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 considered to be "forward-looking statements". These
statements represent our expectations, hopes, beliefs, anticipations,
commitments, intentions, and strategies regarding the future. They may be
identified by the use of words or phrases such as "believes", "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, 2021, and Current Reports on Form 8-K that have been filed
with the SEC through the date of this Report. Except as otherwise indicated, as
used in this Report, the terms the "Company", "Track Group", "we", "our", and
"us" refer to Track Group, Inc., a Delaware corporation.
General
Our business is based on the leasing of patented tracking and monitoring
solutions to federal, state and local law enforcement agencies, both in the U.S.
and abroad, for the electronic monitoring of offenders and offering unique data
analytics services on a platform-as-a-service ("PaaS") business
model. Currently, the Company deploys offender-based management services that
combine patented GPS tracking technologies, full-time 24/7/365 global monitoring
capabilities, case management, and proprietary data analytics. The Company
offers customizable tracking solutions that leverage real-time tracking data,
best-practices monitoring, and analytics capabilities to create complete,
end-to-end tracking solutions.
Our devices consist principally of the ReliAlert® product line, which is
supplemented by the Shadow 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®XC 4 - ReliAlert®XC4 is our flagship GPS device, which is the safest
and most reliable monitoring device ever made. It is the only one-piece GPS
device with patented 3-way voice communication to assist intervention efforts,
now on the LTE network with increased battery life. This device includes
on-board processing, secondary location technology, a 95db siren, embedded RF
technology, anti-tampering capability, increased battery life and sleep mode.
ReliAlert®-XC 3 - 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.
Shadow - Driven by customer demand to improve the performance and affordability
of offender tracking devices, Shadow is the smallest and lightest device of its
kind with a sleek, modern design featuring an enhanced mobile charging
capability that makes it easier to use. The device is 3G compliant and fully
supported by all global mobility providers.
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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, bi-lingual individuals. These operators
act as an extension of agency resources receiving alarms, communicating and
intervening with offenders regarding violations, and interacting with
supervision staff, all pursuant to agency-established protocols. The facilities
have redundant power source, battery backup and triple redundancy in voice,
data, and IP. We have assisted in the establishment of monitoring centers for
customers and local partners in the United States, Chile and other global
locations.
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 location and behavioral data
that helps agencies reduce risks and improve decision making. Our analytics
applications use various combinations of statistical analysis procedures, data
and text mining, and predictive modeling to proactively analyze information on
community-released offenders to discover hidden relationships and patterns in
their behaviors and to predict future outcomes.
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 our results of operations
and financial position.
A description of the Company's critical accounting policies that affect the
preparation of the Company's financial statements is set forth in the Company's
Annual Report on Form 10-K for the year ended September 30, 2021, filed with the
SEC on December 16, 2021. During the six months ended March 31, 2022, there have
been no material changes to the Company's critical accounting policies.
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.
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Government Regulation
Our operations are subject to various federal, state, local and international
laws and regulations. We are not involved in any pending or, to our knowledge,
threatened governmental proceedings, which would require curtailment of our
operations because of such laws and regulations.
The COVID-19 pandemic has adversely impacted both the Company's revenue and
costs by disrupting its operations in Chile, causing shortages within the supply
chain and postponing certain sales opportunities as some government agencies
delay new RFP (Request for Proposal) processes or decisions. (See Item 1A - Risk
Factors). Notwithstanding the challenges, the monitoring being performed by the
Company's significant customers across the globe have remained operational as
have key business partners providing manufacturing and call center services and
at this time, the Company has not experienced unusual payment interruptions from
any large customers. As the conditions have improved with respect to COVID-19,
both our Chile office and the corporate headquarters in the greater-Chicago area
have recently reopened. However, the Company is operating in a rapidly changing
environment so the extent to which COVID-19 impacts its business, operations and
financial results from this point forward will depend on numerous evolving
factors that the Company cannot accurately predict. Those factors include the
following: the duration and scope of the pandemic; governmental, business and
individuals' actions that have been and continue to be taken in response to the
pandemic; the development of widespread testing or a vaccine; the ability of our
supply chain to meet the Company's need for equipment; the ability to sell and
provide services and solutions if shelter in place restrictions and people
working from home are extended to ensure employee safety; the volatility of
foreign currency exchange rates and the subsequent effect on international
transactions; and any closures of clients' offices or the courts on which they
rely.
Results of Operations
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenue
For the three months ended March 31, 2022, the Company recognized total revenue
from operations of $9,484,119 compared to $9,861,830 for the three months ended
March 31, 2021, a decrease of $377,711 or approximately 4%. The $377,711
decrease in total revenue was largely the result of a decrease in domestic
monitoring revenue and other related services, partially offset by an increase
in product sales. The decrease in monitoring and other related services revenue
was principally the result of a decrease of our North American monitoring
operations driven by clients in Illinois, Bahamas, Virginia, and Indiana,
partially offset by increases in revenue in Canada, Puerto Rico and Chile.
Product sales and other revenue for the three months ended March 31, 2022
increased to $641,633 from $119,540 in the same period in 2021, an increase of
$522,093 or approximately 437%. The Company had product sales to a foreign
customer of $520,303 in the three months ended March 31, 2022 compared to $0 in
the same period in fiscal year 2021.
The industry in which the Company operates, as well as many other industries
(automotive, consumer products and medical devices), have been impacted by the
global semiconductor shortage initially caused by the slowdown of many chip
makers and logistics companies due to COVID-19. The shortage, which could last
through at least the remainder of 2022, has been exacerbated by the surge in
demand for a wide variety of products across several industries, all of which
require varying amounts of semiconductors. As a result, until such time as chip
manufacturers are able to meet global demand, our future operating results may
be negatively impacted.
Cost of Revenue
During the three months ended March 31, 2022, cost of revenue totaled $4,945,134
compared to cost of revenue during the three months ended March 31, 2021 of
$4,426,846, an increase of $518,288 or approximately 12%. The increase in cost
of revenue was largely the result of higher depreciation and amortization costs
of $267,893, higher server costs of $125,206, higher product sale costs of
$109,934, higher hardware costs of $95,603 and higher communication costs of
$69,440. These increases were partially offset by lower monitoring center costs
of $117,016 and lower commission costs of $53,722.
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Depreciation and amortization included in cost of revenue for the three months
ended March 31, 2022 and 2021 totaled $792,915 and $525,022, respectively, an
increase of $267,893. These costs represent the depreciation of ReliAlert® and
other monitoring devices, as well as the amortization of monitoring software and
certain royalty agreements. The increase in depreciation and amortization costs
is largely due to the amortization of our new software monitoring platform and
other new software initiatives of $316,062, which began on July 1, 2021,
partially offset by a decrease in depreciation expense related to fully
depreciated devices. We believe the equipment lives on which the depreciation is
based are appropriate due to rapid changes in electronic monitoring technology
and the corresponding potential for obsolescence. Management periodically
assesses the useful life of the devices for appropriateness. Amortization of a
patent related to GPS and satellite tracking is also included in cost of sales.
Gross Profit and Margin
During the three months ended March 31, 2022, gross profit totaled $4,538,985,
resulting in a gross margin of approximately 48%. During the three months ended
March 31, 2021, gross profit totaled $5,434,984, resulting in a gross margin of
approximately 55%. The decrease in absolute gross profit of $895,999 or
approximately 16% is due to lower revenue and increases in certain costs of
revenue, including depreciation and amortization, server costs, product sale
costs, hardware costs and communication costs, partially offset by lower
monitoring costs and commission costs.
General and Administrative Expense
During the three months ended March 31, 2022, general and administrative expense
totaled $2,770,657 compared to $2,313,836 for the three months ended March 31,
2021. The increase of $456,821 or approximately 20% in general and
administrative expense resulted largely from higher legal and professional fees
of $245,451, higher bad debt expense of $78,050, higher fees and license costs
of $64,425, higher consulting costs of $52,698 and higher insurance costs of
$29,173. These costs were offset by lower payroll and related taxes of $53,710
and lower training and recruiting of $32,160.
Selling and Marketing Expense
During the three months ended March 31, 2022, selling and marketing expense
totaled $720,709 compared to $614,409 for the three months ended March 31, 2021.
The increase in expense of $106,300 or approximately 17% is principally the
result of higher consulting and outside service expenses of $37,342. higher
payroll and taxes of $36,149 and higher travel and entertainment cots of
$11,808.
Research and Development Expense
During the three months ended March 31, 2022, research and development expense
totaled $625,477 compared to $334,569 for the three months ended March 31, 2021.
The increase in expense of $290,908 or approximately 87% resulted largely from
continuous improvements of our existing software, resulting in increased payroll
and related tax expense of $274,512 after the implementation and subsequent
amortization of our new monitoring software. As a result of the implementation
of our new monitoring software on July 1, 2021, capitalization of developed
technology decreased to $221,918 during the three months ended March 31, 2022,
which represents technology projects currently in development compared to the
$500,279 which was capitalized in the three months ended March 31, 2021. A
portion of this expense would have been recognized as research and development
expense, absent the significant enhancements to the technology.
Depreciation and Amortization Expense
During the three months ended March 31, 2022, depreciation and amortization
expense totaled $414,771 compared to $510,067 for the three months ended March
31, 2021, a decrease of $95,296 or approximately 19%, largely due to fully
depreciated assets.
Total Operating Expense
During the three months ended March 31, 2022, total operating expense increased
to $4,531,614 compared to $3,772,881 for the three months ended March 31, 2021,
an increase of $758,733 or approximately 20%. The increase is principally due to
the factors disclosed above.
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Operating Income
During the three months ended March 31, 2022, operating income was $7,371
compared to $1,662,103 for the three months ended March 31, 2021, a reduction of
$1,654,732 or over 99%. This reduction was due to a decrease in gross profit of
$895,999, which resulted from lower revenue and higher cost of revenue directly
related to the amortization of our new monitoring software platform, higher
server costs, higher product sale costs, higher hardware costs and higher
communication costs. These increases were partially offset by lower monitoring
center costs and lower commission. In addition, the Company incurred higher
general and administrative, selling and marketing, and research and development
costs. These increases were partially offset by lower depreciation and
amortization expenses in operating expense.
Other Income (Expense)
For the three months ended March 31, 2022, other income (expense) totaled income
of $571,664 compared to income of $559,450 for the three months ended March 31,
2021, an increase in net other income of $12,214. The increase in other income
for the three months ended March 31, 2022 is largely due to a vendor forgiving
$633,471 of accrued expenses, positive currency exchange rate movements of
$272,153 compared to the second fiscal quarter of fiscal 2021, and lower
interest expense, net of $107,346 compared to the second fiscal quarter of 2021.
These improvements were offset by a gain on the forgiveness of loans in the
three months ended March 31, 2021, of $1,000,756. See Note 19.
Net Income Attributable to Common Stockholders
The Company had net income attributable to common stockholders of $452,241 for
the three months ended March 31, 2022, compared to $2,184,231 for the three
months ended March 31, 2021, a reduction of $1,731,990. This decline is largely
due to lower operating income and higher income taxes.
Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021
Revenue
For the six months ended March 31, 2022, the Company recognized revenue from
operations of $19,079,775, compared to $19,263,735 for the six months ended
March 31, 2021, a decrease of $183,960 or approximately 1%. Of this revenue,
$18,312,215 and $19,014,019, respectively, are from monitoring and other related
services, a decrease of $701,804 or approximately 4%. The decrease in revenue
was principally the result of a decrease of our North American monitoring
operations driven by clients in Virginia, Bahamas, Indiana, Illinois and
Washington DC, partially offset by increases of our customers in Canada, Chile,
Puerto Rico and Georgia.
Other revenue for the six months ended March 31, 2022 increased to $767,560 from
$249,716 in the same period in 2021 largely due to product sales to a foreign
customer.
The industry in which the Company operates, as well as many other industries
(automotive, consumer products and medical devices), have been impacted by the
global semiconductor shortage initially caused by the slowdown of many chip
makers and logistics companies due to COVID-19. The shortage, which could last
through at least the remainder of 2022, has been exacerbated by the surge in
demand for a wide variety of products across several industries, all of which
require varying amounts of semiconductors. As a result, until such time as chip
manufacturers are able to meet global demand, our future operating results may
be negatively impacted. See Item 1A. Risk Factors.
Cost of Revenue
During the six months ended March 31, 2022, cost of revenue totaled $9,740,561
compared to cost of revenue during the six months ended March 31, 2021 of
$8,615,947, an increase of $1,124,614 or approximately 13%. The increase in cost
of revenue was largely the result of higher depreciation and amortization costs
of $643,067, higher server costs of $239,187, higher software maintenance costs
of $116,680, higher product sales costs of $105,734, higher hardware purchases
of $59,346 and higher communication costs of $59,298, partially offset by lower
repair costs of $75,402, and lower lost, stolen and damaged costs of $34,145.
The higher depreciation and amortization costs are largely due to the
amortization of our new monitoring software which began in July 2021.
Depreciation and amortization included in cost of revenue for the six months
ended March 31, 2022 and 2021 totaled $1,656,764 and $1,013,697, respectively.
The increase in depreciation and amortization costs of $643,067 is largely due
to the amortization of our new software monitoring platform and other new
software initiatives of $633,706, which began on July 1, 2021 and a minimal
increase in depreciation expense related to devices. Devices are depreciated
over a one to five-year useful life. Royalty agreements are being amortized over
a ten-year useful life. The Company believes these equipment and software lives
are appropriate due to changes in electronic monitoring technology and the
corresponding potential for obsolescence. Management periodically assesses the
useful life of the devices for appropriateness. Amortization of a patent related
to GPS and satellite tracking is also included in cost of sales.
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Gross Profit and Margin
During the six months ended March 31, 2022, gross profit totaled $9,339,214,
resulting in a gross margin of approximately 49%, compared to $10,647,788, or a
gross margin of approximately 55% during the six months ended March 31,
2021. The decrease in absolute gross profit of $1,308,574, or approximately 12%,
is due to a decrease in revenue of $183,960 and increases in certain costs of
revenue, including higher depreciation and amortization costs of $643,067,
higher server costs, higher software maintenance costs, higher product sales
costs, higher hardware purchases and higher communication costs, partially
offset by lower repair costs and lower lost, stolen and damaged costs.
General and Administrative Expense
During the six months ended March 31, 2022, general and administrative expense
totaled $5,269,016 compared to $4,714,571 for the six months ended March 31,
2021. The increase of $554,445 or approximately 12% in general and
administrative costs resulted largely from higher legal and professional fees of
$277,193, higher consulting costs of $62,667, higher insurance costs of $63,392,
higher fees and licenses of $59,068, higher travel and entertainment costs of
$32,986 and higher training and recruiting costs of $28,561. These costs were
partially offset by lower payroll and taxes of $27,612.
Selling and Marketing Expense
During the six months ended March 31, 2022, selling and marketing expense
totaled $1,418,581 compared to $1,164,866 for the six months ended March 31,
2021. This increase of $253,715, or approximately 22%, resulted largely from
higher payroll and related taxes of $107,230, higher consulting and outside
service costs of $72,900, higher travel and entertainment costs of $30,859 and
trade show costs of $17,521.
Research and Development Expense
During the six months ended March 31, 2022, research and development expense
totaled $1,216,329 compared to research and development expense for the six
months ended March 31, 2021 totaling $641,863, an increase of $574,466, or
approximately 89% resulted largely from continuous improvements of our existing
software, resulting in increased payroll and related tax expense of $540,225
after our implementation and subsequent commencement of amortization of our new
monitoring software and higher travel and entertainment of $18,922. As a result
of the implementation of our new monitoring software on July 1, 2021,
capitalization of developed technology decreased to $310,525 during the six
months ended March 31, 2022, which represents technology projects currently in
development compared to the $897,681 which was capitalized in the six months
ended March 31, 2021. A portion of this expense would have been recognized as
research and development expense, absent the significant enhancements to the
technology.
Depreciation and Amortization Expense
During the six months ended March 31, 2022, depreciation and amortization
expense totaled $831,572, compared to $1,041,830 for the six months ended March
31, 2021. This decrease of $210,258, or approximately 20%, was largely due to
fully depreciated assets.
Total Operating Expense
During the six months ended March 31, 2022, total operating expense increased to
$8,735,498 compared to $7,563,130 for the six months ended March 31, 2021, an
increase of $1,172,368, or approximately 16%. The increase was largely due to
higher general and administrative expense of $554,445, higher selling and
marketing expense of $253,715 and higher research and development costs of
$574,466 as disclosed above. These costs were partially offset by lower
depreciation and amortization of $210,258.
Operating Income
During the six months ended March 31, 2022, operating income was $603,716
compared to $3,084,658 for the six months ended March 31, 2021, a reduction of
$2,480,942, or approximately 80%. This decline was due to a reduction in gross
profit of $1,308,574, and an increase in operating expense of $1,172,368.
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Other Income and Expense
For the six months ended March 31, 2022, other income totaled other expense of
($16,174) compared to other income of $738,080 for the six months ended March
31, 2021. The increase in other expense of $754,254 in net other expense was a
result of negative currency exchange rate movements of $652,751 and a decrease
in other income, net of $367,311, partially offset by a reduction in interest
expense of $265,808. Other income, net largely represents $633,471 of accrued
expenses recently forgiven by a vendor and a gain on forgiveness of loans of
$1,000,756 in the six months ended March 31, 2021.
Net income Attributable to Common Shareholders
The Company had net income from continuing operations for the six months ended
March 31, 2022 totaling $146,919 compared to a net income of $3,507,725 for the
six months ended March 31, 2021, representing a decline of $3,360,806 or
approximately 96%.
Liquidity and Capital Resources
The Company is currently self-funded through net cash provided by operating
activities.
On May 19, 2020, the Company received net proceeds of $933,200 from a
potentially forgivable loan from the United States Small Business Administration
pursuant to the Paycheck Protection Program enacted by Congress under the
Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the
"CARES Act") administered by the SBA (the "PPP Loan"). On December 8, 2020, the
Company filed the application for forgiveness with BMO Harris Bank National
Association (the "Lender") and on January 8, 2021, the Company received a
notification from the Lender that the SBA remitted funds to fully repay the PPP
Loan, and that the funds were utilized to pay-off and close the PPP Loan and
that the PPP Loan was fully forgiven.
On October 21, 2020, the Company requested, in writing, an additional extension
to the maturity date of that certain facility agreement between the Company and
Conrent Invest, S.A. (Conrent"), dated December 30, 2013, as amended on February
24, 2019, and further amended on January 7, 2020 (the "Amended Facility
Agreement"), which previously provided for a $30.4 million unsecured debt
facility. On November 25, 2020, the investors who owned the securities from
Conrent used to finance the facility (the "Noteholders") held a meeting to
address the Company's request and approved a new maturity date of July 1, 2024.
On December 21, 2020, Conrent and the Company signed an amendment to the Amended
Facility Agreement (the "Amended Facility") which extends the maturity date of
the agreement to July 1, 2024, capitalizes the accrued and unpaid interest
increasing the outstanding principal amount and reduces the interest rate of the
Amended Facility from 8% to 4%. On March 1, 2021, Conrent completed their
documentation and the updated registration process to implement these changes
and the Company transferred $12,531,556 of accrued interest to the Amended
Facility for total principal of $42,931,556. Conrent forgave $67,556 of the
aggregate amount due under the Amended Facility and the principal and interest
due under the Amended Facility became $42,864,000. Interest payments are
scheduled to be made on June 30 and December 31 each year, which began on June
30, 2021. We began amortizing deferred financing fees of approximately $360,000
on July 1, 2021. As of March 31, 2022, $42,864,000 of principal and $0.4 million
of interest was owed to Conrent. The Company paid Conrent the $876,331 interest
due on January 5, 2022.
On January 6, 2021, the Company borrowed 70,443,375 Chilean Pesos ("CLP")
($101,186USD) from HP Financial 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
interest at a rate of 6.56% per annum, payable monthly with principal beginning
February 2021, and a maturity date of February 6, 2024.
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 for the construction of the Gendarmeria de Chile monitoring
center in Santiago, Chile and remodeling a temporary monitoring center. The loan
bears interest at a rate of 5.04% per annum, payable monthly with principal
beginning February 2021, and a maturity of May 11, 2024. The Company also paid
19,607,843CLP ($27,275USD) in broker fees which are amortized over the life of
the loan.
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On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of
2,000,700CLP fees ($2,734USD), from Banco Estado. To facilitate the Loan, the
Company entered into a Note Payable Agreement with Banco Estado as lender. The
loan provided was used for the construction of the Gendarmeria de Chile
monitoring center in Santiago, Chile and computer equipment for Gendarmeria
branch offices. The loan bears interest at a rate of 3.50% per annum, initially
having a 6-month grace period with the first payment including the 6 months of
interest plus 1 month of principal on August 2, 2021, then monthly interest with
principal, and a maturity date of January 2, 2024. The Company also paid
14,124,294CLP ($19,304USD) in broker fees which are amortized over the life of
the loan.
On February 4, 2021, the Company borrowed 149,794,432CLP ($205,330USD) from HP
Financial Services Chile Limitada. To facilitate the 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.
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 provided was used to purchase HVAC equipment for Gendarmeria de Chile
monitoring center in Santiago, Chile. The loan bears interest at a rate of 2.54%
per annum, payable monthly with principal beginning March 2021, and a maturity
date of March 4, 2024.
On February 15, 2021, the Company borrowed 500,000,000CLP ($678,214USD) from
Banco de Chile. To facilitate the Loan, the Company entered into a Note Payable
Agreement with Banco de Chile as lender. The loan proceeds were used as working
capital and to complete the construction of the Gendarmeria monitoring center in
Puerto Montt, Chile. The loan bears interest at a rate of 3.12% per annum,
payable monthly with principal beginning March 2021, and a maturity of February
17, 2025. The Company also paid 28,248,588CLP ($38,317USD) in broker fees which
are amortized over the life of the loan.
Management will continue to seek other sources of capital, refinancing options,
prepayment of debt at a discount and potentially other transactions including
the exchange of some debt for an equity related security to reduce its total
debt and assist in meeting all of its future obligations. While management
believes it will be successful in completing one or more of these alternatives
prior to the maturity of the Amended Facility Agreement in July 2024, no
assurances can be given.
Other than the above-mentioned items, no borrowings or sales of equity
securities occurred during the six months ended March 31, 2022 or during the
year ended September 30, 2021.
Net Cash Flows provided by Operating Activities.
During the six months ended March 31, 2022, we had cash flows from operating
activities of $1,263,350, compared to cash flows from operating activities of
$849,085 for the six months ended March 31, 2021, representing a $414,265
increase, or approximately 49%. The increase in cash from operations of $414,265
was largely the result of lower use of cash related to performance bonds and
monitoring center assets, a decline in accounts receivable, partially offset by
a decrease in accounts payable and accrued liabilities and lower operating
income.
Net Cash Flows (used in) Investing Activities.
The Company used ($2,359,136) of cash from investing activities during the six
months ended March 31, 2022, compared to ($2,653,457) of cash used for investing
activities during the six months ended March 31, 2021. Cash used for investing
activities was used for purchases of monitoring and other equipment to meet
customer demand and enhancements of certain software during the six months ended
March 31, 2022. For the six months ended March 31, 2022, capitalized software
decreased by $587,156 compared to the six months ended March 31, 2021 as the
Company completed its new software platform in the third fiscal quarter of 2021,
which was partially offset by increased purchases of monitoring equipment and
parts of $334,172 compared to the six months ended March 31, 2021.
Net Cash Flows provided by (used in) Financing Activities.
The Company used ($249,142) of cash from financing activities during the six
months ended March 31, 2022, which was largely the result of loan principal
payments of ($256,636). The Company was provided $1,623,667 of cash for
financing activities during the six months ended March 31, 2021, which included
$1,943,213 of proceeds from notes payable, partially offset by the payment of
financing fee costs of ($271,084).
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Liquidity, Working Capital and Management's Plan
As of March 31, 2022, the Company had unrestricted cash of $7,118,168, compared
to unrestricted cash of $8,421,162 as of September 30, 2021. As of March 31,
2022, we had working capital of $9,667,322, compared to working capital of
$9,190,430 as of September 30, 2021. This increase in working capital of
$476,892 is principally due to cash provided by operating activities, partially
offset by the purchase of monitoring equipment and parts.
On October 21, 2020, the Company requested, in writing, an additional extension
to the maturity date of the Amended Facility Agreement. On November 25, 2020,
the Noteholders held a meeting to address the Company's request and approved a
new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company
signed the Amended Facility which extends the maturity date of the agreement to
July 1, 2024, capitalizes the accrued and unpaid interest increasing the
outstanding principal amount and reduces the interest rate of the Amended
Facility from 8% to 4%. On June 28, 2021, the Company restarted interest
payments to Conrent which will be made semi-annually going forward. See Note 19
to the Consolidated Financial Statements.
During the fiscal year ended September 30, 2021, the Company borrowed
approximately $2.0 million through six notes payable to fund the construction of
monitoring centers in Chile required by our new contract. These six notes mature
between January 2024 to February 2025, and the principal repayments on these six
notes have all commenced. See Note 19 to the Consolidated Financial Statements.
The Company believes it will be able to continue to fund future operations using
cash on hand, utilizing operational cash flows and through other financings or
refinancing.
Inflation
We do not believe that inflation has had a material impact on our operations or
profitability over the four-year period ending in 2020; however, the rise in
inflation in 2021 and 2022 has adversely impacted both the Company's cost of
labor and materials, and virtually all other operating expenses.
Off-Balance Sheet Financial Arrangements
The Company has not entered into any transactions with unconsolidated entities
whereby the Company has financial guarantees, derivative instruments, or other
contingent arrangements that expose the Company to material continuing risks,
contingent liabilities, or any other obligation that provides financing,
liquidity, market risk, or credit risk support to the Company.
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