Track Group, Inc 10-Q for FY2024 Q2
Track Group, Inc. (TRCK)
About this 10-Q
Track Group, Inc filed this 10-Q on May 13, 2024, covering the quarter ended March 31, 2024 (FY2024 Q2).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.99M
- up 8.2% from $8.31M a year earlier
- Net loss
- $1.9M
- compared with a net loss of $1.49M a year earlier
- Diluted EPS
- $0.16
- up 23.1% from $0.13 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ___________ to ____________
Commission file number:
(Exact name of registrant as specified in its charter)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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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Smaller reporting company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the registrant’s common stock as of May 1, 2024, was
TRACK GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2024
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Page |
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Item 1. |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) |
2 | |
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Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) (Unaudited) |
3 | |
| 4 | ||
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 | |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
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Item 3. |
27 | |
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Item 4. |
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Item 1. |
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Item1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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(Unaudited) March 31, |
September 30, |
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2024 |
2023 |
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Assets |
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Current assets: |
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Cash |
$ | $ | ||||||
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Accounts receivable, net of allowance for credit losses of $ |
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Prepaid expense and deposits |
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Inventory, net of reserves of $ |
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Other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ |
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Monitoring equipment, net of accumulated depreciation of $ |
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Intangible assets, net of accumulated amortization of $ |
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Goodwill |
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Other assets |
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Total assets |
$ | $ | ||||||
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Liabilities and Stockholders’ Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
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Accrued liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt, net of current portion |
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Long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 23) |
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Stockholders’ equity (deficit): |
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Common stock, $ |
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Preferred stock, $ |
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Series A Convertible Preferred stock, $ |
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Paid in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total equity (deficit) |
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Total liabilities and stockholders’ equity (deficit) |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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Three Months Ended |
Six Months Ended |
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March 31, |
March 31, |
March 31, |
March 31, |
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2024 |
2023 |
2024 |
2023 |
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Revenue: |
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Monitoring and other related services |
$ | $ | $ | $ | ||||||||||||
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Product sales and other |
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Total revenue |
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Cost of revenue: |
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Monitoring, products and other related services |
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Depreciation and amortization included in cost of revenue |
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Total cost of revenue |
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Gross profit |
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Operating expense: |
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General & administrative |
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Selling & marketing |
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Research & development |
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Depreciation & amortization |
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Total operating expense |
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Operating income (loss) |
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Other income (expense): |
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Interest expense, net |
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Currency exchange rate gain (loss) |
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Other income (expense), net |
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Total other income (expense) |
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Income (loss) before income taxes |
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Income tax expense (benefit) |
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Net income (loss) attributable to common shareholders |
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Foreign currency translation adjustments |
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( |
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Comprehensive income (loss) |
$ | ( |
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$ | ( |
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Net income (loss) per share –basic: |
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Net income (loss) per share |
$ | ( |
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Weighted average shares outstanding |
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Net income (loss) per share – diluted: |
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Net income (loss) per share |
$ | ( |
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$ | ( |
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Weighted average shares outstanding |
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The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
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Common Stock |
Paid-in |
Accumulated |
Comprehensive |
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Shares |
Amount |
Capital |
Deficit |
Loss |
Total |
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Balance September 30, 2023 |
$ | $ | $ | ( |
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$ | ( |
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$ | ( |
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Stock-based compensation |
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Foreign currency translation adjustments |
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( |
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Net income |
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Balance December 31, 2023 |
$ | $ | $ | ( |
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$ | ( |
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$ | ( |
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Foreign currency translation adjustments |
- | ( |
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Net loss |
- | ( |
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Balance March 31, 2024 |
$ | $ | $ | ( |
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Common Stock |
Paid-in |
Accumulated |
Comprehensive |
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Shares |
Amount |
Capital |
Deficit |
Loss |
Total |
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Balance September 30, 2022 |
$ | $ | $ | ( |
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$ | ( |
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$ | ( |
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Stock-based compensation |
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Foreign currency translation adjustments |
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Net income |
- | - | - | 36,384 | ||||||||||||||||||||
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Balance December 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
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Stock-based compensation |
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Foreign currency translation adjustments |
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Net loss |
- | ( |
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Balance March 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
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The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended March 31, |
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2024 |
2023 |
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Cash flows from operating activities: |
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Net loss |
$ | ( |
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$ | ( |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Bad debt expense |
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Sales allowance |
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Stock based compensation |
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Loss on monitoring equipment included in cost of revenue |
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Amortization of debt issuance costs |
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Amortization of monitoring center assets included in cost of revenue |
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Foreign currency exchange (gain) loss |
( |
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Loss on disposal of assets |
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Change in assets and liabilities: |
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Accounts receivable, net |
( |
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Inventories |
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Prepaid expense, deposits and other assets |
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Accounts payable |
( |
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Accrued liabilities |
( |
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Net cash provided by operating activities |
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Cash flow used in investing activities: |
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Purchase of property and equipment |
( |
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Capitalized software |
( |
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Purchase of monitoring equipment and parts |
( |
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( |
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Net cash used in investing activities |
( |
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( |
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Cash flow used in financing activities: |
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Principal payments on long-term debt |
( |
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Payment of deferred financing fees |
( |
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Net cash used in financing activities |
( |
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( |
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Effect of exchange rate changes on cash |
( |
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Net decrease in cash |
( |
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( |
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Cash, beginning of period |
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Cash, end of period |
$ | $ | ||||||
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Cash paid for interest |
$ | $ | ||||||
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Cash paid for taxes |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
TRACK GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial information of Track Group, Inc. and subsidiaries (collectively, the “Company” or “Track Group”) has been prepared in accordance with the Instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2024 and results of its operations for the three and six months ended March 31, 2024. 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, 2023, filed with the SEC on December 20, 2023. The results of operations for the six months ending March 31, 2024, may not be indicative of the results for the fiscal year ending September 30, 2024.
As of March 31, 2024 and September 30, 2023, the Company had an accumulated deficit of $
(2) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Track Group, Inc. and its active 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.
(3) RECENT ACCOUNTING STANDARDS
The Company evaluates all Accounting Standards Updates (each an “ASU”, and collectively, “ASUs”) issued by the Financial Accounting Standards Board (“FASB”) for consideration of their applicability to our consolidated financial statements.
New Accounting Standards or Updates Adopted in Fiscal 2024
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 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 the 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. ASU 2017-04 became effective for accelerated filing companies 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 ASU 2017-04 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. The adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which adds a current expected credit loss (“CECL”) impairment model to 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 became effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which became effective for fiscal years beginning after December 15, 2022. The adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
Recent Accounting Standards or Updates Not Yet Effective
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative. The ASU incorporates several disclosure and presentation requirements currently residing in the SEC Regulations S-X and S-K. The amendments will be applied prospectively and are effective when the SEC removes the related requirements from Regulations S-X or S-K. Any amendments the SEC does not remove by June 30, 2027 will not be effective. As we are currently subject to these SEC requirements, this ASU is not expected to have a material impact on our consolidated financial statements or related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires all public entities to provide enhanced disclosures about significant segment expenses. The amendments in this ASU are to be applied retrospectively and are effective for our annual financial statements starting in fiscal 2025 and interim periods starting in fiscal 2026, with early adoption permitted. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid and to improve the effectiveness of income tax disclosures. This accounting standards update will be effective for us for fiscal year 2026 and interim periods beginning in the first quarter of fiscal 2027, with early adoption permitted. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.
No other new accounting pronouncements issued or effective as of March 31, 2024 have had or are expected to have a material impact on our consolidated financial statements.
(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 Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“ASC 805”), 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. There were no business combination activities in the periods presented.
Acquired Assets and Assumed Liabilities
Pursuant to ASC 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 the seller contingent upon the 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 the 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, which are not required to be recorded in determining net income (loss), but rather are reported as a separate component of stockholders’ equity. The Chilean Peso, New Israeli Shekel and the Canadian Dollar are used as functional currencies of the following operating subsidiaries: (i) Track Group Chile SpA; (ii) Track Group International Ltd.; and (iii) Track Group Analytics Limited, respectively. The balance sheets of all subsidiaries have been converted into United States Dollars at the prevailing exchange rate at March 31, 2024.
(7) NET INCOME 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 to purchase shares of the Company’s common stock, $
At March 31, 2024 and 2023, all stock options and warrants had exercise prices that were above the market price of $
The common stock equivalents outstanding as of March 31, 2024 and 2023 consisted of the following:
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March 31, |
March 31, |
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2024 |
2023 |
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Issuable common stock options and warrants |
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Total common stock equivalents |
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(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 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 with 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™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with us. The Company recognizes revenue from 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 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. There were no multiple element arrangements during the six months ended March 31, 2024 and 2023.
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:
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Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
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Total Revenue |
% of Total Revenue |
Total Revenue |
% of Total Revenue |
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United States |
% |
$ |
% | |||||||||||||
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Latin America |
% |
% |
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Other |
% |
% |
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Total |
$ |
% |
$ |
% |
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Six Months Ended March 31, 2024 |
Six Months Ended March 31, 2023 |
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Total Revenue |
% of Total Revenue |
Total Revenue |
% of Total Revenue |
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United States |
% | $ | % | |||||||||||||
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Latin America |
% | % | ||||||||||||||
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Other |
% | % | ||||||||||||||
|
Total |
$ | % | $ | % | ||||||||||||
The above table includes total revenue for the Company, of which monitoring and other related services is the majority of the Company’s revenue (approximately
Latin America includes Bahamas, Chile, Puerto Rico, Brazil, Panama and the U.S. Virgin Islands. Other includes Canada and Saudi Arabia.
The balance of accounts receivable at March 31, 2024 of $
For the three and six months ended March 31, 2024, the Company wrote-off accounts receivables of $
(9) PREPAID EXPENSE AND DEPOSITS
As of March 31, 2024 and September 30, 2023, the outstanding balance of prepaid expense and deposits was $
(10) INVENTORY
Inventory is valued at the lower of the cost or net realizable value. Cost is determined using the first-in/first-out method. Net realizable value is determined based on the item's selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values.
Inventory primarily consists of completed circuit boards and other parts used to manufacture new devices. Completed and shipped ReliAlert™ devices are reflected in Monitoring Equipment. As of March 31, 2024 and September 30, 2023, inventory consisted of the following:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
Monitoring equipment component boards inventory |
$ | $ | ||||||
|
Reserve for damaged or obsolete inventory |
( |
) | ||||||
|
Total inventory, net of reserves |
$ | $ | ||||||
The Company uses a third-party fulfillment service provider. As a result of this service, the Company’s employees do not actively assemble new products or repair a significant amount of 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.
(11) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of March 31, 2024 and September 30, 2023:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
Equipment, software and tooling |
$ | $ | ||||||
|
Automobiles |
||||||||
|
Leasehold improvements |
||||||||
|
Furniture and fixtures |
||||||||
|
Total property and equipment before accumulated depreciation |
||||||||
|
Accumulated depreciation |
( |
) | ( |
) | ||||
|
Property and equipment, net of accumulated depreciation |
$ | $ | ||||||
Property and equipment depreciation expense for the three months ended March 31, 2024 and 2023 was $
(12) 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 three years for customer tablets and three to five years for monitoring devices. Monitoring equipment as of March 31, 2024 and September 30, 2023 is as follows:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
Monitoring equipment |
$ | $ | ||||||
|
Less: accumulated depreciation |
( |
) | ( |
) | ||||
|
Monitoring equipment, net of accumulated depreciation |
$ | $ | ||||||
Depreciation of monitoring equipment for the three months ended March 31, 2024 and 2023 was $
During the three months ended March 31, 2024 and 2023, the Company recorded charges of $
(13) INTANGIBLE ASSETS
The following table summarizes the activity of intangible assets at March 31, 2024 and September 30, 2023:
|
March 31, 2024 |
September 30, 2023 |
|||||||||||||||||||||||
|
Gross |
Accumulated Amortization |
Net |
Gross |
Accumulated Amortization |
Net |
|||||||||||||||||||
|
Patent & royalty agreements |
$ | $ | ( |
) |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
|
Developed technology |
( |
) |
( |
) |
||||||||||||||||||||
|
Trade name |
( |
) |
( |
) |
||||||||||||||||||||
|
Total intangible assets |
$ | $ | ( |
) |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
The intangible assets summarized above were purchased or developed on various dates from July 2011 through March 31, 2024.
Total amortization expense for the three months ended March 31, 2024 and 2023 was $
Total amortization expense for the six months ended March 31, 2024 and 2023 was $
(14) GOODWILL
The following table summarizes the activity of Goodwill at March 31, 2024 and September 30, 2023, respectively:
|
Six Months Ended March 31, 2024 |
Year Ended September 30, 2023 |
|||||||
|
Balance - beginning of period |
$ | $ | ||||||
|
Effect of foreign currency translation on goodwill |
( |
) | ||||||
|
Balance - end of period |
$ | $ | ||||||
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. impairment of goodwill was recognized through March 31, 2024.
(15) OTHER ASSETS
As of March 31, 2024 and September 30, 2023, the balance of other assets was $
The Company was contractually obligated to construct and equip two monitoring centers for an international customer, as well as supply equipment for the customer’s satellite locations, which have been owned by the customer since construction was completed. The monitoring center equipment is amortized using the straight-line method over the contract period between 32 and 40 months. Monitoring center equipment as of March 31, 2024 and September 30, 2023 was as follows:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
Monitoring center equipment |
$ | $ | ||||||
|
Less: accumulated amortization |
( |
) |
( |
) |
||||
|
Monitoring center equipment, net of accumulated amortization |
$ | $ | ||||||
The Santiago and Puerto Montt monitoring centers amortization is recorded in Monitoring, products and other related service costs on the Condensed Consolidated Statements of Operations. Amortization of costs related to the Santiago and Puerto Montt monitoring centers for the three and six months ended March 31, 2024 were $
(16) LEASES
Leases as Lessor
Monitoring Equipment and Other Related Services
The Company leases monitoring equipment and provides monitoring services to its customers with contract terms varying from month-to-month to several years and each daily contract price varies. Devices supplied to customers are not serial number unique and a single device may be used by multiple customers over its useful life. If a leased device is returned for repair, it will likely be replaced with a different device from a different customer or possibly a new device.
The Company’s tracking devices are considered operating leases under ASC 842 as transfer of control of the asset does not occur at the end of the lease, a single device is not specific to a customer and devices may be used by multiple customers throughout their life cycle. Due to the movement of devices from customer to customer, relatively few long-term contracts, the measurement of the equipment life and the present value of the equipment’s fair values would not be a measurement to qualify the devices as sales-type leases.
Operating lease and monitoring revenue associated with the Company’s monitoring equipment for the three and six months ended March 31, 2024 and 2023, respectively, are shown in the table below:
|
Three Months Ended March 31, |
Six Months Ended March 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Monitoring equipment operating revenue |
$ | $ | $ | $ | ||||||||||||
The Company cannot accurately estimate 5-years of future minimum lease receipts for its devices leased to customers because none of its customers make any contractual commitment regarding the number of active devices utilized in any given year and those quantities of active devices vary significantly for every customer each and every day.
Leases as Lessee
The following table shows right of use assets and lease liabilities for real estate and equipment, with the associated financial statement line items as of March 31, 2024 and September 30, 2023.
|
March 31, 2024 |
September 30, 2023 |
|||||||||||||||
|
Operating lease asset |
Operating lease liability |
Operating lease asset |
Operating lease liability |
|||||||||||||
|
|
$ | - | $ | $ | - | |||||||||||
|
|
- | - | ||||||||||||||
|
|
- | - | ||||||||||||||
The following table summarizes the supplemental cash flow information for the three months ended March 31, 2024 and 2023:
|
Six Months Ended March 31, 2024 |
Six Months Ended March 31, 2023 |
|||||||
|
Cash paid for noncancelable operating leases included in operating cash flows |
$ | $ | ||||||
|
Right of use assets obtained in exchange for operating lease liabilities |
$ | $ | ||||||
The future minimum lease payments under noncancelable operating leases with terms greater than one year as of March 31, 2024 are:
|
Operating Leases |
||||
|
From April 2024 to March 2025 |
$ | |||
|
From April 2025 to March 2026 |
||||
|
From April 2026 to March 2027 |
||||
|
From April 2027 to March 2028 |
||||
|
From April 2028 to March 2029 |
||||
|
Undiscounted cash flow |
||||
|
Less: imputed interest |
( |
) | ||
|
Total |
$ | |||
|
Reconciliation to lease liabilities: |
||||
|
Lease liabilities - current |
$ | |||
|
Lease liabilities - long-term |
||||
|
Total lease liabilities |
$ | |||
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of March 31, 2024 were
(17) ACCRUED LIABILITES
Accrued liabilities consisted of the following as of March 31, 2024 and September 30, 2023:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
Accrued payroll, taxes and employee benefits |
$ | $ | ||||||
|
Deferred revenue |
||||||||
|
Accrued taxes - foreign and domestic |
||||||||
|
Accrued other expense |
||||||||
|
Accrued legal and other professional costs |
||||||||
|
Accrued costs of revenue |
||||||||
|
Right of use liability |
||||||||
|
Accrued estimated expense related to a contract dispute |
||||||||
|
Accrued interest |
||||||||
|
Total accrued liabilities |
$ | $ | ||||||
(18) RELATED PARTIES
ETS Limited is currently the beneficial owner of
(19) DEBT OBLIGATIONS
Debt obligations, net of debt issuance costs, as of March 31, 2024 and September 30, 2023, consisted of the following:
|
March 31, 2024 |
September 30, 2023 |
|||||||
|
The unsecured loan (the “Amended Facility Agreement”) from Conrent Invest S.A. (“Conrent”) whereby, as of March 1, 2021, the Company had borrowed $ |
$ | $ | ||||||
|
The unsecured Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of |
||||||||
|
The unsecured Note Payable Agreement with Banco Santander, net of unamortized issuance costs $ |
||||||||
|
The unsecured Note Payable Agreement with Banco Estado, net of unamortized issuance costs of $ |
||||||||
|
The unsecured Note Payable Agreement with HP Financial Services Chile Limitada bearing interest at a rate of |
||||||||
|
The unsecured Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $ |
||||||||
|
The unsecured Note Payable Agreement with Banco de Chile, net of unamortized issuance costs of $ |
||||||||
|
Total debt obligations |
||||||||
|
Less: current portion |
( |
) |
( |
) |
||||
|
Long-term debt, less current portion |
$ | $ | ||||||
On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement which extended the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”), capitalized the accrued and unpaid interest increasing the outstanding principal amount and reduced the interest rate of the Amended Facility from
On January 6, 2021, the Company borrowed
On January 12, 2021, the Company borrowed
On February 2, 2021, the Company borrowed
On February 4, 2021, the Company borrowed
On February 5, 2021, the Company borrowed
On February 15, 2021, the Company borrowed
The following table summarizes our future maturities of debt obligations, net of the amortization of debt discounts as of March 31, 2024:
|
Twelve months ended March 31: |
Total |
|||
|
2025 |
$ | |||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Total |
||||
|
Issuance costs |
( |
) |
||
|
Debt obligations, net of unamortized issuance costs |
$ | |||
(20) PREFERRED AND COMMON STOCK
The Company is authorized to issue up to
dividends were paid during the six months ended March 31, 2024 or 2023, respectively.
Common Stock Issuances
There were issuances of Common Stock in the six months ended March 31, 2024.
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
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 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 $
As of March 31, 2024, shares of Series A Preferred were issued and outstanding.
(21) STOCK OPTIONS AND WARRANTS
Stock Incentive Plan
At the annual meeting of stockholders on April 13, 2022, our stockholders approved the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”), previously approved by the Company’s Board. The 2022 Plan provides for the grant of incentive options and nonqualified 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
The Board suspended further awards under the 2012 Plan as of June 30, 2020. Any awards outstanding under the 2012 Plan will remain subject to the 2012 Plan. All shares of Common Stock remaining authorized and available for issuance under the 2012 Plan and any shares subject to outstanding awards under the 2012 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under our 2022 Plan.
There were no issuances of restricted shares in the six months ended March 31, 2024.
The Company recorded expense of $
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. The Company recorded expense for the three and six months ended March 31, 2024 and 2023, respectively, related to the issuance and vesting of outstanding options and warrants. During the three and six months ended March 31, 2024 and 2023, the Company granted options or warrants under the 2022 Plan or under the 2012 Plan.
The expected life of options (warrants) represents the period of time that the 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 options (warrants). The dividend yield represents the Company’s anticipated cash dividends over the expected life of the options (warrants).
A summary of stock option (warrant) activity for the six months ended March 31, 2024, is presented below:
|
Shares Under Option |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value |
|||||||||||||
|
Outstanding as of September 30, 2023 |
$ | $ | ||||||||||||||
|
Granted |
- | - | - | - | ||||||||||||
|
Expired/Cancelled |
( |
) |
- | - | ||||||||||||
|
Exercised |
- | - | - | - | ||||||||||||
|
Outstanding as of March 31, 2024 |
$ | - | $ | |||||||||||||
|
Exercisable as of March 31, 2024 |
$ | - | $ | |||||||||||||
(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.
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.
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
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of nearly 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. (a predecessor entity to Track Group, Inc. or the Company) 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. Although preliminary rulings have been unfavorable to the Company, the Company’s counsel continues to review its remaining claims which are upwards of $
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 recover allegedly 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 produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6, 2020. At this time, the case remains stayed by Court order. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Jeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the State of California, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the Company. The Company disputes Abed’s claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel. The Company is scheduled to present a motion for summary judgment in May 2024.
Track Group Chile SpA. v. Republic of Chile. On January 24, 2022, Track Group Chile SpA., a wholly-owned subsidiary of the Company (“Track Chile”) initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile related to its contract with the Chilean National Prisoner Service, the Company’s customer in the Republic of Chile (the “Customer”). The judicial action followed the issuance by the Customer on December 19, 2021 of the first of two letters fining Track Chile approximately USD $1.5 million for delays in completing two offender monitoring centers caused principally by the COVID-19 global pandemic. Track Chile also was granted an injunction preventing the Chilean government from drawing down on the performance bond (the “Performance Bond”) posted by Track Chile on July 2, 2020 with an expiration date of July 2, 2024 (the “Expiration Date”). On January 17, 2024, a Chilean appellate court overturned the injunction. The Company is confident that resolution of these issues can be reached prior to the Expiration Date by way of a settlement in the range of 30-70% of the fines sought, and the Company has recorded an estimated liability of approximately $500,000, which is recorded in accrued liabilities on the Condensed Consolidated Balance Sheet and in operating expense on the Condensed Consolidated Statements of Operations. Notwithstanding the judicial action, Track Chile executed new agreements with the Customer in February 2024.
Michael Matthews v. Track Group, Inc., et al. On December 13, 2022, Plaintiff Michael Matthews filed a complaint in the Circuit Court of Cook County, Illinois, amended on July 23, 2023, against the Company and other defendants alleging wrongful arrest and incarceration and a deprivation of his rights following his purportedly erroneous violation of home monitoring program requirements. On January 10, 2024, the court dismissed the Plaintiff’s second amended complaint with leave to replead by January 30, 2024. Plaintiff filed a third amended complaint on January 30, 2024, however, subsequently filed a motion to voluntarily dismiss the case on January 31, 2024, which was granted on February 5, 2024.
Kevin Barnes v. Track Group, Inc., et. al. On December 28, 2023, the Company was served with a second amended complaint filed in the Circuit Court of Cook County, Illinois naming the Company and alleging strict liability and negligence against the Company and other defendants related to alleged injuries sustained by Barnes from an electronic monitoring device. The Company disputes Barnes’ claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Performance Bonds
As of March 31, 2024, the Company has performance bond in connection with a foreign customer totaling $
The amounts held on additional performance bonds posted by Track Chile were released in the second quarter of 2023 and the Company received $
The Company pays interest on the full amount of the Performance Bond to the financial institution providing the guarantee at
(24) SUBSEQUENT EVENTS
In accordance with the Subsequent Events Topic of FASB ASC 855, we have evaluated subsequent events for their potential impact on the consolidated financial statements and disclosures through the filing date and determined that, except as set forth below, no subsequent events occurred that were reasonably expected to have an impact on the financial statements presented herein.
Peter Poli Resignation as Chief Financial Officer and Appointment to Board of Directors
Effective March 31, 2024, Peter Poli, the Chief Financial Officer of the Company, resigned from his position as CFO, pursuant to a Separation Agreement and General Release of Claims (the “Separation Agreement”) entered into by and between the Company and Mr. Poli on March 21, 2024. Pursuant to the Separation Agreement, Mr. Poli was appointed as a member of the Board of Directors, and will serve as a director until his successor is duly elected and qualified, or until the next annual meeting of stockholders.
Appointment of James Berg as Chief Financial Officer
Effective April 1, 2024, James Berg, previously the Controller of the Company, was appointed to serve as the Chief Financial Officer of the Company.
In connection with Mr. Berg’s appointment, on March 21, 2024, the Company entered into an employment agreement (the “Berg Agreement”) with Mr. Berg setting forth the terms and conditions of Mr. Berg’s employment as the Company’s Chief Financial Officer. Pursuant to the Berg Agreement, Mr. Berg will serve as the Chief Financial Officer of the Company for a two-year term commencing on April 1, 2024, renewable thereafter in one-year terms or until terminated by either party in accordance with the terms of the Berg Agreement.
The Berg Agreement provides that Mr. Berg will be entitled to receive an annual base salary of $
The Company may terminate Mr. Berg’s employment due to death or disability, for cause (as defined in the Berg Agreement) at any time, and without cause at any time upon written notice. Mr. Berg may terminate his employment without good reason (as defined in the Berg Agreement) at any time upon sixty days’ written notice to the Chief Executive Officer of the Company unless such voluntary termination is in connection with an involuntary termination other than for cause, as defined in the Berg Agreement, or in connection with a Disability.
If Mr. Berg’s employment is terminated by either the Company or Mr. Berg for any reason, Mr. Berg shall receive any earned but unpaid Base Salary and expenses required to be reimbursed pursuant to the Berg Agreement and any employee benefits Mr. Berg is entitled to under the Company’s employee benefit plans or programs in which Mr. Berg participates. In addition, if Mr. Berg’s employment is terminated by the Company without cause (as defined in the Berg Agreement) or by Mr. Berg for good reason (as defined in the Berg Agreement), then, subject to compliance with the restrictive covenants set forth in the Berg Agreement and the execution of a release of claims in favor of the Company, the Company will pay the following severance payments and benefits: (i) an amount equal to six months’ Base Salary, payable in 13 equal bi-weekly installments over a 26-week severance period; (ii) an amount equal to any earned, but unpaid, Annual Bonus for services rendered during the year preceding the date of termination; and (iii) a lump sum payment in an amount equal to the cost of COBRA continuation for a period of six months.
Chile Contract Dispute
Subsequent to March 31, 2024, the Company and the Chilean National Prisoner Service have continued negotiations toward a resolution of their dispute, which negotiations remain ongoing. As a result of these negotiations, the Company has elected to record an estimated liability of approximately $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”, or this “Report”) contains information that constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, the statements contained in this Report that are not purely historical can be “forward-looking statements”. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified using words or phrases such as “believes”, “expects”, “intends”, “anticipates”, “should”, “plans”, “estimates”, “projects”, “potential”, and “will” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in our most recent Annual Report on Form 10-K, and those described from time to time in our reports filed with the Securities and Exchange Commission (“SEC”).
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report. Except as otherwise indicated, as used in this Report, the terms the “Company”, “Track Group”, “we”, “our”, and “us” refer to Track Group, Inc., a Delaware corporation.
General
Our core business is based on the leasing of patented tracking and monitoring solutions to federal, state and local law enforcement agencies, both in the U.S. and abroad, for the electronic monitoring of offenders and offering unique data analytics services on a platform-as-a-service (“PaaS”) business model. Currently, we deploy offender-based management services that combine patented GPS tracking technologies, full-time 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.
Devices - Our devices consist principally of the ReliAlert® product line. These devices are generally leased on a daily rate basis and may be combined with our monitoring center services, proprietary software and data analytics subscription to provide an end-to-end PaaS.
ReliAlert®XC4 is our flagship GPS device, which is among the safest and most reliable monitoring devices 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 capabilities, increased battery life and sleep mode.
ReliAlert®XC3 - Advanced features enable agencies to 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.
Monitoring Center Services - 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, bilingual 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 sources, 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.
Data Analytics Services - Our IntelliTrack, TrackerPAL® software, IntelliTrack Mobile, TrackerPAL® Mobile, combined with our Data Analytic analysis tools, provide an integrated platform allowing case managers and law enforcement officers quick access views of an offender’s travel behavior, mapping, and inference on patterns. Our data analytics services help facilitate the discovery and communication of meaningful patterns in diverse locations 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.
Other Services - The Company offers smartphone applications specifically designed for the criminal justice market, including a domestic violence app that creates a mobile geo-zone around a survivor and an alcohol monitoring app linked to a police-grade breathalyzer.
Business Strategy
We are committed to helping our customers improve offender rehabilitation and re-socialization outcomes through our innovative hardware, software and services. We treat our business as a service business. Although we still manufacture patented tracking technology, we see the physical goods as only a small part of the integrated offender monitoring solutions we provide. Accordingly, rather than receiving a payment just for a piece of manufactured equipment, the Company receives a recurring stream of revenue for ongoing device agnostic subscription contracts. As part of our strategy, we continue to expand our device-agnostic platform to not only collect, but also store, analyze, assess and correlate location data for both accountability and auditing reasons, as well as to use for predictive analytics and assessment of effective and emerging techniques in criminal behavior and rehabilitation. We believe a high-quality customer experience along with knowledgeable salespeople who can convey the value of our products and services greatly enhances our ability to attract and retain customers. Therefore, our strategy also includes building and expanding our own direct sales force and our third-party distribution network to effectively reach more customers and provide them with a world-class sales and post-sales support experience. In addition, we are developing related service offerings to address adjacent market opportunities in both the public and private sectors. We believe continual investment in research and development (“R&D”), including smartphone applications and other monitoring services is critical to the development and sale of innovative technologies and integrated solutions today and in the future.
Critical Accounting Policies
From time to time, management reviews and evaluates certain accounting policies that are considered to be significant in determining the results of operations and financial position.
A description of the Company’s critical accounting policies that affect the preparation of the Company’s financial statements is set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed with the SEC on December 20, 2023. During the six months ended March 31, 2024, there have been two changes to the Company’s critical accounting policies.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. ASU 2017-04 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 the 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. ASU 2017-04 became effective for accelerated filing companies 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 ASU 2017-04 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. The adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which adds a current expected credit loss (“CECL”) impairment model to 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 became effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which became effective for fiscal years beginning after December 15, 2022. The adoption of this accounting standard in the first quarter of fiscal 2024 did not have a significant impact on our consolidated financial statements.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense. By their nature, these judgments are subject to an inherent degree of uncertainty. We assess the reasonableness of our estimates, including those related to bad debts, inventories, right of use assets, estimated useful lives, intangible assets, warranty obligations, product liability, revenue, legal matters and income taxes. We base our estimates on historical experience as well as available current information on a regular basis. Management uses this information to form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Government Regulation
Our operations are subject to various federal, state, local and international laws and regulations.
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.
Results of Operations
Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023
Revenue
For the three months ended March 31, 2024, the Company recognized total revenue from operations of $8,991,220 compared to $8,308,046 for the three months ended March 31, 2023, an increase of $683,174, or approximately 8%. The increase in monitoring revenues is driven principally by an increase in people assigned to monitoring for clients in Illinois, Brazil and Canada. This increase was partially offset by revenue decreases for clients in Michigan and Chile who experienced decreases in the number of people assigned to monitoring. These increases and reductions from all of these locations represent typical fluctuations which occur daily.
Product sales and other revenue for the three months ended March 31, 2024 increased to $232,570 from $129,021 in the same period in 2023, an increase of $103,549 or approximately 80%. The increase in product and other revenue was largely due to higher international product sales, principally in Brazil. We continue to largely focus on recurring subscription-based opportunities as opposed to equipment sales.
The industry in which the Company operates, as well as many other industries (automotive, consumer products and medical devices), have been impacted by the global semiconductor shortage. The availability of semiconductor parts has continued to improve in Fiscal 2024; however, long lead times remain with certain parts.
Cost of Revenue
During the three months ended March 31, 2024, cost of revenue totaled $5,024,385 compared to cost of revenue during the three months ended March 31, 2023 of $4,565,241, an increase of $459,144 or 10%. The increase in cost of revenue was largely the result of higher device repair costs of $441,384, higher monitoring center costs of $113,620, and higher hardware purchases of $68,271, partially offset by lower communication costs of $45,376 and lower lost, stolen or damaged costs of $95,949.
Depreciation and amortization included in cost of revenue for the three months ended March 31, 2024 and 2023 totaled $793,887 and $843,714, respectively, a decrease of $49,827. These costs represent the depreciation of ReliAlert® and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. The decrease in depreciation and amortization costs is largely due to a decrease in amortization of $37,500 for fully amortized device royalties and a decrease in amortization of $22,471 for fully amortized developed technology. Amortization of a patent related to GPS and satellite tracking are also included in depreciation and amortization. Devices are depreciated over either a three- or five-year useful life. Monitoring software is amortized over a seven-year 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.
Gross Profit and Margin
During the three months ended March 31, 2024, gross profit totaled $3,966,835, resulting in a gross margin of approximately 44%. During the three months ended March 31, 2023, gross profit totaled $3,742,805, resulting in a gross margin of approximately 45%. The increase in absolute gross profit of $224,030 is due to an increase in revenue of $683,174, lower communication costs and lower lost, stolen or damaged costs, partially offset by higher device repair costs, higher monitoring center costs, and higher hardware purchases.
General and Administrative Expense
During the three months ended March 31, 2024, general and administrative expense totaled $3,173,866 compared to $2,869,799 for the three months ended March 31, 2023. The increase of $304,067 or approximately 11% is primarily due to the estimated accrued expense related to the ongoing contract dispute discussed in Note 23 of approximately $500,000, partially offset by lower outside services of $80,736, lower legal and professional fees of $67,557, and lower insurance costs of $58,521.
Selling and Marketing Expense
During the three months ended March 31, 2024, selling and marketing expense totaled $810,441 compared to $768,871 for the three months ended March 31, 2023. The increase of $41,570 or approximately 5% resulted largely from higher travel and entertainment costs of $26,262 and higher trade show costs of $17,051.
Research and Development Expense
During the three months ended March 31, 2024, research and development expense totaled $701,183 compared to $706,772 for the three months ended March 31, 2023. The nominal decrease was largely due to increased payroll and related tax expense, partially offset by a decrease in outside services.
Depreciation and Amortization Expense
During the three months ended March 31, 2024, depreciation and amortization expense totaled $236,524 compared to $247,574 for the three months ended March 31, 2023, a decrease of $11,050 or approximately 4%, largely due to fully amortized intangible assets and fully depreciated equipment and software.
Total Operating Expense
During the three months ended March 31, 2024, total operating expense increased to $4,922,014 compared to $4,593,016 for the three months ended March 31, 2023, an increase of $328,998 or approximately 7%. The increase is principally due to the factors disclosed above.
Operating Income (Loss)
During the three months ended March 31, 2024, operating loss was $955,179 compared to $850,211 for the three months ended March 31, 2023. The increase of $104,968 in operating loss was principally due to an increase in operating expense of $328,998, partially offset by an increase in gross profit of $224,030.
Other Income (Expense)
For the three months ended March 31, 2024, other expense totaled $952,244 compared to $329,184 for the three months ended March 31, 2023, an increase of $623,060. The increase in other expense is largely due to negative currency exchange rate movements of $591,725 between the US Dollar vs. the Chilean Peso, compared to the prior period.
Net Income (Loss) Attributable to Common Stockholders
The Company had net loss attributable to common stockholders of $1,903,075 for the three months ended March 31, 2024, compared to $1,485,258 for the three months ended March 31, 2023, an increase of $417,817. This increase is principally due to a currency exchange rate loss.
Six Months Ended March 31, 2024, Compared to Six Months Ended March 31, 2023
Revenue
For the six months ended March 31, 2024, the Company recognized total revenue from operations of $17,958,193 compared to $17,163,737 for the six months ended March 31, 2023, an increase of $794,456, or approximately 5%. The increase in monitoring revenues is driven principally by an increase in people assigned to monitoring for clients in Illinois, Brazil and Canada. This increase was partially offset by revenue decreases for clients in Michigan and Chile who experienced decreases in the number of people assigned to monitoring. These increases and reductions from all of these locations represent typical fluctuations which occur daily.
Product sales and other revenue for the six months ended March 31, 2024 decreased to $525,057 from $694,930 in the same period in 2023, a decrease of $169,873 or approximately 24%. The decrease in product and other revenue was largely due to lower international product sales, principally in Saudi Arabia, partially offset by product sales to a new customer in Brazil. We continue to largely focus on recurring subscription-based opportunities as opposed to equipment sales.
The industry in which the Company operates, as well as many other industries (automotive, consumer products and medical devices), have been impacted by the global semiconductor shortage. The availability of semiconductor parts has continued to improve in Fiscal 2024; however, long lead times remain with certain parts.
Cost of Revenue
During the six months ended March 31, 2024, cost of revenue totaled $9,787,838 compared to cost of revenue during the six months ended March 31, 2023 of $9,240,254, an increase of $547,584 or 6%. The increase in cost of revenue was largely the result of higher device repair costs of $716,538 and higher monitoring center costs of $119,287, partially offset by lower communication costs of $171,323 and lower lost, stolen or damaged costs of $63,920.
Depreciation and amortization included in cost of revenue for the six months ended March 31, 2024 and 2023 totaled $1,583,351 and $1,616,733, respectively, a decrease of $33,382. These costs represent the depreciation of ReliAlert® and other monitoring devices, as well as the amortization of monitoring software and certain royalty agreements. The decrease in depreciation and amortization costs is largely due to a decrease in amortization of $37,500 for fully amortized device royalties and a decrease in amortization of $46,411 for fully amortized developed technology, partially offset by an increase in device depreciation expense of $50,529. Amortization of a patent related to GPS and satellite tracking are also included in depreciation and amortization. Devices are depreciated over either a three- or five-year useful life. Monitoring software is amortized over a seven-year 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.
Gross Profit and Margin
During the six months ended March 31, 2024, gross profit totaled $8,170,355, resulting in a gross margin of approximately 45%. During the six months ended March 31, 2023, gross profit totaled $7,923,483, resulting in a gross margin of approximately 46%. The increase in absolute gross profit of $246,872 is due to an increase in revenue of $794,456, lower communication costs and lower lost, stolen or damaged costs, partially offset by higher device repair costs and higher monitoring center costs.
General and Administrative Expense
During the six months ended March 31, 2024, general and administrative expense totaled $5,931,753 compared to $5,624,320 for the six months ended March 31, 2023. The increase of $307,433 or approximately 5% in general and administrative cost is primarily due to the estimated accrued expense related to the ongoing contract dispute discussed in Note 23 of approximately $500,000 and an increase in bad debt expense of $115,436, partially offset by lower insurance costs of $121,267, lower outside services of $136,930, and lower stock based compensation of $109,778.
Selling and Marketing Expense
During the six months ended March 31, 2024, selling and marketing expense totaled $1,516,972 compared to $1,498,341 for the six months ended March 31, 2023. The nominal increase resulted largely from higher travel and entertainment, partially offset by lower outside services, and lower insurance costs.
Research and Development Expense
During the six months ended March 31, 2024, research and development expense totaled $1,383,646 compared to $1,296,577 for the six months ended March 31, 2023. The increase of $87,069 or approximately 7% was largely due to increased payroll and related tax expense of $177,246, partially offset by a decrease in outside services of $50,866.
Depreciation and Amortization Expense
During the six months ended March 31, 2024, depreciation and amortization expense totaled $476,284 compared to $495,283 for the six months ended March 31, 2023, a decrease of $18,999 or approximately 4%, largely due to fully amortized intangible assets and fully depreciated equipment and software.
Total Operating Expense
During the six months ended March 31, 2024, total operating expense increased to $9,308,655 compared to $8,914,521 for the six months ended March 31, 2023, an increase of $394,134 or approximately 4%. The increase is principally due to the factors disclosed above.
Operating Income (Loss)
During the six months ended March 31, 2024, operating loss was $1,138,300 compared to $991,038 for the six months ended March 31, 2023. The increase of $147,262 in operating loss was principally due to an increase in operating expense of $394,134, partially offset by an increase in gross profit of $246,872.
Other Income (Expense)
For the six months ended March 31, 2024, other expense totaled $851,221 compared to $265,583 for the six months ended March 31, 2023, an increase of $585,638. The increase in other expense is largely due to a decrease in currency exchange rate gain of $535,930 between the US Dollar vs. the Chilean Peso, compared to the prior period.
Net Income (Loss) Attributable to Common Stockholders
The Company had net loss attributable to common stockholders of $1,902,614 for the six months ended March 31, 2024, compared to $1,448,874 for the six months ended March 31, 2023, an increase of $453,740. This increase is due to a decrease in currency exchange rate gain and an increase in operating loss.
Liquidity and Capital Resources
The company believes that its existing cash and its future cash flow from operations will be sufficient to meet the cash requirements of its existing business for the foreseeable future.
On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility Agreement which extended the maturity date of the Amended Facility Agreement to July 1, 2024 (“Amended Facility”), capitalized the accrued and unpaid interest, increasing the outstanding principal amount and reduced the interest rate of the Amended Facility from 8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the “Amendment”). The Amendment: (i) extended the maturity date from July 1, 2024, to July 1, 2027 (the “Maturity Date”); (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date; and (iii) removed section 7.3 “Change of Control” of the Amended Facility Agreement. In return, the Company agreed to pay total fees of EUR 225,000 in five annual installments to Conrent. As of March 31, 2024, $42,864,000 of principal and $909,733 of interest was owed to Conrent.
On January 6, 2021, the Company borrowed 70,443,375 Chilean Pesos (“CLP”) ($101,186USD) from HP Financial Services Chile Limitada. To facilitate the Loan, the Company entered into a Note Payable Agreement with HP Financial Services Chile Limitada as lender. The loan was used to purchase PABX (private automatic branch exchange phone equipment) for the construction of the Gendarmeria de Chile monitoring centers in Santiago and Puerto Montt, Chile. The loan bears an interest rate of 6.56% per annum, payable monthly with principal beginning February 2021 and a maturity date of February 6, 2024. This note was paid in full upon maturity.
On January 12, 2021, the Company borrowed 347,198,500CLP ($482,965USD), net of 2,801,500CLP fees ($3,897USD), from Banco Santander. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco Santander as lender. The loan was used to comply with the construction of Gendarmeria de Chile monitoring center in Santiago, Chile and remodel a temporary monitoring center. The loan bears an interest rate of 5.04% per annum, payable monthly with principal beginning February 2021 and a maturity of May 11, 2024. The Company also paid 19,607,843CLP ($27,275USD) in broker fees which are amortized over the life of the loan.
On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of 2,000,700CLP fees ($2,734USD), from Banco Estado. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco Estado as lender. The loan was used for the construction of the Gendarmeria de Chile monitoring center in Santiago and computer equipment for Gendarmeria branch offices. The loan bears an interest rate of 3.50% per annum, initially having a 6-month grace period with the first payment including the 6 months of interest plus 1 month of principal on August 2, 2021, then monthly interest with principal and a maturity date of January 2, 2024. The Company also paid 14,124,294CLP ($19,304USD) in broker fees which are amortized over the life of the loan. This note was paid in full upon maturity.
On February 4, 2021, the Company borrowed 149,794,432CLP ($205,330USD) from HP Financial Services Chile Limitada. To facilitate the Loan, the Company entered into a Note Payable Agreement with HP Financial Services Chile Limitada as lender. The loan was used to purchase computer equipment for the Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears interest at a rate of 6.61% per annum, payable monthly with principal beginning March 2021 and a maturity of March 4, 2024. This note was paid in full upon maturity.
On February 5, 2021, the Company borrowed 99,808,328CLP ($136,564USD), net of 210,485CLP fees ($286USD), from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan was used to purchase HVAC equipment for Gendarmeria de Chile monitoring center in Santiago, Chile. The loan bears an interest rate of 2.54% per annum, payable monthly with principal beginning March 2021 and a maturity date of March 4, 2024. This note was paid in full upon maturity.
On February 15, 2021, the Company borrowed 500,000,000CLP ($678,214USD) from Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable Agreement with Banco de Chile as lender. The loan was used as working capital and to complete the construction of the Gendarmeria monitoring center in Puerto Montt, Chile. The loan bears interest at a rate of 3.12% per annum, payable monthly with principal beginning March 2021 and a maturity of February 17, 2025. The Company also paid 28,248,588CLP ($38,317USD) in broker fees which are amortized over the life of the loan.
No borrowings or sales of equity securities occurred during the six months ended March 31, 2024 or during the years ended September 30, 2023 or 2022.
Net Cash Flows Provided by Operating Activities.
During the six months ended March 31, 2024, we had cash flows from operating activities of $2,044,821, compared to cash flows from operating activities of $2,133,053 for the six months ended March 31, 2023, representing a $88,232 decrease, or approximately 4%. The decrease in cash from operations was largely the result of increases in our net loss and accounts receivable and decreases in prepaid expense, deposits and other assets, partially offset by an increase in accrued liabilities.
Net Cash Flows Used in Investing Activities.
The Company used $1,910,516 of cash from investing activities during the six months ended March 31, 2024, compared to $3,548,322 of cash used for investing activities during the six months ended March 31, 2023. Cash used for investing activities was primarily related to capitalized software and purchases of monitoring and other equipment to meet customer demand during the six months ended March 31, 2024 and 2023.
Net Cash Flows Used in Financing Activities.
The Company used $250,821 of cash from financing activities during the six months ended March 31, 2024, compared to $276,666 during the six months ended March 31, 2023. Cash used for financing activities was for principal payments on long-term debt and payment of deferred financing fees.
Liquidity, Working Capital and Management’s Plan
As of March 31, 2024, the Company had unrestricted cash of $3,645,651, compared to unrestricted cash of $4,057,195 as of September 30, 2023. As of March 31, 2024, we had working capital of $4,587,024, compared to working capital of $4,813,777 as of September 30, 2023. This decrease in working capital of $226,753 is principally due to an increase in accounts payable and accrued liabilities, partially offset by an increase in other current assets and accounts receivable.
On December 21, 2020, Conrent and the Company signed an amendment to the Amended Facility, which extended the maturity date of the Amended Facility to July 1, 2024, capitalized the accrued and unpaid interest, increasing the outstanding principal amount, and reduced the interest rate of the Amended Facility from 8% to 4%. On April 26, 2023, the Company and Conrent entered into another amendment to the Amended Facility (the “Amendment”). The Amendment: (i) extended the maturity date from July 1, 2024 to the Maturity Date; (ii) amended the applicable interest rate resulting in an escalating interest rate as follows: 4% through June 30, 2024, 5% through June 30, 2025, 5.5% through June 30, 2026, and 6% through the Maturity Date; and (iii) removed section 7.3 “Change of Control” of the Amended Facility Agreement. In return, the Company agreed to pay certain fees to Conrent. As of March 31, 2024, $42,864,000 of principal and $909,733 of interest was owed to Conrent.
During the fiscal year ended September 30, 2021, the Company borrowed approximately $1.95 million through six notes payable to fund the construction of monitoring centers in Chile required by our new contract. Four of the six notes have matured and the remaining two mature between May 2024 to February 2025 and the principal repayments on the remaining two notes have commenced. No additional funds were borrowed during the six months ended March 31, 2024 or during the years ended September 30, 2023 or 2022.
Off-Balance Sheet Financial Arrangements
The Company has not entered any transactions with unconsolidated entities whereby the Company has financial guarantees, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation that provides financing, liquidity, market risk, or credit risk support to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company footprint extends to several countries outside the United States, and we intend to continue to examine international opportunities. As a result, our revenue and results of operations are affected by fluctuations in currency exchange rates, interest rates, transfer pricing changes, taxes and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
Foreign Currency Risks
We had $2,864,698 and $3,085,549 in foreign currency revenue from sources outside of the United States for the six months ended March 31, 2024 and 2023, respectively. Our foreign currency revenue is made up of sales in Chile. We made and received payments in a foreign currency during the periods indicated, which resulted in a foreign exchange gain of $19,013 and $554,943 in the six months ended March 31, 2024 and 2023, respectively. Fluctuations in the exchange loss or gain in any given period are due to the strengthening or weakening of the U.S. dollar against the Chilean Peso and Canadian dollar which have been magnified by global matters, inflation, and the government policies established to address those issues. 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 periodically enter into small, simple forward foreign currency exchange contracts or derivative financial instruments to mitigate the risk of repatriating funds converted from foreign currency into U.S. dollars. To the extent foreign sales become a more significant part of our business in the future, we may seek to implement additional strategies which make use of these or other instruments to minimize the effects of foreign currency exchange on our business and/or require some international customers to receive invoices and make payments in US dollars. The Company had no active foreign currency exchange contracts as of March 31, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024, was completed pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of March 31, 2024.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There was no change in our internal control over financial reporting during the quarter ended March 31, 2024, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company is, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of nearly 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. (a predecessor entity to Track Group, Inc. or the Company) 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. Although preliminary rulings have been unfavorable to the Company, the Company’s counsel continues to review its remaining claims which are upwards of $4.0 million. Based upon the fee arrangement the Company has with its counsel, we anticipate the future liabilities attributable to legal expense will be minimal.
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 recover allegedly 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 produced documentation supporting its position in an informal document exchange with the Commonwealth on July 6, 2020. At this time, the case remains stayed by Court order. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Jeffrey Mohamed Abed v. Track Group, Inc., et al. On June 7, 2021, Jeffrey Mohamed Abed filed a complaint seeking unspecified damages in the Superior Court of the State of California, alleging strict products liability, negligence and breach of implied warranty premised upon injuries sustained by Abed who was involved in an automobile accident while wearing a GPS tracking device of the Company. The Company disputes Abed’s claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel. The Company is scheduled to present a motion for summary judgment in May 2024.
Track Group Chile SpA. v. Republic of Chile. On January 24, 2022, Track Group Chile SpA., a wholly-owned subsidiary of the Company (“Track Chile”) initiated a judicial action in the Court of Justice of Chile to settle a contract dispute with the Republic of Chile related to its contract with the Chilean National Prisoner Service, the Company’s customer in the Republic of Chile (the “Customer”). The judicial action followed the issuance by the Customer on December 19, 2021 of the first of two letters fining Track Chile approximately USD $1.5 million for delays in completing two offender monitoring centers caused principally by the COVID-19 global pandemic. Track Chile also was granted an injunction preventing the Chilean government from drawing down on the performance bond (the “Performance Bond”) posted by Track Chile on July 2, 2020 with an expiration date of July 2, 2024 (the “Expiration Date”). On January 17, 2024, a Chilean appellate court overturned the injunction. The Company is confident that resolution of these issues can be reached prior to the Expiration Date by way of a settlement in the range of 30-70% of the fines sought, and the Company has recorded an estimated liability of approximately $500,000, which is recorded in accrued liabilities on the Condensed Consolidated Balance Sheet and in operating expense on the Condensed Consolidated Statements of Operations. Notwithstanding the judicial action, Track Chile executed new agreements with the Customer in February 2024.
Michael Matthews v. Track Group, Inc., et al. On December 13, 2022, Plaintiff Michael Matthews filed a complaint in the Circuit Court of Cook County, Illinois, amended on July 23, 2023, against the Company and other defendants alleging wrongful arrest and incarceration and a deprivation of his rights following his purportedly erroneous violation of home monitoring program requirements. The Company disputes the allegations of the complaint, has retained counsel, and intends to vigorously defend the case. On January 10, 2024, the court dismissed the Plaintiff’s second amended complaint with leave to replead by January 30, 2024. Plaintiff filed a third amended complaint on January 30, 2024 however, subsequently filed a motion to voluntarily dismiss the case on January 31, 2024, which was granted on February 5, 2024.
Kevin Barnes v. Track Group, Inc., et. al. On December 28, 2023, the Company was served with a second amended complaint filed in the Circuit Court of Cook County, Illinois naming the Company and alleging strict liability and negligence against the Company and other defendants related to alleged injuries sustained by Barnes from an electronic monitoring device. The Company disputes Barnes’ claims and will defend the case vigorously. The Company remains confident in its position and no accrual for a potential loss has been made, after consultation with legal counsel.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended September 30, 2023, filed on December 20, 2023. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report and other reports we file with the SEC. Should any of these risks materialize or deteriorate further, our business, financial condition and future prospects could be negatively impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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(a) Exhibits Required by Item 601 of Regulation S-K
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Exhibit Number |
Title of Document |
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10.1 |
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10.2 |
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10.3 |
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31(i) |
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31(ii) |
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32 |
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101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Track Group, Inc. |
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Date: May 13, 2024 |
By: |
/s/ Derek Cassell |
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Derek Cassell, Chief Executive Officer (Principal Executive Officer) |
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| Date: May 13, 2024 |
By: |
/s/ James A. Berg |
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James A. Berg, Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT 31(i)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Derek Cassell, Chief Executive Officer and Principal Executive Officer, of Track Group, Inc. (the “Company”), certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Track Group, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent three months (the registrant's fourth three months in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: May 13, 2024 |
By: |
/s/ Derek Cassell |
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Derek Cassell |
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Chief Executive Officer and Principal Executive Officer |
EXHIBIT 31(ii)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James A. Berg, Chief Financial Officer, Principal Financial and Accounting Officer, of Track Group, Inc. (the “Company”), certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Track Group, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: May 13, 2024 |
By: |
/s/ James A. Berg |
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James A. Berg |
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Chief Financial Officer, Principal Financial and Accounting Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Track Group, Inc. on Form 10-Q for the period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Derek Cassell, Chief Executive Officer (Principal Executive Officer), and James A. Berg, Chief Financial Officer (Principal Financial and Accounting Officer), of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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By: |
/s/ Derek Cassell |
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Derek Cassell |
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Chief Executive Officer (Principal Executive Officer) |
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By: |
/s/ James A. Berg |
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James A. Berg, Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: May 13, 2024
This certification accompanies each Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.