonable assurance that the
information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms as of September 30,
2020.
-29-
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,
2020.
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, 2020, that has
materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.
Item 9B. Other Information
None.
-30-
PART III
Item 10.
Directors, Executive Officers and
Corporate Governance
The Company’s Board of Directors (the
“Board”) and executive officers consist of the
persons named in the table below. Each director serves for a
one-year term, until his or her successor is elected and qualified,
or until earlier resignation or removal. Our Bylaws provide that
the authorized number of directors shall be fixed by the Board from
time to time. The directors and executive officers are as
follows:
|
Guy Dubois
|
|
62
|
|
Chair of the Board
|
|
Karen Macleod
|
|
57
|
|
Director
|
|
Karim Sehnaoui
|
|
42
|
|
Director
|
|
Derek Cassell
|
|
47
|
|
Chief Executive Officer
|
|
Peter K. Poli
|
|
59
|
|
Chief Financial Officer
|
Guy
Dubois was
appointed as a director in December 2012 and has served as Chair of
the Board since February 2013. In addition, Mr. Dubois previously
served as our Chief Executive Officer from September 2016 to
December 2017. Mr. Dubois is the Founder and Chairman of
Singapore-based Tetra House Pte. Ltd., a provider of bespoke
consulting and advisory services out of Singapore. He is co-founder
of Circo3,
a regulated capital arrangement company with a platform approach to
the investor capital raising business. Mr. Dubois is a former director and Chief
Executive Officer of Gategroup AG, and previously held various
executive leadership roles at Gate Gourmet Holding LLC. Mr. Dubois
has held executive management positions at Roche Vitamins Inc. in
New Jersey, as well as regional management roles in that
firm’s Asia Pacific operations. Mr. Dubois also served the
European Organization for Nuclear Research (CERN) team in
Switzerland in various roles, including as its Treasurer and Chief
Accountant. Additionally, Mr. Dubois worked with IBM in Sweden as
Product Support Specialist for Financial Applications. A Belgian
citizen, Mr. Dubois holds a degree in Financial Science and
Accountancy from the Limburg Business School in Diepenbeek,
Belgium.
Mr.
Dubois’ extensive financial and management expertise and
experience, in addition to his public company senior management and
board experience, and the leadership he has shown in his positions
with prior companies as well as his knowledge of the daily
operations of the Company having previously served as Chief
Executive Officer, make him a valuable asset to the Board and the
Company.
Karen
Macleod was appointed as a
director in January 2016 and currently serves as Chief Executive
Officer of Arete Group LLC, a professional services firm. Prior to
Arete Group, Ms. Macleod was President of Tatum LLC, a New
York-based professional services firm owned by Randstad, from 2011
to 2014, and was a co-founder of Resources Connection (NASDAQ:
RECN), now known as RGP, a multinational professional services firm
founded as a division of Deloitte in June 1996. Ms. Macleod served
in several positions for RGP, including as a director from 1999 to
2009 and President, North America from 2004 to 2009. Prior to RGP,
Ms. Macleod held several positions in the Audit Department of
Deloitte from 1985 to 1994. Ms. Macleod served as a director for
A-Connect (Schweiz) AG, a privately held, Swiss-based global
professional services firm, from 2014 to 2016, and was a director
for Overland Solutions from 2006 to 2013. Currently, Ms. Macleod is
serving as a director on the Board of the FWA (Financial
Women’s Association) in New York and is a member of their
Audit Committee. Ms. Macleod holds a Bachelor of Science in
Business/Managerial Economics from the University of California,
Santa Barbara.
Ms.
Macleod’s senior public company leadership experience along
with her finance and accounting background make her a significant
contributor to the Board and the strategic growth of the
Company.
Karim
Sehnaoui was appointed as a
director in February 2018. Mr. Sehnaoui is an entrepreneur and
investment professional, who specializes in private equity, venture
capital, and corporate finance. Currently, he serves as Chief
Investment Officer of ADS Securities LLC, a position he has held
since October 2018, and as a Director of ETS Limited. In addition,
Mr. Sehnaoui is the Founder and current Managing Director of Elham
Management and Investment Group, an investment firm founded in 2011
that is dedicated to sustainable strategic investing. From 2012 to
2016, Mr. Sehnaoui taught graduate level finance courses as a
visiting Assistant Professor at MSB Mediterranean School of
Business in Tunisia. Prior to that, Mr. Sehnaoui spent several
years in investment banking and private equity, serving as Acting
Chief Investment Officer of Abu Dhabi Investment House PJSC and
General Manager for Abu Dhabi Investment House S.A., and Business
Development Director at Ithmaar Bank. Mr. Sehnaoui is currently a
member of the Supervisory Board of Fyber N.V. (FRA: FBEN), an
advertising technology company. Mr. Sehnaoui holds Bachelor’s
and Master’s degrees in Civil Engineering from McGill
University in Montreal, Canada, and was a Global Leadership Fellow
at the World Economic Forum in Geneva, Switzerland from 2005 to
2007.
-31-
Mr.
Sehnaoui was appointed as a director in connection with ETS Limited
becoming the Company’s largest stockholder of record in 2018.
Mr. Sehnaoui’s senior leadership experience, along with his
private equity and venture capital background make him a valued
member of the Board and a strong asset to the ongoing growth of the
Company.
Derek
Cassell joined the Company in
June 2014 through the strategic acquisition of Emerge Monitoring,
at which time he was appointed Divisional President, Americas. Mr.
Cassell was appointed to serve as our President in December 2016
and was promoted to the role of Chief Executive Officer effective
January 1, 2018. From September 2008 until June 2014, Mr. Cassell
served as an Executive Vice President of Emerge Monitoring, which
was part of the Bankers Surety Team. Mr. Cassell has over 20 years
of experience providing correctional solutions to the criminal
justice industry. His previous positions include Director of
Operations for ADT Correctional Services, Director of Customer
Support for G4S Justice Services, and National Sales and Marketing
Manager for ElmoTech Inc. He holds a Criminal Justice Degree from
Henry Ford College in Dearborn Heights,
Michigan.
Peter K.
Poli has served as our Chief
Financial Officer since January 2017. In addition, he has served as
the Chief Financial Officer and Treasurer of Emerge Monitoring,
Inc., Secretary and Treasurer of Track Group – Puerto Rico,
Inc., Secretary of Track Group Analytics, Limited and Manager of
Emerge Monitoring LLC, all of which are subsidiaries of the
Company, since May 2017. Before joining the Company, Mr. Poli
served as the Chief Financial Officer of Grand Banks Yachts Limited
from August 18, 2004 through December 31, 2015. In addition, he
served as an Executive Director of Grand Banks Yachts from March
31, 2008 through October 28, 2015. Prior to his time with Grand
Banks Yachts Limited, Mr. Poli served as the Chief Financial
Officer for Acumen Fund Inc., I-Works Inc., and as Vice
President and Chief Financial Officer of FTD.COM. Mr. Poli also
spent nine years as an Investment Banker with Dean Witter Reynolds,
Inc. and served as the CFO of a wholly-owned subsidiary of Morgan
Stanley Dean Witter from 1997 to 1999. In addition, Mr. Poli served
as an Independent Director of Leapnet, Inc. from 2000 to 2002. Mr.
Poli earned a Bachelor of Arts in Economics and Engineering from
Brown University in 1983 and an MBA from Harvard Business School in
1987.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange
Act”), requires our
officers, directors, and persons who beneficially own more than ten
percent of our Common Stock to file reports of ownership and
changes in ownership with the SEC. Officers, directors, and
greater-than-ten-percent stockholders are also required by the SEC
to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of these forms that were furnished to us, we
believe that all reports required to be filed by these individuals
and persons under Section 16(a) were filed during fiscal year 2020
and that such filings were timely.
Code of Business Conduct and Ethics
We have established a Code of Business Conduct and
Ethics (the “Code”) that applies to our officers, directors
and employees. This Code contains general guidelines for
conducting our business consistent with the highest standards of
business ethics, and is intended to qualify as a “code of
ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder. A copy of our Code is available online at
www.trackgrp.com. Any
amendments to or waivers from a provision of our Code that apply to
our principal executive officer, principal financial officer,
principal accounting officer, controller or persons performing
similar functions and that relates to any element of the Code will
be made available to the public at the aforementioned
website.
Board Leadership Structure
In
addition to Messrs. Cassell and Dubois’ leadership, the Board
maintains effective independent oversight through a number of
governance practices, including, open and direct communication with
management, input on meeting agendas, and regular executive
sessions.
-32-
Board Role in Risk Assessment
Management,
in consultation with outside professionals, as applicable,
identifies risks associated with the Company’s operations,
strategies and financial statements. Risk assessment is also
performed through periodic reports received by the Board from
management, counsel and the Company’s independent registered
public accountants relating to risk assessment and management. Our
Board meets privately in executive sessions with representatives of
the Company’s independent registered public accountants. The
Board also provides risk oversight through its periodic reviews of
the financial and operational performance of the
Company.
Director Nominations
The
Board nominates directors for election at each annual meeting of
stockholders and appoints new directors to fill vacancies when they
arise, and has the responsibility to identify, evaluate and recruit
qualified candidates to the Board for such nomination or
appointment.
The
Board of Directors identifies director nominees by first
considering those current members of the Board who are willing to
continue service. Current members of the Board with skills and
experience that are relevant to our business and who are willing to
continue service are considered for re-nomination, balancing the
value of continuity of service by existing members of the Board
with that of obtaining a new perspective. Nominees for director are
selected by a majority of the members of the Board of Directors.
Although the Company does not have a formal diversity policy, in
considering the suitability of director nominees, the Board
considers such factors as it deems appropriate to develop a Board
that is diverse in nature and comprised of experienced and seasoned
advisors. Factors considered by the Board include judgment,
knowledge, skill, diversity, integrity, experience with businesses
and other organizations of comparable size, including experience in
the software and/or technology industries, software, intellectual
property, business, finance, administration or public service, the
relevance of a candidate’s experience to our needs and
experience of other Board members, experience with accounting rules
and practices, the desire to balance the considerable benefit of
continuity with the periodic injection of the fresh perspective
provided by new members, and the extent to which a candidate would
be a desirable addition to the Board and any committees of the
Board.
A
stockholder who wishes to suggest a prospective nominee for the
Board may notify the Secretary of the Company in writing with any
supporting material the stockholder considers appropriate. Nominees
suggested by stockholders are considered in the same way as
nominees suggested from other sources.
In
addition, the Company’s Bylaws contain provisions that
address the process by which a stockholder may nominate an
individual to stand for election to the Board at the
Company’s annual meeting of stockholders. In order to
nominate a candidate for director, a stockholder must give timely
notice in writing to the Secretary of the Company and otherwise
comply with the provisions of the Company’s Bylaws.
Information required by the Company’s Bylaws to be in the
notice include: the name, contact information and share ownership
information for the candidate and the person making the nomination,
and other information about the nominee that must be disclosed in
proxy solicitations under Section 14 of the Exchange Act and
its related rules and regulations. The Board may also require any
proposed nominee to furnish such other information as may
reasonably be required by the Board to determine the eligibility of
such proposed nominee to serve as director of the Company. The
recommendation should be sent to: Secretary, Track Group, Inc., 200
E. 5th Avenue, Suite 100, Naperville, Illinois 60563. You can
obtain a copy of the Company’s Bylaws by writing to the
Secretary at this address.
Stockholder Communications
If
you wish to communicate with the Board, you may send your
communication in writing to: Secretary, Track Group, Inc., 200 E.
5th Avenue, Suite 100, Naperville, Illinois 60563. You must
include your name and address in the written communication and
indicate whether you are a stockholder of the Company. The
Secretary will review any communication received from a
stockholder, and all material and appropriate communications from
stockholders will be forwarded to the appropriate director or
directors or committee of the Board based on the subject
matter.
Board Meetings
Directors
are generally elected for a term of one year until the next annual
meeting of stockholders and until their successors have been
elected or appointed and duly qualified. Vacancies on the Board
which are created by the retirement, resignation or removal of a
director, may be filled by the vote of the remaining members of the
Board, with such new director serving the remainder of the term or
until his/her successor is elected and qualified.
The
Board of Directors is elected by and is accountable to our
stockholders. The Board establishes policy and provides
strategic direction, oversight, and control. The Board met 19
times during the year ended September 30, 2020 and all incumbent
directors attended 100% of the aggregate number of meetings of the
Board.
-33-
Board Committees and Charters
Prior
to May 31, 2018, the Board of Directors had three standing
committees which consisted of the Audit Committee, the Compensation
Committee, and the Nominating and Corporate Governance Committee.
Due to the resignations of certain former directors during 2018 as
previously disclosed by the Company and the current size of the
Board, these committees are no longer active. Instead the full
Board administers the duties of each of these committees, and will
likely do so for the foreseeable future.
Audit Committee
Prior to May 31, 2018, we had a separately
designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The primary duties of the
Audit Committee were to oversee (i) management’s conduct
related to our financial reporting process, including reviewing the
financial reports and other financial information provided by the
Company, and reviewing our systems of internal accounting and
financial controls, (ii) our independent auditors’
qualifications and independence and the audit and non-audit
services provided to the Company, and (iii) the engagement and
performance of our independent auditors. The Audit Committee
assisted the Board in providing oversight of our financial and
related activities, including capital market transactions. The
Audit Committee has a charter, a copy of which is available on our
website at www.trackgrp.com.
Currently,
the entire Board of Directors serves in the capacity as an Audit
Committee with Ms. Macleod also serving as Committee Chair. With
the exception of Mr. Sehnaoui, each member of the Audit Committee,
satisfy, as determined by the full Board of Directors, the
definition of independent director as established in the OTC Rules
and all members are financially literate. In accordance with
Section 407 of the Sarbanes-Oxley Act of 2002, the Board of
Directors designated Ms. Macleod as the Audit Committee’s
“audit committee financial expert” as defined by the
applicable regulations promulgated by the SEC. The Audit
Committee met with our Chief Financial Officer and with our
independent registered public accounting firm and evaluated the
responses by the Chief Financial Officer, both to the facts
presented and to the judgments made by our independent registered
public accounting firm.
Our full Board reviewed and discussed the matters
required by United States auditing standards required by the Public
Company Accounting Oversight Board (the “PCAOB”) and our audited financial statements for
the fiscal year ended September 30, 2020 with management and our
independent registered public accounting firm. Our Board received
the written disclosures and the letter from our independent
registered public accounting firm required by Independence
Standards Board No. 1, and our Board discussed with the independent
registered public accounting firm the independent registered public
accounting firm's independence.
Compensation Committee
We
currently do not have a compensation committee of the Board or a
committee performing similar functions. It is the view of the Board
that it is appropriate for us not to have such a committee because
of our size and because the Board participates in the consideration
of executive compensation. As such, the entire Board of Directors
has the responsibility for developing and maintaining an executive
compensation policy that creates a direct relationship between pay
levels and corporate performance and returns to stockholders. The
Board monitors the results of such policy to assure that the
compensation payable to our executive officers provides overall
competitive pay levels, creates proper incentives to enhance
stockholder value, rewards superior performance, and is justified
by the returns available to stockholders.
Additionally,
the Board administers compensation plans in a manner consistent
with the terms of such plans (including, as applicable, the
granting of stock options, restricted stock, stock units and other
awards, the review of performance goals established before the
start of the relevant plan year, and the determination of
performance compared to the goals at the end of the plan
year). None of our executive officers served as a director or
member of the compensation committee of any entity that has one or
more executive officers serving on our Board.
Nominating and Corporate Governance Committee
We
do not have a nominating committee. Our Board of Directors selects
individuals to stand for election as members of the Board and does
not have a policy with regards to the consideration of any director
candidates recommended by our stockholders. Our Board has
determined that it is in the best position to evaluate our
company’s requirements as well as the qualifications of each
candidate when it considers a nominee for a position on the Board.
As such, the entire Board of Directors has the responsibility for
identifying and recommending candidates to fill vacant and newly
created Board positions, setting corporate governance guidelines
regarding director qualifications and responsibilities, and
planning for senior management succession.
-34-
Currently,
our full Board is required to review the qualifications and
backgrounds of all directors and nominees (without regard to
whether a nominee has been recommended by stockholders), as well as
the overall composition of the Board of Directors, and recommend
director candidates to be nominated for election at the annual
meeting of stockholders, or, in the case of a vacancy on the Board,
elect a new director to fill such vacancy. If stockholders
wish to recommend candidates directly to our Board, they may do so
by communicating directly with our Secretary at the address
specified on the cover of this annual report. There has not been
any change to the procedures that our stockholders may recommend
nominees to our Board of Directors.
Independent Directors
The Board has determined that Mr. Dubois and Ms.
Macleod are currently the Company’s independent directors as
defined by the rules and regulations of the OTC Markets. Mr. Dubois
and Ms. Macleod meet the independence standards established by the
OTC Markets and the U.S. Securities and Exchange Commission (the
“SEC”). In addition, the Board has determined
that of its current directors, Ms. Macleod satisfies the definition
of an “audit committee financial expert” under SEC
rules and regulations. These designations do not impose any duties,
obligations or liabilities that are greater than those generally
imposed as members of the Board, and the designation as an audit
committee financial expert does not affect the duties, obligations
or liability of any other member of the Board.
Indemnification of Officers and Directors
As
permitted by Delaware law, the Company will indemnify its
directors and officers against expenses and liabilities they
incur to defend, settle, or satisfy any civil or
criminal action brought against them on account of
their being or having been Company directors or officers
unless, in any such action, they are adjudged to have acted
with gross negligence or willful
misconduct.
Item
11. Executive Compensation
The
following discussion relates to the compensation of our
“named executive officers”.
Summary Compensation Table
The following summary
compensation table sets forth the compensation paid to the
following persons for our fiscal years ended September 30, 2020 and
2019:
(a)
our
principal executive officer;
(b)
our
other two most highly compensated executive officers who were
serving as executive officers at the end of the fiscal year ended
September 30, 2020 and who had total compensation exceeding
$100,000; and
(c)
additional individuals for whom disclosure would
have been provided under (b) but for the fact that the individual
was not serving as an executive officer at the end of the most
recently completed financial year (together, the
“Named
Executive Officers”).
|
Name and
|
|
Salary
|
Bonus
|
Stock Awards
|
All Other Compensation
|
Total
|
|
Principal
Position
|
Year
|
($)
|
($)
|
($) (1)
|
($)
|
($)
|
|
Derek
Cassell
|
2020
|
$275,000
|
$275,000
|
$-
|
$-
|
$550,000
|
|
Chief Executive Officer and Former President
|
2019
|
$275,000
|
$366,667
|
$-
|
$-
|
$641,667
|
|
|
|
|
|
|
|
|
|
Peter
Poli
|
2020
|
$250,000
|
$125,000
|
$-
|
$-
|
$375,000
|
|
Chief Financial Officer
|
2019
|
$250,000
|
$166,667
|
$-
|
$-
|
$416,667
|
(1)
This
column
represents the grant date fair value in accordance with ASC 718.
These amounts do not represent the actual value that may be
realized by the named executive
officers.
-35-
Narrative Disclosure to the Summary Compensation Table
Poli Employment Agreement
On December 12, 2016,
the Company entered into a three-year employment agreement with Mr.
Poli (the “Poli Employment
Agreement”). Under the
terms and conditions of the Poli Employment Agreement, Mr. Poli
began receiving a base salary equal to $240,000 per annum beginning
in January 2017, and received an option to purchase 100,000 shares
of the Company’s Common Stock at an exercise price per share
equal to the closing price of the Company’s Common Stock on
the date approved by the Board. One-half of this option vested on
January 1, 2018, and the remaining one-half vested on January 1,
2019. If the Company terminates Mr. Poli’s employment as a
result of an involuntary termination, he would receive an amount
equal to 12 months base salary, plus any annual bonus deemed to be vested and earned as
well as certain COBRA benefits.
An amendment to the
Poli Employment Agreement was approved at a Board meeting on
December 13, 2017, and such amendment was executed on January 3,
2018. Pursuant to the terms of
the Poli Agreement, as amended (the “Poli
Amendment”), effective
January 1, 2018, Mr. Poli’s employment was extended three
years, and shall automatically renew for successive one year
periods thereafter unless either party provides the other with
notice of its intent not to renew the Poli Agreement at least six
months prior to termination. In addition, the Poli Amendment
provides: (i) an increase in Mr. Poli’s base salary to
$250,000 per year; (ii) the issuance of 150,000 unregistered
restricted shares of the Company’s Common Stock, which shall
vest annually in increments of 50,000 beginning January 1, 2018;
and (iii) in the event of a change of control, Mr. Poli shall be
entitled to a cash payment equal to one year’s salary, plus
all restricted stock, warrants and options previously issued to Mr.
Poli shall become immediately vested and
exercisable.
Cassell Employment Agreement
On December 1, 2016,
the Company entered into an employment agreement with Mr. Cassell,
which was subsequently amended on February 13, 2017 (the
“Cassell Employment
Agreement”). Under the
terms and conditions of the Cassell Employment Agreement, Mr.
Cassell received a base salary equal to $240,000 per annum, and
received 60,000 unregistered restricted shares of the
Company’s Common Stock. One-half of these shares vested
immediately upon issuance, and the remaining one-half vested on
March 30, 2018. If the Company terminates Mr. Cassel’s
employment as a result of an involuntary termination, he would
receive an amount equal to 12 months base salary, plus
any annual bonus deemed to be vested
and earned as well as certain COBRA benefits.
A second amendment to
the Cassell Employment Agreement was approved at a Board meeting
held on December 13, 2017, and such amendment was executed on
January 4, 2018. Under the terms of the Cassell Agreement, as
amended (the “Cassell
Amendment”), effective
January 1, 2018, Mr. Cassell was promoted from President to Chief
Executive Officer of the Company, a position which he shall hold
until December 31, 2020, unless earlier terminated or extended.
Should Mr. Cassell elect to voluntarily terminate his employment
with the Company, he must provide written notice of his intent to
do so at least 180 days prior to terminating his
employment. In addition,
the Cassell Amendment provides: (i) an increase in Mr.
Cassell’s base salary to $275,000 per year; (ii) an increase,
to 100% of his base salary, in his annual bonus effective for bonus
plan year 2018 and thereafter; (iii) the issuance of 300,000
unregistered restricted shares of the Company’s Common Stock,
which shall vest annually in increments of 100,000 beginning
January 1, 2018; and (iv) in the event of a change of control, Mr.
Cassell shall be entitled to a cash payment equal to one
year’s salary, plus all restricted stock, warrants and
options previously issued to Mr. Cassell shall become immediately
vested and exercisable.
-36-
Outstanding Equity Awards at September 30, 2020
The
following table discloses outstanding shares, stock option awards
and warrants held by each of the Named Executive Officers as of
September 30, 2020:
Outstanding Equity Awards at Fiscal Year-End 2020
|
Name
|
Number of securities underlying unexercised options (#)
exercisable
|
Number of securities underlying unexercised options (#)
unexercisable
|
Equity incentive plan awards: Number of underlying unexercised
unearned options (#)
|
Option exercise price
($)(1)
|
Option
expiration
date
|
Number of shares or units of stock that have not vested
(#)
|
Market value of shares or units of stock that have not vested
($)
|
Equity incentive plan awards: Number of Unearned shares, units or
other rights that have not vested (#)
|
Equity incentive plan awards: Market or Payout value of unearned
shares, units or other rights that have not vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Poli
|
100,000
|
-
|
-
|
$1.24
|
1/1/2022
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Derek
Cassell
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Director Compensation
During the fiscal year ended September 30, 2020,
each of our non-employee directors received $25,000 per quarter for
serving on the Board of Directors, which fees were
payable in
cash. The members of the Board
of Directors are also eligible for reimbursement of their expenses
incurred in attending Board meetings in accordance with our
policies.
-37-
The
following table sets forth the compensation awarded to, earned by,
or paid to each non-employee director having served during the
fiscal year ended September 30, 2020:
|
|
Stock Awards
|
Warrant Awards
|
Cash
|
Total Fees Earned
|
|
Name
|
($)
|
($)
|
($)
|
($)
|
|
|
|
|
|
|
|
Guy Dubois
|
$-
|
$-
|
$100,000
|
$100,000
|
|
Karen Macleod
|
$-
|
$-
|
$100,000
|
$100,000
|
|
Karim Sehnaoui
|
$-
|
$-
|
$100,000
|
$100,000
|
Director
Warrants
The following table lists the warrants to purchase shares of Common
Stock held by each of our non-employee directors as of December 1,
2020, all of which were granted in connection with their services
as directors:
|
Name
|
Grant
Date
|
Expiration
Date
|
Exercise
price
|
Number
of
Warrants
|
Compensation
expense
|
|
|
|
|
|
|
|
|
Guy
Dubois (1)
|
3/22/13
|
3/21/22
|
$1.24
|
2,385
|
$11,682
|
|
4/16/13
|
4/14/22
|
$1.24
|
64,665
|
$285,003
|
|
|
7/1/13
|
6/30/22
|
$1.24
|
4,083
|
$23,640
|
|
|
10/1/13
|
9/30/22
|
$1.24
|
2,280
|
$17,982
|
|
|
1/2/14
|
12/31/23
|
$1.24
|
2,344
|
$12,014
|
|
|
4/1/14
|
3/31/23
|
$1.24
|
2,432
|
$8,684
|
|
|
6/3/14
|
6/02/23
|
$1.24
|
51,576
|
$300,326
|
|
|
7/1/14
|
6/30/23
|
$1.24
|
2,647
|
$7,270
|
|
|
1/27/14
|
1/27/22
|
$1.24
|
14,988
|
$61,918
|
|
|
4/20/15
|
4/20/22
|
$1.24
|
8,868
|
$27,464
|
|
|
8/14/15
|
8/14/22
|
$1.24
|
113,310
|
$300,000
|
|
|
10/1/15
|
9/30/22
|
$1.24
|
8,571
|
$25,114
|
|
|
10/15/15
|
10/14/22
|
$1.24
|
12,676
|
$25,859
|
|
|
1/15/16
|
1/15/23
|
$1.24
|
15,126
|
$45,008
|
|
|
4/1/16
|
3/31/23
|
$1.24
|
14,286
|
$47,572
|
|
|
7/1/16
|
6/30/23
|
$1.24
|
18,000
|
$53,454
|
|
|
Karen
Macleod
|
7/1/16
|
6/30/23
|
$1.24
|
9,000
|
$37,154
|
|
9/30/16
|
9/30/21
|
$1.15
|
3,529
|
$15,000
|
|
|
10/1/16
|
9/30/21
|
$1.15
|
5,882
|
$25,000
|
|
|
1/1/17
|
12/31/21
|
$1.15
|
9,191
|
$25,000
|
|
|
4/1/17
|
3/31/22
|
$1.15
|
12,195
|
$25,000
|
|
(1)
Mr.
Dubois served as the Company’s Chief Executive Officer from
September 2016 until December 31, 2017. Effective January 1, 2018
he resigned from such position but continues to serve as Chair of
the Board.
Compensation Risks Assessment
As
required by rules adopted by the SEC, management has assessed our
compensation policies and practices with respect to all employees
to determine whether risks arising from those policies and
practices are reasonably likely to have a material adverse effect
on us. In doing so, management considered various features and
elements of the compensation policies and practices that discourage
excessive or unnecessary risk taking. As a result of the
assessment, we have determined that our compensation policies and
practices do not create risks that are reasonably likely to have
material adverse effects.
-38-
Item
12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
Security Ownership of Certain Beneficial Owners
The following table presents information regarding
beneficial ownership as of December 1, 2020 (the
“Table Date”), of our Common Stock by (i) each
stockholder known to us to be the beneficial owner of more than
five percent of our Common Stock; (ii) each of our Named Executive
Officers serving as of the Table Date; (iii) each of our directors
serving as of the Table Date; and (iv) all of our executive
officers and directors as a group.
We
have determined beneficial ownership in accordance with the rules
of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the persons
and entities named in the table below have sole voting and
dispositive power with respect to all securities they beneficially
own. As of the Table Date, the applicable percentage ownership
is based on 11,414,150 shares of our Common Stock issued and
outstanding.
Beneficial
ownership representing less than one percent of the issued and
outstanding shares of a class is denoted with an asterisk
(“*”). Holders of Common Stock are entitled to one vote
per share.
|
Name and Address of
|
Common Stock
|
|
|
Beneficial Owner (1)
|
Shares
|
%
|
|
|
|
|
|
5% Beneficial Owners:
|
|
|
|
ETS Limited (2)
|
4,871,745
|
43%
|
|
Safety Invest S.A., Compartment Secure
I (3)
|
1,740,697
|
15%
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
Guy Dubois (4)
|
653,568
|
6%
|
|
Karen Macleod (5)
|
94,939
|
1%
|
|
Karim Sehnaoui (6)
|
14,021
|
0%
|
|
Derek Cassell (7)
|
317,209
|
3%
|
|
Peter Poli (8)
|
233,640
|
2%
|
|
All
directors and executive officers as a group
(5
persons)
|
1,313,377
|
12%
|
(1)
Except
as otherwise indicated, the business address for these beneficial
owners is c/o the Company, 200 E. 5th Avenue, Suite 100,
Naperville, Illinois 60563.
(2)
Address
is c/o Mourant Ozannes Corporate Services (Cayman) Limited, 94
Solaris Avenue, Camana Bay, PO Box 1348, Grand Cayman KY1-1108,
Cayman Islands. Holding information is based on Amendment No. 2 to
Schedule 13D filed by ADS Securities LLC on February 9,
2018.
(3)
Secure I is a compartment of Safety Invest S.A.
(“ Safety”), a company established under the
Luxembourg Securitization Law and incorporated as a
“société anonyme” under the laws of the Grand
Duchy of Luxembourg whose principal business is to enter into one
or more securitization transactions. Holding information is based
on Schedule 13D filed on March 20, 2019.
(4)
Holdings
consist of 315,331 shares of Common Stock owned of record and
338,237 shares of Common Stock issuable upon exercise of stock
purchase warrants.
(5)
Holdings
includes 55,142 shares of Common Stock owned of record and 39,797
shares of Common Stock issuable upon exercise of stock purchase
warrants.
(6)
Holdings
include 14,021 shares of Common Stock owned of record.
(7)
Holdings
include 317,209 shares of Common Stock owned of
record.
(8)
Holdings
consist of 133,640 shares of Common Stock and 100,000 shares of
Common Stock issuable upon exercise of stock purchase
warrants.
-39-
Securities
Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of September 30, 2020
regarding equity compensation plans approved by our security
holders and equity compensation plans that have not been approved
by our security holders:
|
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 first
column)
|
|
Equity
compensation plans approved by security holders
|
616,655(1)
|
$1.61
|
27,218(2)
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
68,604
|
1.15
|
-
|
|
|
|
|
|
|
Total
|
685,259
|
$1.56
|
27,218
|
|
(1)
|
Consists
of shares of our Common Stock issuable upon exercise of outstanding
options issued under the 2012 Plan.
|
|
|
|
|
(2)
|
Consists
of shares of our Common Stock reserved for future issuance under
the 2012 Plan.
|
|
|
|
Item
13. Certain Relationships
And Related Transactions, And Director
Independence
ETS Limited is currently the beneficial owner of
4,871,745 shares of the Company's Common Stock
(“Track Group
Shares”) held by ADS
Securities LLC (“ADS”) under an agreement dated September 28,
2017, pursuant to which ADS transferred all of the Track Group
Shares to ETS Limited in exchange for all of the outstanding shares
of ETS Limited.
A member of our Board
of Directors serves as Chief
Investment Officer of ADS a position he has held since October
2018, and as a Director of ETS Limited.
On
September 8, 2020, the Company received a letter from ADS informing
the Company that ADS had been assigned the right to payment under
that certain Loan Facility dated September 14, 2015, by and between
Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On
September 30, 2020, the Company and ADS settled the outstanding
amount due under the Sapinda Loan Agreement for $2.7 million. The
Company recorded a gain of
approximately $0.7 million which is included in Other
income/expense, net on the Consolidated Statement of Operations in
the twelve months ended September 30, 2020.
-40-
Item 14. Principal Accounting Fees
and Services
During
the years ended September 30, 2020 and 2019, Eide Bailly
served as our independent registered public accounting firm. The
following table presents approximate aggregate fees and other
expenses for professional services rendered by Eide Bailly, our
independent registered public accounting firm, for the audit of the
Company’s annual financial statements for the years ended
September 30, 2020 and 2019 and fees and other expenses for other
services rendered during those periods.
|
|
2020
|
2019
|
|
|
|
|
|
Audit Fees (1)
|
$189,672
|
$187,823
|
|
Audit-Related Fees (2)
|
$8,644
|
$8,764
|
|
Tax Fees (3)
|
$22,000
|
$22,738
|
|
All Other Fees (4)
|
$13,250
|
$10,500
|
|
Total
|
$233,566
|
$229,825
|
|
(1)
|
Audit services in 2020 and 2019 consisted of the audit of our
annual consolidated financial statements, and other services
related to filings and registration statements filed by us and our
subsidiaries, and other pertinent matters. Eide Bailly has served
as our independent registered public accounting firm since
September 24, 2013.
|
|
(2)
|
Audit-related fees consisted of travel costs related to our annual
audit.
|
|
(3)
|
For
permissible professional services related to income tax return
preparation and compliance.
|
|
(4)
|
All
other fees are related to the examination of the 401(k) financial
statements.
|
Audit Committee Pre-Approval Policies and Procedures
Prior
to May 31, 2018, our former Audit Committee had, and subsequent to
such date our entire Board has, established pre-approval policies
and procedures, pursuant to which the Audit Committee approved the
foregoing audit and permissible non-audit services provided by Eide
Bailly in fiscal 2018 and the full Board approved the foregoing
audit and permissible non-audit services provided by Eide Bailly in
fiscal 2019. Such procedures govern the ways in which the Audit
Committee pre-approved, and the full Board now pre-approves, audit
and various categories of non-audit services that the auditor
provides to the Company. Services that have not received
pre-approval must receive specific approval of the full Board for
fiscal 2020.
Auditor Independence
Our
Audit Committee and the full Board considered that the work done
for us in fiscal year 2020 and 2019, respectively, by Eide
Bailly was compatible with maintaining Eide Bailly’s
independence.
Report of the Audit Committee of the Board of
Directors
Date:
December 14,
2020
The full Board, serving in the capacity of the
Company’s Audit Committee, has reviewed and discussed with
management and Eide Bailly,
LLP, our independent registered
public accounting firm, the audited consolidated financial
statements in the Track Group, Inc. Annual Report on Form
10-K for the year ended September 30, 2020. The Board has also
discussed with Eide Bailly, LLP
those matters required to be discussed
by Public Company Accounting Oversight Board
(“PCAOB”) Auditing Standard No.
61.
Eide Bailly, LLP
also provided the Board with the
written disclosures and the letter required by the applicable
requirements of the PCAOB regarding the independent auditor’s
communication with the Board concerning independence. The Board has
discussed with the registered public accounting firm their
independence from our Company.
Based
on its discussions with management and the registered public
accounting firm, and its review of the representations and
information provided by management and the registered public
accounting firm, including as set forth above, the Board determined
that the audited financial statements should be included in our
Annual Report on Form 10-K for the year ended September 30,
2020.
|
|
Respectfully Submitted,
Karen Macleod, Committee Chair
Guy
Dubois
Karim Sehnaoui
|
The information contained above under the caption
“Report of the Audit Committee
of the Board of Directors” shall not be deemed to be soliciting
material or to be filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, except to the extent that we specifically
incorporate it by reference into such filing.
-41-
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).
|
-42-
|
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).
|
|
|
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).
|
|
|
Amendment
Agreement by and between Track Group, Inc. and Conrent Invest S.A.,
dated January 10, 2020 (incorporated by reference to Exhibit 10.1
to our Current Report on Form 8-K, filed January 15,
2020).
|
|
|
Note
Payable Agreement by and between Track Group, Inc. and BMO Harris
Bank National Association, dated May 12, 2020 (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K, filed
May 27, 2020).
|
|
|
Monitoring
Services Agreement between Track Group, Inc. and Gendarmeria de
Chile, the Republic of Chile’s uniform prison service, dated
July 29, 2020 (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed August 17, 2020).
|
|
| Amendment No. 3 to Employment Agreement between Track Group, Inc. and Derek Cassell, dated December 21, 2020. | |
|
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
|
XBRL
INSTANCE DOCUMENT
|
|
101.SCH
|
XBRL
TAXONOMY EXTENSION SCHEMA
|
|
101.CAL
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE
|
|
101.DEF
|
XBRL
TAXONOMY EXTENSION DEFINITION LINKBASE
|
|
101.LAB
|
XBRL
TAXONOMY EXTENSION LABEL LINKBASE
|
|
101.PRE
|
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE
|
-43-
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:
December 23, 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
|
|
December
23, 2020
|
|
Guy
Dubois
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Karen Macleod
|
|
Director
|
|
December
23, 2020
|
|
Karen
Macleod
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Karim Sehnaoui
|
|
Director
|
|
December
23, 2020
|
Karim
Sehnaoui
-44-
Index to Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-8
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors
Track Group, Inc.
Naperville, IL
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Track Group, Inc. as of September 30, 2020 and 2019, 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 consolidated financial statements present fairly, in all
material respects, the financial position of Track Group, Inc. as
of September 30, 2020 and 2019, 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.
Denver, Colorado
December 22, 2020
F-2
TRACK GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2020 AND 2019
|
|
September
30,
|
September
30,
|
|
Assets
|
2020
|
2019
|
|
Current assets:
|
|
|
|
Cash
|
$6,762,099
|
$6,896,711
|
|
Accounts
receivable, net of allowance for doubtful accounts of $2,654,173
and $2,454,281, respectively
|
5,546,213
|
6,763,236
|
|
Prepaid
expense and deposits
|
866,389
|
1,339,465
|
|
Inventory,
net of reserves of $6,483 and $26,934, respectively
|
124,606
|
274,501
|
|
Total
current assets
|
13,299,307
|
15,273,913
|
|
Property
and equipment, net of accumulated depreciation of $2,531,631 and
$2,248,913, respectively
|
378,764
|
675,037
|
|
Monitoring
equipment, net of accumulated depreciation of $6,639,883 and
$6,322,768, respectively
|
2,065,947
|
2,624,900
|
|
Intangible
assets, net of accumulated amortization of $16,390,721 and
$14,157,090, respectively
|
21,171,045
|
21,955,679
|
|
Goodwill
|
8,220,380
|
8,187,911
|
|
Deferred
tax asset
|
432,721
|
540,563
|
|
Other
assets
|
2,166,743
|
124,187
|
|
Total
assets
|
$47,734,907
|
$49,382,190
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$2,199,215
|
$2,628,003
|
|
Accrued
liabilities
|
14,958,628
|
13,828,696
|
|
Current
portion of long-term debt
|
30,914,625
|
33,827,689
|
|
Total
current liabilities
|
48,072,468
|
50,284,388
|
|
Long-term
debt, net of current portion
|
418,575
|
-
|
|
Long-term
liabilities
|
164,487
|
-
|
|
Total
liabilities
|
48,655,530
|
50,284,388
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
Common
stock, $0.0001 par value: 30,000,000 shares authorized;
11,414,150 and 11,401,650 shares outstanding,
respectively
|
1,141
|
1,140
|
|
Series
A Convertible Preferred stock, $0.0001 par value: 1,200,000 shares
authorized; 0 shares outstanding
|
-
|
-
|
|
Paid
in capital
|
302,270,242
|
302,250,556
|
|
Accumulated
deficit
|
(302,270,933)
|
(302,152,292)
|
|
Accumulated
other comprehensive loss
|
(921,073)
|
(1,001,602)
|
|
Total
deficit
|
(920,623)
|
(902,198)
|
|
Total
liabilities and stockholders’ deficit
|
$47,734,907
|
$49,382,190
|
The
accompanying notes are an integral part of the financial
statements.
F-3
TRACK GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
Revenue:
|
|
|
|
Monitoring
and other related services
|
$33,217,661
|
$32,100,370
|
|
Product
sales and other
|
657,506
|
1,918,782
|
|
Total
revenue
|
33,875,167
|
34,019,152
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
Monitoring,
products and other related services
|
13,306,108
|
12,989,186
|
|
Depreciation
and amortization
|
1,923,356
|
2,012,975
|
|
Total
cost of revenue
|
15,229,464
|
15,002,161
|
|
|
|
|
|
Gross profit
|
18,645,703
|
19,016,991
|
|
|
|
|
|
Operating expense:
|
|
|
|
General
& administrative
|
10,381,859
|
12,243,459
|
|
Gain
on sale of asset
|
-
|
(10,563)
|
|
Selling
& marketing
|
2,257,667
|
2,257,101
|
|
Research
& development
|
1,182,542
|
1,313,499
|
|
Depreciation
& amortization
|
2,064,097
|
2,047,980
|
|
Total operating
expense
|
15,886,165
|
17,851,476
|
|
|
|
|
|
Operating income
|
2,759,538
|
1,165,515
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
39,592
|
23,929
|
|
Interest
expense
|
(2,503,542)
|
(2,403,047)
|
|
Currency
exchange rate loss
|
(316,330)
|
(466,140)
|
|
Other
income/expense, net
|
695,298
|
143
|
|
Total other income (expense)
|
(2,084,982)
|
(2,845,115)
|
|
Net income (loss) before income taxes
|
674,556
|
(1,679,600)
|
|
Income
tax expense
|
793,197
|
884,353
|
|
Net loss attributable to common stockholders
|
(118,641)
|
(2,563,953)
|
|
Foreign
currency translation adjustments
|
80,529
|
(31,332)
|
|
Comprehensive loss
|
$(38,112)
|
$(2,595,285)
|
|
Net
loss per common share, basic and diluted
|
$(0.01)
|
$(0.23)
|
|
Weighted
average common shares outstanding, basic and diluted
|
11,413,535
|
11,213,431
|
The accompanying notes are an integral part of the
financial statements.
F-4
TRACK GROUP,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|
Balance as of October 1, 2019
|
11,401,650
|
$1,140
|
$302,250,556
|
$(302,152,292)
|
$(1,001,602)
|
$(902,198)
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to employees for services
|
12,500
|
1
|
(1)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
19,687
|
-
|
-
|
19,687
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
80,529
|
80,529
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(118,641)
|
-
|
(118,641)
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2020
|
11,414,150
|
$1,141
|
$302,270,242
|
$(302,270,933)
|
$(921,073)
|
$(920,623)
|
|
|
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
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)
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
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.
F-5
TRACK GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(118,641)
|
$(2,563,953)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
3,987,453
|
4,060,955
|
|
Bad
debt expense
|
234,909
|
655,480
|
|
Stock
based compensation
|
19,687
|
21,465
|
|
Gain
on disposal of property and equipment
|
-
|
(10,563)
|
|
Loss
on monitoring equipment included on cost of sales
|
556,304
|
355,117
|
|
Gain
on settlement of note payable
|
(699,644)
|
-
|
|
Foreign
currency exchange loss
|
316,330
|
466,140
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
989,684
|
(1,418,487)
|
|
Inventories
|
80,500
|
498,936
|
|
Prepaid
expense and other assets
|
(1,201,780)
|
(755,050)
|
|
Accounts
payable and accrued expense
|
561,062
|
3,761,610
|
|
Net
cash provided by operating activities
|
4,725,864
|
5,071,650
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(67,199)
|
(277,332)
|
|
Capitalized
software
|
(1,514,482)
|
(1,181,308)
|
|
Purchase
of monitoring equipment and parts
|
(1,360,514)
|
(1,820,206)
|
|
Proceeds
from sale of assets
|
-
|
10,563
|
|
Net
cash used in investing activities
|
(2,942,195)
|
(3,268,283)
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
Proceeds
from note payable
|
933,200
|
-
|
|
Principal
payments on notes payable
|
(2,727,557)
|
(65,317)
|
|
Net
cash used in financing activities
|
(1,794,357)
|
(65,317)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(123,924)
|
(287,896)
|
|
|
|
|
|
Net increase (decrease) in cash
|
(134,612)
|
1,450,154
|
|
Cash, beginning of year
|
6,896,711
|
5,446,557
|
|
Cash, end of year
|
$6,762,099
|
$6,896,711
|
The
accompanying notes are an integral part of the financial
statements.
F-6
TRACK GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
|
|
|
|
Cash
paid for interest
|
$28,418
|
$27,215
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements.
F-7
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, 2020 and 2019 the
Company had an accumulated deficit of $302,270,933 and
$302,152,292, respectively. The Company incurred a net loss of
$118,641 and $2,563,953 for the years ended September 30, 2020 and
2019, respectively. The Company may continue to incur losses and
require additional financial resources. The Company also has debt maturing in July 2021
and a potentially forgivable loan from the U.S. Small
Business Administration ("SBA")
pursuant to the Paycheck Protection Program ("PPP")
enacted by Congress under the Coronavirus Aid, Relief, and Economic
Security Act (15 U.S.C. 636(a)(36)) (the "CARES
Act") administered by the
SBA (the "PPP
Loan") which matures in May 2022, with payments beginning
in December 2020. The Company’s transition to profitable
operations is dependent upon generating a level of revenue adequate
to support its cost structure, which it has achieved on an
operating basis, although the Company needs to resolve its debt
obligations which mature on July 1, 2021. Management has evaluated
the significance of these conditions and has determined that the
Company can meet its operating obligations for a reasonable period
of time. The Company expects to fund operations using cash on hand
and through operational cash flows through the upcoming twelve
months and the Company believes it will be able to extend
its debt through additional renegotiation, if necessary.
At
September 30, 2020, the Company has a $30.4 million Amended
Facility Agreement with Conrent Invest S.A. (“Conrent”) which matures on
July 1, 2021. On December 21, 2020, Conrent and the Company signed
an Amendment to the Amended Facility Agreement which extends the
maturity date of the agreement to July 1, 2024, capitalizes the
accrued and unpaid interest increasing the outstanding principal
amount and reduces the interest rate of the Amended Facility
Agreement from 8% to 4%. See Note 14.
|
(2)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of Track
Group, Inc. and its wholly-owned 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.
F-8
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, 2020. 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, 2020 and 2019.
|
|
2020
|
%
|
2019
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$6,374,742
|
19%
|
$8,570,404
|
25%
|
|
Customer
B
|
$3,710,759
|
11%
|
$3,549,273
|
10%
|
No other customer represented more than 10% of the Company’s
total revenue for the fiscal years ended September 30, 2020 or
2019.
F-9
Concentration of credit risk associated with the Company’s
total and outstanding accounts receivable as of September 30, 2020
and 2019, respectively, are shown in the table below:
|
|
2020
|
%
|
2019
|
%
|
|
|
|
|
|
|
|
Customer
A
|
$536,587
|
10%
|
$1,538,775
|
23%
|
|
Customer
B
|
$374,809
|
7%
|
$844,241
|
12%
|
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 $5,075,274 and $5,688,493 of cash deposits in excess of
federally insured limits as of September 30, 2020 and 2019,
respectively.
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.
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.
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, 2020 and September
30, 2019, inventory consisted of the following:
|
|
2020
|
2019
|
|
Finished
goods inventory
|
$131,089
|
$301,435
|
|
Reserve
for damaged or obsolete inventory
|
(6,483)
|
(26,934)
|
|
Total
inventory, net of reserves
|
$124,606
|
$274,501
|
The Company uses a third-party fulfillment service provider. As a
result of this service, the Company’s employees do not
actively assemble new product or repair damaged inventory or
monitoring equipment shipped directly from suppliers. Purchases of
monitoring equipment are recognized directly. Management believes
this process reduces maintenance and fulfillment costs associated
with inventory and monitoring equipment. Management reviews inventory regularly to identify
damaged or obsolete inventory and reserves for potential losses.
The Company recorded charges of $67,926 and $0 during the years
ended September 30, 2020 and 2019, respectively, for inventory that
was obsolete, lost or damaged. Obsolete, lost and damaged inventory
items are included in Monitoring, products & other related
services in the Consolidated Statement of
Operations.
F-10
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.
Property and equipment consisted of the following as of September
30, 2020 and 2019, respectively:
|
|
2020
|
2019
|
|
Equipment,
software and tooling
|
$1,272,635
|
$1,210,583
|
|
Automobiles
|
5,156
|
5,574
|
|
Leasehold
improvements
|
1,290,708
|
1,393,976
|
|
Furniture
and fixtures
|
341,896
|
313,817
|
|
Total
property and equipment before accumulated depreciation
|
2,910,395
|
2,923,950
|
|
Accumulated
depreciation
|
(2,531,631)
|
(2,248,913)
|
|
Property
and equipment, net of accumulated depreciation
|
$378,764
|
$675,037
|
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, 2020 and
2019, the Company recognized a $0 and $10,563 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. See Note 13.
Depreciation expense recognized for property and equipment for the
fiscal years ended September 30, 2020 and 2019 was $336,666 and
$315,380, 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, 2020 and 2019 is as
follows:
|
|
2020
|
2019
|
|
Monitoring
equipment
|
$8,705,830
|
$8,947,668
|
|
Less:
accumulated depreciation
|
(6,639,883)
|
(6,322,768)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$2,065,947
|
$2,624,900
|
Depreciation expense for the fiscal years ended September 30, 2020
and 2019 was $1,409,220 and $1,509,166, 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, 2020 and 2019, the
Company disposed of leased monitoring equipment and parts of
$488,378 and $355,117, 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 13.
F-11
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.
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. Revenue transactions
associated to the sale of devices and replacement parts comprise a
single performance obligation. We satisfy the performance
obligation when the Company has
transferred control of the product to the customer and they receive
substantially all of the benefits. Transfer of control
passes to customers upon shipment or upon receipt depending on the
country of the sale and the agreement with the customer. The
transaction price is determined based upon the invoiced sales price
and payment terms for the transaction depends on the agreement with
the customer and payment is generally required within 60 days or
less of shipment. 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.
F-12
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 total 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, 2020 and September 30,
2019, the Company incurred research and development expense of
$1,182,542 and $1,313,499, respectively.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expense for the fiscal years ended
September 30, 2020 and 2019 was $16,445 and $19,642,
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.
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, 2020 and September 30, 2019, we did not record a
liability for uncertain tax positions.
F-13
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, 2020, and 2019, there were 685,259 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, 2020 and 2019 consisted of the
following:
|
|
2020
|
2019
|
|
Issuable
Common Stock options and warrants
|
685,259
|
685,259
|
|
Total
Common Stock equivalents
|
685,259
|
685,259
|
At September 30, 2020 and September 30, 2019, all stock option and
warrant exercise prices were above the market price of $0.3733 and
$0.51, 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 for those goods or services. On
October 1, 2018, the Company adopted ASU No. 2014-09 using the
modified retrospective method, whereby the adoption does not impact
any prior periods. See Note 3.
In February 2016, FASB issued ASU No. 2016-02,
“Leases (Topic
842)” For lessees, the
amendments in this update require that for all leases not
considered to be short term, a company recognize both a lease
liability and right-of-use asset on its balance sheet, representing
the obligation to make payments and the right to use or control the
use of a specified asset for the lease term. The amendments in this
update are effective for annual periods beginning after December
15, 2018 and interim periods within those annual periods.
The Company adopted the new standard effective October 1, 2019 and
recorded a right of use asset and corresponding lease liability of
approximately $0.6 million upon adoption. See Note 12.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic
230)” (“ASU 2016-15”) requiring the
classification of certain cash receipts and cash payments to
conform the presentation in the statement of cash flows for certain
transactions, including cash distributions from equity method
investments, among others. The Company adopted ASU 2016-15 in the
first quarter of fiscal year 2019. The Company’s adoption of
ASU 2016-15 did not have an impact on its Consolidated Financial
Statements.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
“Intangibles – Goodwill
and Other: Simplifying the Test for Goodwill
Impairment”. The new
guidance simplifies the subsequent measurement of goodwill by
removing the second step of the two-step impairment test. The
amendment requires an entity to perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The new
guidance will be effective for annual periods or any interim
goodwill impairment tests in fiscal years beginning after December
15, 2019. The amendment should be applied on a prospective basis.
Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
Management does not anticipate that this adoption will have a
significant impact on its consolidated financial position, results
of operations, or cash flows.
F-14
In June
2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial
Instruments.” ASU 2016-13 adds a current expected
credit loss (“CECL”) impairment model to U.S.
GAAP that is based on expected losses rather than incurred losses.
Modified retrospective adoption is required with any
cumulative-effect adjustment recorded to retained earnings as of
the beginning of the period of adoption. ASU 2016-13 is effective
for fiscal years beginning after December 15, 2019, including
interim periods within the year of adoption. Early adoption is
permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company
will adopt ASU 2016-13 in fiscal year 2021. The Company does not
expect the application of the CECL impairment model to have a
significant impact on our allowance for uncollectible amounts for
accounts receivable.
(3)
Revenue
Recognition
In
May 2014, the FASB issued ASU 2014-09 and related amendments,
which superseded all prior revenue recognition methods and
industry-specific guidance. The principle of 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.
Monitoring and Other Related
Services. Monitoring services
include two components: (i) lease contracts pursuant to which the
Company provides monitoring services and lease devices to
distributors or end users and the Company retains ownership of the
leased device; and (ii) monitoring services purchased by
distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
Sales of devices and leased GPS devices are required to use the
Company’s monitoring service and both the GPS leased devices
and monitoring services are accounted for as a single performance
obligation. Monitoring revenue is recognized ratably over
time, as the customer simultaneously receives and consumes the
benefit of these services as they are performed. Payment due or
received from the customers prior to rendering the associated
services are recorded as deferred revenue. The balance of the
deferred revenue at September 30, 2020, 2019 and 2018 are $147,921,
$389,229 and $150,604, respectively, and are included in accrued
liabilities on the Consolidated Balance Sheets. The Company
recognized $268,258 and $180,919 of deferred revenue in the fiscal
years ended September 30, 2020 and September 30, 2019,
respectively.
Product Sales and
Other. The Company sells devices and replacement parts to
customers under certain contracts, as well as law enforcement
software licenses and maintenance, and analytical software. Revenue
from the sale of devices and parts is recognized upon their
transfer of control to the customer, which is generally upon
delivery. Delivery is considered complete at either the time of
shipment or arrival at destination, based on the agreed upon terms
within the contract. Payment terms are generally 30 days from
invoice date.
Multiple Element
Arrangements. The majority of
our revenue transactions do not have multiple elements. However, on
occasion, the Company may enter into revenue transactions that have
multiple elements. These may include different combinations of
products or services that are included in a single billable
rate. These products or services are delivered over time as
the customer utilizes our services. In cases where
obligations in a contract are distinct and thus require separation
into multiple performance obligations, revenue recognition guidance
requires that contract consideration be allocated to each distinct
performance obligation based on its relative standalone selling
price. The value allocated to each performance obligation is then
recognized as revenue when the revenue recognition criteria for
each distinct promise or bundle of promises has been
met.
The
standalone selling price for each performance obligation is an
amount that depicts the amount of consideration to which the entity
expects to be entitled in exchange for transferring the good or
service. When there is only one performance obligation associated
with a contract, the entire sale value is attributed to that
obligation. When a contract contains multiple performance
obligations the transaction value is first allocated using the
observable price, which is generally a list price net of applicable
discount or the price used to sell in similar circumstances. In
circumstances when a selling price is not directly observable, the
Company will estimate the standalone selling price using
information available to us.
F-15
Effect of Adopting ASU 2014-09. The
Company adopted ASU 2014-09 using the modified retrospective
method. Under the modified retrospective method, the Company
recognized the cumulative effect of initially applying this
accounting standard as an adjustment to the opening balance in
retained earnings of $92,969, relating to one contract for the sale
of products and associated use of software.
The
cumulative effect of the changes made to the Company’s
Consolidated October 1, 2018 Balance Sheet for the adoption of ASU
2014-09 is as follows:
|
Balance
Sheet
|
As
Reported at
September
30,
2018
|
Adjustments
|
Balance
as of
October
1,
2018
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Accrued
liabilities
|
$10,333,103
|
$92,969
|
$10,426,072
|
|
Total current
liabilities
|
$43,288,943
|
$92,969
|
$43,381,912
|
|
Total
liabilities
|
$46,717,918
|
$92,969
|
$46,810,887
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
Accumulated
deficit
|
$(299,495,370)
|
$(92,969)
|
$(299,588,339)
|
|
Total
equity
|
$1,638,366
|
$(92,969)
|
$1,545,397
|
|
Total liabilities
and stockholders’ equity
|
$48,356,284
|
$(92,969)
|
$48,263,315
|
The
following tables present the Company’s revenue disaggregated
by geography, based on management’s assessment of available
data:
|
|
Twelve
Months Ended September 30, 2020
|
Twelve
Months Ended September 30, 2019
|
||
|
|
Total
Revenue
|
% of
Total
Revenue
|
Total
Revenue
|
% of
Total
Revenue
|
|
|
|
|
|
|
|
United
States
|
$23,072,250
|
68%
|
$20,482,165
|
60%
|
|
Latin
America
|
10,210,719
|
30%
|
13,095,679
|
39%
|
|
Other
|
592,198
|
2%
|
441,308
|
1%
|
|
Total
|
$33,875,167
|
100%
|
$34,019,152
|
100%
|
The
above table includes total revenue for the Company, of which
monitoring and other related services is the majority
(approximately 98%) of the Company’s revenue. Latin America
includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin
Islands. Other includes Canada, New Zealand, Saudi Arabia, South
Africa, the United Kingdom and Vietnam.
(4)
Other Assets
As of September 30, 2020 and September 30, 2019, respectively, the
outstanding balance of other assets was $2,166,743 and $124,187,
respectively. Other assets at September 30, 2020 are comprised
largely of two cash collateralized performance bonds for an
international customer. The Company anticipates these
performance bonds will be reimbursed to the Company upon completion
of its contracts with the customer.
F-16
|
(5)
|
Accrued Liabilities
|
|
|
|
|
|
Accrued liabilities consisted of the following as of
September 30, 2020 and 2019:
|
|
September 30,
2020
|
September 30,
2019
|
|
Accrued
payroll, taxes and employee benefits
|
1,607,920
|
$1,680,634
|
|
Deferred
revenue
|
147,921
|
389,229
|
|
Deposits
payable
|
-
|
10,000
|
|
Accrued
taxes - foreign and domestic
|
324,221
|
1,071,532
|
|
Accrued
other expense
|
117,264
|
170,055
|
|
Accrued
legal costs
|
725,547
|
1,057,305
|
|
Accrued
right of use liabilities
|
210,910
|
-
|
|
Accrued
costs of revenue
|
309,470
|
251,262
|
|
Accrued
bond guarantee
|
-
|
142,405
|
|
Accrued
interest
|
11,515,375
|
9,056,274
|
|
Total
accrued liabilities
|
$14,958,628
|
$13,828,696
|
|
(6)
|
Related Parties
|
ETS Limited is currently the beneficial owner of 4,871,745 shares
of the Company's Common Stock (“Track Group
Shares”) held by ADS
Securities LLC (“ADS”) under an agreement dated September 28,
2017 pursuant to which ADS transferred all of the Track Group
Shares to ETS Limited in exchange for all of the outstanding shares
of ETS Limited. A Director of ETS Limited was elected to the
Company's Board of Directors on February 7,
2018.
On
September 8, 2020, the Company received a letter from ADS informing
the Company that ADS had been assigned the right to payment under
that certain Loan Facility dated September 14, 2015, by and between
Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On
September 30, 2020, the Company and ADS settled the outstanding
amount due under the Sapinda Loan Agreement for $2.7 million. The
Company recorded a gain of
approximately $0.7 million which is included in Other
income/expense, net on the Consolidated Statement of Operations in
the twelve months ended September 30, 2020.
|
(7)
|
Debt Obligations
|
Debt obligations as of September 30, 2020 and 2019 consisted of the
following:
|
|
2020
|
2019
|
|
|
|
|
|
The
unsecured Amended Facility Agreement with Conrent whereby, as of
June 30, 2015, the Company had borrowed $30.4 million, bearing
interest at a rate of 8% per annum, payable in arrears
semi-annually, with all principal and accrued and unpaid interest
due on July 1, 2021. The Company did not pay interest on this loan
during the year ended September 30, 2020.
|
$30,400,000
|
$30,400,000
|
|
|
|
|
|
Sapinda
Loan Agreement with Sapinda Asia Limited whereby the Company can
borrow up to $5.0 million at 8% interest per annum on borrowed
funds maturing and repaid on September 30, 2020.
|
$-
|
3,399,644
|
|
|
|
|
|
Note
payable with BMO Harris Bank for PPP loan with the SBA, bearing
interest at a rate of 1% per annum, with a maturity of May 19, 2022
and principal payments beginning on December 19, 2020.
|
933,200
|
-
|
|
|
|
|
|
Non-interest
bearing notes payable to a Canadian governmental agency assumed in
conjunction with the G2 acquisition.
|
-
|
28,045
|
|
|
|
|
|
Total
debt obligations
|
31,333,200
|
33,827,689
|
|
Less
current portion
|
(30,914,625)
|
(33,827,689)
|
|
Long-term
debt, net of current portion
|
$418,575
|
$-
|
F-17
On
September 8, 2020, the Company received a letter from ADS informing
the Company that ADS had been assigned the right to payment under
that certain Loan Facility dated September 14, 2015, by and between
Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On
September 30, 2020, the Company and ADS settled the outstanding
amount due under the Sapinda Loan Agreement for $2.7 million. The
Company recorded a gain of
approximately $0.7 million which is included in Other
income/expense, net on the Consolidated Statement of Operations in
the twelve months ended September 30, 2020.
On
October 21, 2020, the Company requested, in writing, an additional
extension to the maturity date of the Amended Facility Agreement.
On November 25, 2020, the Noteholders held a meeting to address the
Company’s request and approved a new maturity date of July 1,
2024. On December 21, 2020, Conrent and the Company signed an
Amendment to the Amended Facility Agreement which extends the
maturity date of the agreement to July 1, 2024, capitalizes the
accrued and unpaid interest increasing the outstanding principal
amount and reduces the interest rate of the Amended Facility
Agreement from 8% to 4%. See Note 14.
The following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of
September 30, 2020:
|
Fiscal Year
|
Total
|
|
2021
|
$30,914,625
|
|
2022
|
418,575
|
|
Thereafter
|
-
|
|
Total
|
$31,333,200
|
|
(8)
|
Preferred Stock
|
The Company’s Certificate of Incorporation authorizes it to
issue up to 20,000,000 shares of preferred stock, $0.0001 par value
per share (“Preferred
Stock”), of which
1,200,000 shares have been designated as Series A Convertible
Preferred Stock (“Series A
Preferred”).
The Company’s Board of Directors
has the authority to amend its Certificate of Incorporation,
without further stockholder approval, to designate and determine,
in whole or in part, the preferences, limitations and relative
rights of the preferred stock before any issuance of the Preferred
Stock and to create additional series of Preferred
Stock.
Series A Convertible Preferred Stock
On October 12, 2017, the Company filed a Certificate of Designation
of the Relative Rights and Preferences (“Certificate
of Designation”) with the
Delaware Division of Corporations, designating 1,200,000 shares of
the Company’s preferred stock as Series A Preferred. Shares
of Series A Preferred rank senior to the Company’s Common
Stock, and all other classes and series of equity securities of the
Company that by their terms do not rank senior to the Series A
Preferred.
Except with respect to transactions upon which holders of the
Series A Preferred are entitled to vote separately as a class under
the terms of the Certificate of Designation, the Series A Preferred
has no voting rights. The
shares of Common Stock into which the Series A Preferred is
convertible shall, upon issuance, have all of the same voting
rights as other issued and outstanding shares of our Common
Stock.
The Series A Preferred has no separate dividend rights; however,
whenever the Board declares a dividend on the Company’s
Common Stock, if ever, each holder of record of a share of Series A
Preferred shall be entitled to receive an amount equal to such
dividend declared on one share of Common Stock multiplied by the
number of shares of Common Stock into which such share of Series A
Preferred could be converted on the Record Date.
Each share of Series A Preferred has a Liquidation Preference of
$35.00 per share, and is convertible, at the holder’s option,
into ten shares of the Company’s Common Stock, subject to
adjustments as set forth in the Certificate of Designation, at any
time beginning five hundred and forty days after the date of
issuance.
As of September 30, 2020, no shares of Series A Preferred were
issued and outstanding.
|
(9)
|
Common Stock
|
Common Stock Issuances
The Company is authorized to issue up to 30,000,000 shares of
Common Stock, $0.0001 par value per share.
On October 18, 2019, the Company issued 12,500 shares from the 2012
Equity Compensation Plan (the “2012 Plan”), which was suspended in fiscal 2019, to a
member of the executive team, valued at $50,000 when approved on
February 13, 2017.
F-18
|
(10)
|
Stock Options and Warrants
|
Stock Incentive Plan
The 2012 Plan was approved at the Annual Meeting of Stockholders on
December 21, 2011, and at the Annual Meeting of Stockholders on May
19, 2015, the Company’s
stockholders approved an amendment increasing the number of shares
of Common Stock available for issuance under the 2012
Plan. The 2012 Plan provides for the grant of incentive stock
options and nonqualified stock options, restricted stock, stock
appreciation rights, performance shares, performance stock units,
dividend equivalents, stock payments, deferred stock, restricted
stock units, other stock-based awards and performance-based awards
to employees and certain non-employees who have important
relationships with the Company. All future grants of warrants and
options will have an expiration period of five years. The warrants
for directors serving on the Board vest immediately and warrants
issued to employees vest annually over either a two or three year
period after the grant date. A total of 803,262 shares are
authorized for issuance pursuant to awards granted under the 2012
Plan; however, the Board of Directors suspended the 2012 Plan in
fiscal year 2019. The Company issued an nominal amount of stock for
fully vested stock awards in fiscal 2020 and possibly could issue
stock in the future for warrants and options that have vested, but
not been exercised at September 30, 2020.
During the fiscal years ended September 30, 2020 and 2019, no
options to purchase shares of Common Stock were granted under the
2012 Plan. As of September 30, 2020, 27,218 shares of Common Stock
were available for future grants under the 2012 Plan. During the
fiscal year 2020, the Company recorded $19,687 of expense related
to restricted shares that were granted in fiscal year 2018 and
$147,690 of expense in fiscal 2019 related to the restricted shares
issued in 2018 previously mentioned, stock granted in fiscal 2017
and options granted in fiscal year 2017.
All Options and Warrants
The fair value of each stock option and warrant grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
During the fiscal years ended September 30, 2020 and 2019, the
Company granted no options and warrants to purchase shares of
Common Stock under the 2012 Plan. The warrants for Board members
vest immediately and expire five years from grant date and warrants
or options issued to employees vest annually over either a two to
three-year period and expire five years after the final vesting
date of the grant. The Company recorded expense of $0 and
$21,231 for the fiscal years ended September 30, 2020 and 2019,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
All options
and warrants have vested and are exercisable at September 30, 2020
and no future issuances are expected.
As of September 30, 2020, no compensation expense associated with
unvested stock options and warrants issued previously to members of
the Board of Directors will be recognized over the next
year.
A summary of the compensation-based options and warrants activity
for the fiscal years ended September 30, 2020 and 2019 is presented
below:
|
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual Life
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of September 30, 2018
|
685,259
|
$1.56
|
3.90
years
|
$-
|
|
Granted
|
-
|
-
|
|
-
|
|
Expired
|
-
|
-
|
|
-
|
|
Exercised
|
-
|
$-
|
|
-
|
|
Outstanding
as of September 30, 2019
|
685,259
|
$1.56
|
2.90
years
|
-
|
|
Granted
|
-
|
-
|
|
-
|
|
Expired
|
-
|
-
|
|
-
|
|
Exercised
|
-
|
$-
|
|
-
|
|
Outstanding
as of September 30, 2020
|
685,259
|
$1.56
|
1.90
years
|
$-
|
|
Exercisable
as of September 30, 2020
|
685,259
|
$1.56
|
1.90
years
|
$-
|
The intrinsic value of options and warrants outstanding and
exercisable is based on the Company’s share price of $0.3733
at September 30, 2020.
F-19
|
(11)
|
Income Taxes
|
The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary. Interest and penalties related to income tax
liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
On
December 22, 2017, the Tax Cuts and Jobs Act (the
“Tax Act”) was
enacted and implements comprehensive tax legislation which, among
other changes, reduces the federal statutory corporate tax rate
from 35% to 21%, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were
previously deferred, creates new provisions related to foreign
sourced earnings, eliminates the domestic manufacturing deduction
and moves to a territorial system. Additionally, in December
2017, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses
how a company recognizes provisional amounts when a company
does not have the necessary information available,
prepared or analyzed (including computations) in reasonable detail
to complete its accounting for the effect of the changes in the Tax
Act. The measurement period, as defined in SAB 118, ends when a
company has obtained, prepared and analyzed the information
necessary to finalize its accounting, but cannot extend
beyond one year. As of September 30, 2020, the
measurement period is closed and any amounts that were provisional
at September 30, 2019 were finalized with little to no impact to
the consolidated financial statement.
For the fiscal years ended September 30, 2020 and 2019,
the Company incurred net losses for
income tax purposes of $118,641 and $2,563,953,
respectively. The amount and ultimate realization of the
benefits from the net operating losses is dependent, in part, upon
the tax laws in effect, our future earnings, and other future
events, the effects of which cannot be determined. The Company has
established a valuation allowance for all deferred income tax
assets not offset by deferred income tax liabilities due to the
uncertainty of their realization. Accordingly, there is no
benefit for income taxes in the accompanying statements of
operations.
At September 30, 2020, the
Company had net carryforwards available to offset future taxable
income of approximately $205,218,000 of which $5,432,000 expires in
2021. The utilization of the net loss carryforwards is
dependent upon the tax laws in effect at the time the net operating
loss carryforwards can be utilized. The Internal Revenue Code
contains provisions that likely could reduce or limit the
availability and utilization of these net operating loss
carryforwards. An ownership change generally affects the rate at
which NOLs and potentially other deferred tax assets are permitted
to offset future taxable income. Since the Company maintains a full valuation allowance
on all U.S. and state deferred tax assets, the impact of prior
year ownership changes on the future realizability of U.S. and
state deferred tax assets did not result in an impact to the
provision for income taxes for the year ended September 30, 2020,
or on net deferred tax asset as of September 30,
2020.
The Company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The tax
provision for the year ended September 30, 2020 was due primarily
to taxes on the income of a foreign-based subsidiary and
U.S. state and local income taxes.
The deferred income tax assets (liabilities) were comprised of the
following for the periods indicated:
|
|
Fiscal Years
Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
2019
|
|
Net
loss carryforwards
|
$34,701,720
|
$35,256,000
|
|
Accruals
and reserves
|
1,253,087
|
1,367,000
|
|
Contributions
|
321
|
16,000
|
|
Severance
indemnity reserve
|
72,047
|
59,000
|
|
Depreciation
|
(21,365)
|
(389,000)
|
|
Stock-based
compensation
|
638,589
|
639,000
|
|
Valuation
allowance
|
(36,211,678)
|
(36,407,000)
|
|
Total
|
$432,721
|
$541,000
|
F-20
Reconciliations between the benefit for income taxes at the federal
statutory income tax rate and the Company's benefit for income
taxes for the years ended September 30, 2020 and 2019 are as
follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
2019
|
|
Federal
income tax benefit at statutory rate
|
$(224,890)
|
$(801,000)
|
|
State
income tax benefit, net of federal income tax
effect
|
(27,875)
|
(141,000)
|
|
Effect
of foreign income taxes
|
668,390
|
874,000
|
|
Non-deductible
expenses
|
286,212
|
(199,000)
|
|
Rate
change due to Tax Cuts and Jobs Act
|
-
|
760,000
|
|
Deferred
only adjustment
|
(393,510)
|
954,000
|
|
Return
to provision
|
569,749
|
-
|
|
Withholding
taxes
|
110,382
|
-
|
|
Change
in valuation allowance
|
(195,261)
|
(563,000)
|
|
Provision
for income taxes
|
$793,197
|
$884,000
|
During the fiscal year ended September 30, 2014,
the Company began recognizing revenue
from international sources from our products and monitoring
services. During the fiscal year ended September 30,
2014, the Company began
recognizing a liability for value-added taxes, which will be due
upon collection. At September 30, 2020, the Company had a net receivable related to
payments on VAT tax of $267,069. During the year ended September
30, 2020, the Company recorded income tax expense of $668,390
related to a foreign jurisdiction, which is included in income tax
expense on the Consolidated Statements of
Operations.
The Company’s open tax years for federal and state income tax
returns are for the tax years ended September 30, 2017
through September 30, 2020. The
Company is currently under examination by the Internal Revenue
Service for fiscal years ended September 30, 2018 and September 30,
2017.
|
(12)
|
Commitments and Contingencies
|
Legal Matters
The Company is, from time to time, involved in various legal
proceedings incidental to the conduct of our business.
Historically, the outcome of all such legal proceedings has not, in
the aggregate, had a material adverse effect on our business,
financial condition, results of operations or liquidity. Other than
as set forth below, there are no additional pending or threatened
legal proceedings at this time.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social (“OADPRS”) of the then Public
Security Department, and presently, an agency of the National
Security Commission of the Department of the Interior, and
SecureAlert, Inc., presently Track Group, Inc. The Company’s
claim amount is upwards of $6.0 million. The Supreme Court took
action to resolve previous, conflicting decisions regarding the
jurisdiction of such claims and determined that such claims will be
resolved by the Federal Administrative Tribunal. Subsequently,
plaintiff filed an Amparo action before the Collegiate Court,
seeking an appeal of the Federal Administrative Court’s
earlier decision against plaintiff. The Collegiate Court issued a
ruling in August 2019 that the matter of dispute was previously
resolved by a lower court in 2016. The Company disagrees with this
ruling and on November 11, 2020 made a re-demand of the OADPRS for
payment due under the July 15, 2011 contract. The OADPRS has 3
months from November 11, 2020 in which to formally respond. The
Based upon the fee arrangement the Company has with its counsel, we
anticipate the future liabilities attributable to legal expense
will be minimal.
Blaike Anderson v.
Track Group, Inc., et. al. On June 24, 2019, Blaike Anderson
filed a complaint seeking unspecified damages in the State Court of
Marion County, Indiana, alleging liability on the part of
defendants for providing a defective ankle monitoring device and
failure to warn plaintiff regarding the condition thereof. The
Company removed the matter to federal court and subsequently filed
its answer denying Plaintiff’s allegations in August 2019.
Discovery, delayed by the Covid-19 crisis, remains ongoing. The
Company continues to vigorously defend the case.
F-21
Commonwealth of
Puerto Rico, through its Trustees v. International Surveillance
Services Corporation. On January 23, 2020, the
Company was served with a summons for an Adversary Action pending
against International Surveillance Services Corporation
(“ISS”), a
subsidiary of the Company, now known as Track Group – Puerto
Rico Inc., in the United States District Court for the District of
Puerto Rico seeking to avoid and recover allegedly constructive
fraudulent transfers and to disallow claims pursuant to United
States Bankruptcy and Puerto Rican law. The allegations stem from
payments made to ISS between 2014 and 2017, which the Company
believes were properly made in accordance with a contract between
ISS and the government of Puerto Rico, through the Oficina de
Servicios con Antelacion a Juicio, originally signed in 2011. The
Company is confident that all payments it received were earned and
due under applicable law and has produced documentation supporting
its position in an informal document exchange with the Commonwealth
on July 6, 2020, though the Commonwealth, through its financial
advisory form, in correspondence dated November 13, 2020, requested
additional information and discussion. The Company remains
confident in its current position and continues to defend the
case.
Eli Sabag v. Track
Group, Inc., et al. On March 12, 2020, Eli Sabag commenced
an arbitration with the International Centre for Dispute
Resolution, Case Number 01-20-0003-6931. The arbitration claim, as
it pertains to the Company, alleges breach of the Share Purchase
Agreement (“SPA”) between the Company
and Sabag. Sabag alleges that the Company breached the SPA because
it failed to pay him his earn-out after it sold or leased a
sufficient number of GPS Global Tracking devices to meet the
earn-out milestone, or alternatively, breached the SPA by failing
to act in “good faith” to allow Sabag to achieve his
earn-out. Sabag further claims that the Company fraudulently
induced Sabag to sell GPS Global Tracking and Surveillance System
Ltd. to the Company. The Company has entered its appearance and on
July 17, 2020, filed its Answer denying the allegations of the
claim and asserting numerous defenses. The Company continues to
vigorously defend against the allegations. The Company participated
in mediation discussions on December 15, 2020 with all parties. The
Company has not accrued any potential loss as the probability of
incurring a material loss is deemed remote by management, after
consultation with outside legal counsel.
Leases
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified
lease accounting for lessees to create transparency and
comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing
arrangements. The Company adopted the new lease standard utilizing
the modified retrospective transaction method, under which amounts
in prior periods were not restated. For contracts existing at the
time of the adoption, the Company elected not to reassess (a)
whether any are or contain leases, (b) lease classification, and
(c) initial direct costs. Upon adoption on October 1, 2019, the
Company recorded $597,289 right of use assets and lease
liabilities. The adoption of the new standard did not impact the
Company’s Statements of Operations or Statements of Cash
Flows.
Future
maturities of lease liabilities under ASC 840 at September 30, 2019
were as follows:
|
|
Operating
Leases
|
|
|
|
|
From October 2019
to September 2020
|
$196,245
|
|
From October 2020
to September 2021
|
233,107
|
|
From October 2021
to September 2022
|
167,325
|
|
From October 2022
to September 2023
|
3,612
|
|
Total minimum lease
payments
|
$597,289
|
The
following table shows right of use assets and lease liabilities and
the associated financial statement line items as of September 30,
2020.
|
|
Operating
lease
asset
|
Operating
lease liability
|
|
|
|
|
|
Other
assets
|
$375,397
|
$-
|
|
Accrued
liabilities
|
$-
|
$210,910
|
|
Long-term
liabilities
|
$-
|
$164,487
|
|
|
|
|
F-22
The
following table summarizes the supplemental cash flow information
for the year ended September 30, 2020:
|
|
September 30,
2020
|
|
Cash
paid for noncancelable operating leases included in operating cash
flows
|
$356,059
|
|
|
|
|
Right of use assets
obtained in exchange for operating lease liabilities:
|
$-
|
The
future minimum lease payments under noncancelable operating leases
with terms greater than one year as of September 30, 2020
are:
|
|
Operating
Leases
|
|
From October 2020
to September 2021
|
$233,107
|
|
From October 2021
to September 2022
|
167,325
|
|
From October 2022
to September 2023
|
3,612
|
|
Undiscounted Cash
Flow
|
404,044
|
|
Less: imputed
interest
|
(28,647)
|
|
Total
|
$375,397
|
|
Reconciliation to
lease liabilities:
|
|
|
Lease liabilities -
current
|
$210,910
|
|
Lease liabilities -
long-term
|
164,487
|
|
Total Lease
Liabilities
|
$375,397
|
The
weighted-average remaining lease term and discount rate related to
the Company’s lease liabilities as of September 30, 2020 were
1.8 years and 8%,
respectively. The Company’s lease discount rates are
generally based on the estimates of its incremental borrowing rate
as the discount rates implicit in the Company’s leases cannot
be readily determined.
Performance Bonds
As of
September 30, 2020, Company has two performance bonds in connection
with a foreign customer totaling $2,351,304, of which $1,645,881 is
held in an interest-bearing account on behalf of the customer and
is recorded in Other Assets on the Consolidated Balance Sheet. The
remaining amount of $705,423 is guaranteed by a foreign financial
institution on behalf of the Company. The amounts held on the two
bonds will be released upon expiration as follows: $307,383 on
January 18, 2022 and $1,338,498 on July 2, 2024.
As of
September 30, 2019, the Company held one of the above performance
bonds totaling $474,682, of which $332,277 was held in an
interest-bearing account on behalf of the customer and is recorded
in Other Current Assets on the Consolidated Balance Sheet, with the
remainder guaranteed by a foreign financial institution on behalf
of the Company. This performance bond was renewed in 2020, thus, is
included in the totals above.
The
Company pays interest on the full amount of the bonds to the
financial institution providing the guarantee at 3.5% interest for
the bond expiring in January 2022 and 2.8% interest for the bond
expiring in July 2024. Related interest expense recorded for the
years ended September 30, 2020 and 2019 was $33,617 and $17,860,
respectively.
F-23
|
(13)
|
Intangible Assets
|
The following table summarizes the activity of intangible assets
for the years ended September 30, 2020 and 2019,
respectively:
|
2020
|
Weighted Average Useful Life (yrs)
|
Gross
Carrying Amount
|
Accumulated Amortization
|
Net Book Value
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
21,170,565
|
(10,415,534)
|
10,755,031
|
|
Developed
technology
|
7.90
|
14,134,562
|
(4,086,241)
|
10,048,321
|
|
Customer
relationships
|
7.70
|
1,860,000
|
(1,535,376)
|
324,624
|
|
Trade
name
|
9.57
|
318,438
|
(275,369)
|
43,069
|
|
Website
|
3.00
|
78,201
|
(78,201)
|
-
|
|
Total
|
|
37,561,766
|
(16,390,721)
|
21,171,045
|
|
2019
|
Weighted Average Useful Life (yrs)
|
Gross
Carrying Amount
|
Accumulated Amortization
|
Net Book Value
|
|
|
|
|
|
|
|
Patent
& royalty agreements
|
7.99
|
$21,170,565
|
$(9,084,569)
|
$12,085,996
|
|
Developed
technology
|
8.00
|
12,685,281
|
(3,441,289)
|
9,243,992
|
|
Customer
relationships
|
7.70
|
1,860,000
|
(1,293,055)
|
566,945
|
|
Trade
name
|
9.57
|
318,722
|
(259,976)
|
58,746
|
|
Website
|
3.00
|
78,201
|
(78,201)
|
-
|
|
Total
|
|
$36,112,769
|
$(14,157,090)
|
$21,955,679
|
The intangible assets summarized above were purchased or developed
on various dates from January 2010 through September 30, 2020. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the years ended September 30, 2020 and
2019 was $2,241,566 and $2,236,410, respectively.
There was no impairment indicated for
the years ended September 30, 2020 or September 30,
2019.
The following table summarizes the future maturities of
amortization of intangible assets as of September 30,
2020:
|
Fiscal
Year
|
Amortization
|
STOP
Royalty
|
|
2021
|
$1,992,505
|
$450,000
|
|
2022
|
3,022,836
|
450,000
|
|
2023
|
2,808,750
|
450,000
|
|
2024
|
2,237,739
|
187,500
|
|
2025
|
1,915,214
|
-
|
|
Thereafter
|
7,656,501
|
-
|
|
Total
|
$19,633,545
|
$1,537,500
|
Goodwill – In accordance
with accounting principles generally accepted in the United States
of America, we do not amortize goodwill. These principles require
the Company to periodically perform tests for goodwill impairment,
at least annually, or sooner if evidence of possible impairment
arises. We evaluated the goodwill for impairment as of September
30, 2020. Based on the evaluation made, the Company concluded that no impairment of
goodwill was necessary.
Goodwill, as of September 30 consisted of the
following:
|
|
September 30,
|
|
|
|
2020
|
2019
|
|
Balance
- beginning of year
|
$8,187,911
|
$8,076,759
|
|
Effect
of foreign currency translation on goodwill
|
32,469
|
111,152
|
|
Balance
- end of year
|
$8,220,380
|
$8,187,911
|
|
(14)
|
Subsequent Events
|
On
October 21, 2020, the Company requested, in writing, an additional
extension to the maturity date of the Amended Facility Agreement.
On November 25, 2020, the Noteholders held a meeting to address the
Company’s request and approved a new maturity date of July 1,
2024. On December 21, 2020, Conrent and the Company signed an
Amendment to the Amended Facility Agreement which extends the
maturity date of the agreement to July 1, 2024, capitalizes the
accrued and unpaid interest increasing the outstanding principal
amount and reduces the interest rate of the Amended Facility
Agreement from 8% to 4%.
In
accordance with the Subsequent Events Topic of the FASB ASC 855, we
have evaluated subsequent events, through the filing date and noted
that, other than as disclosed above, no additional subsequent
events have occurred that are reasonably likely to impact the
financial statements.
F-24