NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated
financial information of Track Group, Inc. and subsidiaries
(collectively, the “Company” or “Track Group”) has been prepared in accordance with the
Instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission
(“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management,
the accompanying interim consolidated financial information
contains all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the Company’s
financial position as of December 31, 2020, and results of its
operations for the three months ended December 31, 2020. These
financial statements should be read in conjunction with the audited
annual consolidated financial statements and notes thereto that are
included in the Company’s Annual Report on Form 10-K for the
year ended September 30, 2020, filed with the SEC on December 23,
2020. The results of operations for the three months ended
December 31, 2020 may not be indicative of the results for the
fiscal year ending September 30, 2021.
As
of December 31, 2020 and 2019, the Company had an accumulated
deficit of $300,947,439 and $302,384,917, respectively. The Company
incurred net income of $1,323,494 and net loss of $(232,625) for
the three months ended December 31, 2020 and 2019, respectively.
The Company may continue to incur losses and require additional
financial resources. The Company also has debt maturing in July
2024 and a potentially forgivable PPP loan which matures in May
2022. See Note 24. 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
obligation which matures on July 1, 2024. Management has evaluated
the significance of these conditions and has determined that the
Company can meet its operating obligations for a reasonable period
of time. The Company expects to fund operations using cash on hand
and through operational cash flows through the upcoming twelve
months.
(2) PRINCIPLES OF CONSOLIDATION
The
consolidated financial statements include the accounts of Track
Group, Inc. and its active subsidiaries, Track Group Analytics
Limited, Track Group Americas, Inc., Track Group International
LTD., and Track Group - Chile SpA. All significant inter-company
transactions have been eliminated in consolidation.
(3) RECENT ACCOUNTING STANDARDS
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board
(“FASB”) or other standard setting bodies, which
are adopted by the Company as of the specified effective
date.
Recently Adopted Accounting Standards
In February 2016, FASB issued Accounting Standards
Update (“ASU”) No. 2016-02, “Leases (Topic
842)”.
For lessees, the amendments in this
update require that for all leases not considered to be short term,
a company recognize both a lease liability and right-of-use asset
on its balance sheet, representing the obligation to make payments
and the right to use or control the use of a specified asset for
the lease term. The amendments in this update are effective for
annual periods beginning after December 15, 2018 and interim
periods within those annual periods. The Company adopted ASU
2016-02 on October 1, 2019. See Note 16 for the impact the adoption
had on our consolidated financial position, results of operations
and cash flows.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
“Intangibles – Goodwill
and Other: Simplifying the Test for Goodwill
Impairment”. The new
guidance simplifies the subsequent measurement of goodwill by
removing the second step of the two-step impairment test. The
amendment requires an entity to perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The new
guidance for accelerated filing companies will be effective for
annual periods or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019 and all other
entities should adopt the amendments in this update for its annual
or any interim goodwill impairment tests in fiscal years beginning
after December 15, 2022. The amendment should be applied on a
prospective basis. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after
January 1, 2017. Management does not
anticipate that this adoption will have a significant impact on its
consolidated financial position, results of operations, or cash
flows.
In 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, excluding
smaller reporting entities, which will be effective for fiscal
years beginning after December 15, 2022. The Company will adopt ASU
2016-13 in fiscal year 2022. The Company does not expect the
application of the CECL impairment model to have a significant
impact on our allowance for uncollectible amounts for accounts
receivable.
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The
Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset
may not be recoverable and in the case of goodwill, at least
annually. The Company evaluates whether events and circumstances
have occurred which indicate possible impairment as of each balance
sheet date. If the carrying amount of an asset exceeds its fair
value, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the
lowest levels for which there is an identifiable fair value that is
independent of other groups of assets.
(5) BUSINESS COMBINATIONS
The Company accounts for its business acquisitions
under the acquisition method of accounting as indicated in ASC
805, “Business
Combinations”, which
requires the acquiring entity in a business combination to
recognize the fair value of all assets acquired, liabilities
assumed, and any non-controlling interest in the acquiree, and
establishes the acquisition date as the fair value measurement
point. Accordingly, the Company recognizes assets acquired and
liabilities assumed in business combinations, including contingent
assets and liabilities and non-controlling interest in the
acquiree, based on fair value estimates as of the date of
acquisition. In accordance with ASC 805, the Company recognizes and
measures goodwill as of the acquisition date, as the excess of the
fair value of the consideration paid over the fair value of the
identified net assets acquired.
Acquired Assets and Assumed Liabilities
Pursuant
to ASC No. 805-10-25, if the initial accounting for a business
combination is incomplete by the end of the reporting period in
which the combination occurs, but during the allowed measurement
period not to exceed one year from the acquisition date, the
Company retrospectively adjusts the provisional amounts recognized
at the acquisition date, by means of adjusting the amount
recognized for goodwill.
Contingent Consideration
In
certain acquisitions, the Company has agreed to pay additional
amounts to sellers contingent upon achievement by the acquired
businesses of certain future goals, which may include revenue
milestones, new customer accounts, and earnings targets. The
Company records contingent consideration based on its estimated
fair value as of the date of the acquisition. The Company evaluates
and adjusts the value of contingent consideration, if necessary, at
each reporting period based on the progress toward and likely
achievement of certain targets on which issuance of the contingent
consideration is based. Any differences between the
acquisition-date fair value and the changes in fair value of the
contingent consideration subsequent to the acquisition date are
recognized in current period earnings until the arrangement is
settled. If there is uncertainty surrounding the value of
contingent consideration, then the Company’s policy is to
wait until the end of the measurement period before making an
adjustment.
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Comprehensive
income (loss) includes net income (loss) as currently reported
under GAAP and other comprehensive income (loss). Other
comprehensive income (loss) considers the effects of additional
economic events, such as foreign currency translation adjustments,
that are not required to be recorded in determining net income
(loss), but rather are reported as a separate component of
stockholders’ equity. The Chilean Peso, New Israeli Shekel
and the Canadian Dollar are used as functional currencies of the
following operating subsidiaries: (i) Track Group Chile SpA; (ii)
Track Group International Ltd.; and (iii) Track Group Analytics
Limited, respectively. The balance sheets of all subsidiaries have
been converted into United States Dollars at the prevailing
exchange rate at December 31, 2020.
(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share
(“Basic EPS”) is computed by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period.
Diluted net income (loss) per common share
(“Diluted EPS”) is computed by dividing net income (loss)
attributable to common stockholders by the sum of the
weighted-average number of common shares outstanding and the
weighted-average dilutive common share equivalents
outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an
anti-dilutive effect.
Common
share equivalents consist of shares issuable upon the exercise of
common stock options and warrants. As of both December 31,
2020, and 2019, there were 685,259 outstanding common share
equivalents that were not included in the computation of Diluted
EPS for the three months ended December 31, 2020 and 2019,
respectively, as their effect would be anti-dilutive. The common
stock equivalents outstanding as of December 31, 2020 and December
31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
Exercisable
common stock options and warrants
|
685,259
|
685,259
|
|
Total
common stock equivalents
|
685,259
|
685,259
|
At
December 31, 2020 and 2019, all stock option and warrant exercise
prices were above the market price of $0.34 and $0.49,
respectively, and thus have not been included in the basic earnings
per share calculation.
(8) REVENUE RECOGNITION
Monitoring and Other Related
Services. Monitoring services
include two components: (i) lease contracts pursuant to which the
Company provides monitoring services and lease devices to
distributors or end users and the Company retains ownership of the
leased device; and (ii) monitoring services purchased by
distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
Sales of devices and leased GPS devices are required to use the
Company’s monitoring service and both the GPS leased devices
and monitoring services are accounted for as a single performance
obligation. Monitoring revenue is recognized ratably over
time, as the customer simultaneously receives and consumes the
benefit of these services as they are performed. Payment due or
received from the customers prior to rendering the associated
services are recorded as a contract liability. The balance of the
contract liabilities at December 31, 2020 and September 30, 2020
are $99,202 and $147,921, respectively, and are included in accrued
liabilities on the Consolidated Balance Sheets. The Company
recognized $48,816 and $73,071 of deferred revenue in the three
months ended December 31, 2020 and December 31, 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.
The
following table presents the Company’s revenue by geography,
based on management’s assessment of available
data:
|
|
Three
months ended December 31, 2020
|
Three
months ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
$6,797,758
|
72%
|
$5,567,858
|
66%
|
|
Latin
America
|
2,506,412
|
27%
|
2,737,593
|
33%
|
|
Other
|
97,735
|
1%
|
115,380
|
1%
|
|
Total
|
$9,401,905
|
100%
|
$8,420,831
|
100%
|
The
above table includes total revenue for the Company, of which
monitoring and other related services is the majority
(approximately 99%) of the Company’s revenue. Latin America
includes Bahamas, Chile, Mexico, Puerto Rico and the U.S. Virgin
Islands. Other includes Canada and Saudi Arabia in the three months
ended December 31, 2020 and Canada, Saudi Arabia, South Africa and
Vietnam in the three months ended December 31, 2019.
(9) PREPAID EXPENSE AND DEPOSITS
As
of December 31, 2020, and September 30, 2020, the outstanding
balance of prepaid expense and deposits was $817,774 and $866,389,
respectively. These balances are comprised largely of tax
deposits, vendor deposits and other prepaid supplier
expense.
(10) INVENTORY
Inventory
is valued at the lower of the cost or net realizable
value. Cost is determined using the standard costing method.
Net realizable value is determined based on the item selling
price. Inventory is periodically reviewed in order to identify
obsolete or damaged items or impaired values.
Inventory
consists of finished goods that are to be shipped to customers
and parts used for minor repairs of ReliAlert™, Shadow, and
other tracking devices. Completed and shipped ReliAlert™ and
other tracking devices are reflected in Monitoring
Equipment. As of December 31, 2020, and September 30, 2020,
inventory consisted of the following:
|
|
|
|
|
Finished
goods inventory
|
$124,902
|
$131,089
|
|
Reserve
for damaged or obsolete inventory
|
(6,392)
|
(6,483)
|
|
Total
inventory, net of reserves
|
$118,510
|
$124,606
|
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 $91 and $35,213 during the
three months ended December 31, 2020 and December 31, 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 Condensed
Consolidated Statement of Operations.
(11) PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of December 31, 2020
and September 30, 2020, respectively:
|
|
|
|
|
Equipment,
software and tooling
|
$1,360,582
|
$1,272,635
|
|
Automobiles
|
5,687
|
5,156
|
|
Leasehold
improvements
|
1,386,831
|
1,290,708
|
|
Furniture
and fixtures
|
352,932
|
341,896
|
|
Total
property and equipment before accumulated depreciation
|
3,106,032
|
2,910,395
|
|
Accumulated
depreciation
|
(2,746,715)
|
(2,531,631)
|
|
Property
and equipment, net of accumulated depreciation
|
$359,317
|
$378,764
|
Property
and equipment depreciation expense for the three months ended
December 31, 2020 and 2019 was $112,209 and $83,432,
respectively.
(12) MONITORING EQUIPMENT
The
Company leases monitoring equipment to agencies for offender
tracking under contractual service agreements. The monitoring
equipment is amortized using the straight-line method over an
estimated useful life of between one and five years. Monitoring
equipment as of December 31, 2020 and September 30, 2020 was as
follows:
|
|
|
|
|
Monitoring
equipment
|
$8,345,234
|
$8,705,830
|
|
Less:
accumulated depreciation
|
(5,589,903)
|
(6,639,883)
|
|
Monitoring
equipment, net of accumulated depreciation
|
$2,755,331
|
$2,065,947
|
Depreciation
of monitoring equipment for the three months ended December 31,
2020 and 2019 was $337,560 and $360,630, respectively. Depreciation
expense for monitoring devices is recognized in cost of revenue.
During the three months ended December 31, 2020 and December 31,
2019, the Company recorded charges of $110,123 and $98,834,
respectively, for devices that were lost, stolen or damaged. Lost,
stolen and damaged items are included in Monitoring, products &
other related services in the Condensed Consolidated Statement of
Operations.
(13) INTANGIBLE ASSETS
The
following table summarizes intangible assets at December 31, 2020
and September 30, 2020, respectively:
|
Intangible
assets:
|
|
|
|
Patent
& royalty agreements
|
$21,170,565
|
$21,170,565
|
|
Developed
technology
|
15,003,573
|
14,134,562
|
|
Customer
relationships
|
1,860,000
|
1,860,000
|
|
Trade
name
|
319,900
|
318,438
|
|
Website
|
78,201
|
78,201
|
|
Total
intangible assets
|
38,432,239
|
37,561,766
|
|
Accumulated
amortization
|
(17,019,421)
|
(16,390,721)
|
|
Intangible
assets, net of accumulated amortization
|
$21,412,818
|
$21,171,045
|
The
intangible assets summarized above were purchased or developed on
various dates from January 2010 through December 31, 2020. The
assets have useful lives ranging from three to twenty years.
Amortization expense for the three months ended December 31, 2020
and 2019 was $570,669 and $559,319, respectively.
(14) GOODWILL
The
following table summarizes the activity of goodwill at December 31,
2020 and September 30, 2020, respectively:
|
|
|
|
|
|
|
|
|
Balance
- beginning of
period
|
$8,220,380
|
$8,187,911
|
|
Effect
of foreign currency translation on goodwill
|
306,877
|
32,469
|
|
Balance
- end of period
|
$8,527,257
|
$8,220,380
|
Goodwill
is recognized in connection with acquisition transactions in
accordance with ASC 805. The Company performs an impairment test
for goodwill annually or more frequently if indicators of potential
impairment exist. No impairment of goodwill was recognized through
December 31, 2020.
(15) OTHER ASSETS
As
of December 31, 2020 and September 30, 2020, respectively, the
outstanding balance of other assets was $2,577,659 and $2,166,743,
respectively. Other assets at December 31, 2020 are comprised
largely of cash collateralized Performance Bonds (as defined in
Note 23) for an international customer, as well as right of use
assets, lease deposits, insurance costs and other long-term
assets. The Company anticipates these Performance Bonds will
be reimbursed to the Company upon completion of its contracts with
the customer.
(16) LEASES
Effective October
1, 2019, the Company adopted the new lease accounting guidance in
ASU No. 2016-02, Leases (Topic 842) “ASC Topic 842” which modified
lease accounting for lessees to create transparency and
comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing
arrangements. The Company adopted the new lease standard utilizing
the modified retrospective transaction method, under which amounts
in prior periods were not restated. For contracts existing at the
time of the adoption, the Company elected not to reassess (a)
whether any are or contain leases, (b) lease classification, and
(c) initial direct costs. Upon adoption on October 1, 2019, the
Company recorded $597,289 right of use assets and lease
liabilities. The adoption of the new standard did not impact the
Company’s Statements of Operations or Statements of Cash
Flows.
The following table
shows right of use assets and lease liabilities and the associated
financial statement line items as of December 31, 2020 and
September 30, 2020.
|
|
|
|
|
|
|
Operating
lease liability
|
|
Operating
lease liability
|
|
|
|
|
|
|
|
Other
assets
|
$330,899
|
$-
|
$375,397
|
$-
|
|
Accrued
liabilities
|
-
|
221,194
|
-
|
210,910
|
|
Long-term
liabilities
|
-
|
109,705
|
-
|
164,487
|
The following
table summarizes the supplemental cash flow information for the
three months ended December 31, 2020 and December 31
2019:
|
|
|
|
|
Cash
paid for noncancelable operating leases included in operating cash
flows
|
$75,890
|
$116,411
|
|
|
|
|
|
Right of use assets
obtained in exchange for operating lease liabilities:
|
$-
|
$-
|
The
future minimum lease payments under noncancelable operating leases
with terms greater than one year as of December 31, 2020
are:
|
|
|
|
From January 2021
to September 2021
|
$179,871
|
|
From October 2021
to September 2022
|
169,122
|
|
From October 2022
to September 2023
|
3,612
|
|
Undiscounted cash
flow
|
352,605
|
|
Less: imputed
interest
|
(21,706)
|
|
Total
|
$330,899
|
|
Reconciliation to
lease liabilities:
|
|
|
Lease liabilities -
current
|
$221,194
|
|
Lease liabilities -
long-term
|
109,705
|
|
Total lease
liabilities
|
$330,899
|
The
weighted-average remaining lease term and discount rate related to
the Company’s lease liabilities as of December 31, 2020 were
1.5 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.
(17) ACCRUED LIABILITES
Accrued
liabilities consisted of the following as of December 31, 2020 and
September 30, 2020, respectively:
|
|
|
|
|
Accrued
payroll, taxes and employee benefits
|
$1,229,245
|
$1,607,920
|
|
Deferred
revenue
|
99,202
|
147,921
|
|
Accrued
taxes - foreign and domestic
|
525,234
|
324,221
|
|
Accrued
other expense
|
99,095
|
117,264
|
|
Accrued
legal and other professional costs
|
663,547
|
725,547
|
|
Accrued
costs of revenue
|
396,176
|
309,470
|
|
Right
of use liability
|
221,194
|
210,910
|
|
Accrued
interest
|
12,138,909
|
11,515,375
|
|
Total
accrued liabilities
|
$15,372,602
|
$14,958,628
|
(18) RELATED PARTIES
ETS Limited is currently the beneficial owner of
4,871,745 shares of the Company's Common Stock
(“Track Group
Shares”) held by ADS
Securities LLC (“ADS”) under an agreement dated September 28,
2017 pursuant to which ADS transferred all of the Track Group
Shares to ETS Limited in exchange for all of the outstanding shares
of ETS Limited. A Director of ETS Limited was elected to the
Company's 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 during the fiscal year ended September
30, 2020.
(19) DEBT OBLIGATIONS
Debt
obligations as of December 31, 2020 and September 30, 2020
consisted of the following:
|
|
|
|
|
|
|
|
|
The
unsecured Amended Facility Agreement with Conrent whereby, as of
June 30, 2015, the Company had borrowed $30.4 million, net of
unamortized issuance costs of $89,286 at December 31, 2020, bearing
interest at a rate of 8% per annum, payable in arrears
semi-annually, with all principal and accrued and unpaid interest
due on July 1, 2024. The Company did not pay interest on this loan
during the three months ended December 31, 2020.
|
$30,310,714
|
$30,400,000
|
|
|
|
|
|
Note payable with BMO Harris Bank for a
Paycheck Protection Program
("PPP") loan
with the U.S. Small
Business Administration ("SBA"), bearing interest at a rate of 1% per
annum, with a maturity of May 19, 2022.
|
933,200
|
933,200
|
|
|
|
|
|
Total
debt obligations
|
31,243,914
|
31,333,200
|
|
Less:
current portion
|
(671,266)
|
(30,914,625)
|
|
Long-term
debt, less current portion and unamortized issuance
costs
|
$30,572,648
|
$418,575
|
On
September 8, 2020, the Company received a letter from ADS informing
the Company that ADS had been assigned the right to payment under
that certain Loan Facility dated September 14, 2015, by and between
Sapinda Asia Limited and the Company (the “Sapinda Loan Agreement”). On
September 30, 2020, the Company and ADS settled the outstanding
amount due under the Sapinda Loan Agreement for $2.7 million. The
Company recorded a gain of
approximately $0.7 million which is included in Other
income/expense, net on the Consolidated Statement of Operations in
the twelve months ended September 30, 2020.
On
October 21, 2020, the Company requested, in writing, an additional
extension to the maturity date of the Amended Facility Agreement.
On November 25, 2020, the Noteholders held a meeting to address the
Company’s request and approved a new maturity date of July 1,
2024. On December 21, 2020, Conrent and the Company signed an
amendment to the Amended Facility Agreement which extends the
maturity date of the Amended Facility Agreement to July 1, 2024
(“Amended
Facility”), capitalizes the accrued and unpaid
interest increasing the outstanding principal amount and reduces
the interest rate of the Amended Facility from 8% to 4%. Conrent is
currently working on documentation and the updated registration
process to implement these changes. We currently anticipate
restructuring the Amended Facility in the second fiscal quarter of
2021, with the expectation that all outstanding accrued interest
will be capitalized and the interest rate will be reduced to 4%. As
a result, we anticipate that we will begin amortizing deferred
financing fees on July 1, 2021. As of December 31, 2020,
approximately $30.4 million of
principal and $12.1 million of interest was owed to
Conrent.
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 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,
scheduled payments of both principal and interest would have begun
December 19, 2020; however, payments were deferred because the
Company filed its forgiveness application. 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 on January 8, 2021, the
Company received a notification from the Lender that the SBA
remitted funds to fully repay the PPP Loan, and that the funds were
utilized to pay-off and close the PPP Loan and that the PPP Loan
was fully forgiven. See Note
24.
The
following table summarizes our future maturities of debt
obligations, net of the amortization of debt discounts as of
December 31, 2020:
|
Twelve months ended
December 31,
|
|
|
2021
|
$671,266
|
|
2022
|
261,934
|
|
2023
|
-
|
|
2024
|
30,400,000
|
|
Thereafter
|
-
|
|
Total
|
$31,333,200
|
(20) PREFERRED AND COMMON STOCK
The
Company is authorized to issue up to 30,000,000 shares of common
stock, $0.0001 par value per share.
The
Company is authorized to issue up to 20,000,000 shares of preferred
stock, $0.0001 par value per share. The Company’s Board of
Directors has the authority to amend the Company’s
Certificate of Incorporation, without further stockholder approval,
to designate and determine, in whole or in part, the preferences,
limitations and relative rights of the preferred stock before any
issuance of the preferred stock, and to create one or more series
of preferred stock. As of December 31, 2020, there were no shares
of preferred stock outstanding.
No
dividends were paid during the three-month period ended December
31, 2020 or 2019, respectively.
Series A Convertible Preferred Stock
On October 12, 2017,
the Company filed a Certificate of Designation of the Relative
Rights and Preferences (“Certificate
of Designation”) with the
Delaware Division of Corporations, designating 1,200,000 shares of
the Company’s preferred stock as Series A Preferred. Shares
of Series A Preferred rank senior to the Company’s common
stock, and all other classes and series of equity securities of the
Company that by their terms do not rank senior to the Series A
Preferred.
Except with respect to
transactions upon which holders of the Series A Preferred are
entitled to vote separately as a class under the terms of the
Certificate of Designation, the Series A Preferred has no voting
rights. The shares of
common stock into which the Series A Preferred is convertible
shall, upon issuance, have all of the same voting rights as other
issued and outstanding shares of our common
stock.
The
Series A Preferred has no separate dividend rights; however,
whenever the Board declares a dividend on the Company’s
common stock, if ever, each holder of record of a share of Series A
Preferred shall be entitled to receive an amount equal to such
dividend declared on one share of common stock multiplied by the
number of shares of common stock into which such share of Series A
Preferred could be converted on the Record Date.
Each share of Series A Preferred has a Liquidation Preference of
$35.00 per share, and is convertible, at the holder’s option,
into ten shares of the Company’s common stock, subject to
adjustments as set forth in the Certificate of Designation, at any
time beginning five hundred and forty days after the date of
issuance.
As of December 31, 2020, no shares of Series A Preferred were
issued and outstanding.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting
of stockholders on March 21, 2011, our stockholders approved the
2012 Equity Compensation Plan (the “2012
Plan”). The 2012
Plan provides for the grant of incentive stock options and
nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend
equivalents, stock payments, deferred stock, restricted stock
units, other stock-based awards and performance-based awards to
employees and certain non-employees who provide services to the
Company in lieu of cash. A total of 90,000 shares were initially
authorized for issuance pursuant to awards granted under the 2012
Plan. At the 2015 annual meeting of stockholders held on May 19,
2015, our stockholders approved a 713,262 share increase to the
total number of shares authorized under the 2012
Plan. Warrants for Board
members vest immediately, and warrants issued to employees vest
annually over either a two or three-year period after the grant
date.
As
of December 11, 2018, the Board of Directors suspended further
awards under the 2012 Plan until further notice. The Company
recorded expense of $0 and $19,687 for the three months ended
December 31, 2020 and 2019, respectively, related to the vesting of
common stock awarded prior to the suspension of the 2012 Plan.
There were 27,218 shares of common stock available for issuance
under the 2012 Plan as of December 31, 2020.
All Options and Warrants
The
fair value of each stock option and warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model.
During the three months ended December 31, 2020 and 2019, the
Company granted no options and warrants to purchase shares of
common stock under the 2012 Plan. The 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 for
both the three months ended December 31, 2020 and 2019,
respectively, related to the issuance and vesting of outstanding
stock options and warrants.
All options
and warrants have vested and are exercisable at December 31, 2020
and no future issuances are expected.
The
expected life of stock options (warrants) represents the period of
time that the stock options or warrants are expected to be
outstanding based on the simplified method allowed under GAAP. The
expected volatility is based on the historical price volatility of
the Company’s common stock. The risk-free interest rate
represents the U.S. Treasury bill rate for the expected life of the
related stock options (warrants). The dividend yield represents the
Company’s anticipated cash dividends over the expected life
of the stock options (warrants).
A
summary of stock option (warrant) activity for the three months
ended December 31, 2020 is presented below:
|
|
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life
|
Aggregate Intrinsic Value
|
|
Outstanding
as of September 30, 2020
|
685,259
|
$1.56
|
|
$-
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Expired/Cancelled
|
-
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Outstanding
as of December 31, 2020
|
685,259
|
$1.56
|
1.65
|
$-
|
|
Exercisable
as of December 31, 2020
|
685,259
|
$1.56
|
1.65
|
$-
|
The
intrinsic value of options and warrants outstanding and exercisable
is based on the Company’s share price of $0.34 at December
31, 2020.
(22) INCOME TAXES
The
Company recognizes deferred income tax assets or liabilities for
the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Deferred income tax assets or liabilities are determined based upon
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to apply
when the differences are expected to be settled or
realized. Deferred income tax assets are reviewed periodically
for recoverability and valuation allowances are provided as
necessary. Interest and penalties related to income tax
liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
For
the three months ended December 31, 2020 and 2019, the Company
incurred net income (loss) for income tax purposes of $1,323,494
and $(232,625), respectively. The amount and ultimate
realization of the benefits from the net operating losses is
dependent, in part, upon the tax laws in effect, our future
earnings, and other future events, the effects of which cannot be
determined. The Company has established a valuation allowance for
all deferred income tax assets not offset by deferred income tax
liabilities due to the uncertainty of their
realization. Accordingly, there is no benefit for income taxes
in the accompanying statements of operations.
In
computing income tax, we recognize an income tax provision in tax
jurisdictions in which we have pre-tax income for the period and
are expecting to generate pre-tax book income during the fiscal
year.
(23) COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, claims are made against the Company in the
ordinary course of business, which could result in litigation.
Claims and associated litigation are subject to inherent
uncertainties, and unfavorable outcomes could occur. In the opinion
of management, the resolution of these matters, if any, will not
have a material adverse impact on the Company’s financial
position or results of operations. Other than as set forth
below, there are no additional pending or threatened legal
proceedings at this time.
SecureAlert,
Inc. v. Federal Government of Mexico (Department of the
Interior). On March 24, 2017, SecureAlert Inc. filed a
complaint before the Federal Administrative Tribunal, asserting the
failure by defendants to pay claimant amounts agreed to, and due
under, the Pluri Annual Contract for the Rendering of Monitoring
Services of Internees, through Electric Bracelets, in the Islas
Marias Penitentiary Complex dated July 15, 2011, entered into by
and between the Organo Administrativo Desconcentrado Prevencion y
Readaptacion Social (“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. 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.
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 firm, 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.
Performance Bonds
As of
December 31, 2020, Company has two performance bonds in connection
with a foreign customer totaling $2,593,377, (“Performance Bonds”) of which
$1,815,329 is held in an interest-bearing account on behalf of the
customer and is recorded in Other Assets on the Consolidated
Balance Sheet. The remaining amount of $778,048 is guaranteed by a
foreign financial institution on behalf of the Company. The amounts
held on the two Performance Bonds will be released approximately 90
days after the expiration of the Performance Bonds, as follows:
$339,029 on January 18, 2022 and $1,476,300 on July 2,
2024.
The
Company pays interest on the full amount of the Performance Bonds
to the financial institution providing the guarantee at 3.5%
interest for the Performance Bond expiring in January 2022 and 2.8%
interest for the Performance Bond expiring in July 2024. Related
interest expense recorded for the three months ended December 31,
2020 of $18,462. During the three months ended December 31, 2019
the Company expensed $5,256 related to the Performance Bond which
expires on January 18, 2022.
(24) SUBSEQUENT EVENTS
We received proceeds of
approximately $933,200 from a forgivable loan from the U.S. Small
Business Administration ("SBA")
pursuant to the Paycheck Protection Program ("PPP")
enacted by Congress under the of 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"). On January 8, 2021, the Company received a
notification from the lender that the SBA remitted funds to fully
repay the PPP Loan. As a result, the PPP Loan was fully
forgiven.
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.