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 (the "Annual Report"),
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, 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. 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 a small and light device featuring a
mobile charging capability. The device is 3G compliant and fully supported by
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 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 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. During the nine months ended June 30, 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.
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. 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, and the extent to which COVID-19 impacts its business, operations
and financial results going forward will depend on numerous evolving factors
that the Company cannot accurately predict. Those factors include: 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.
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Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenue
For the three months ended June 30, 2022, the Company recognized total revenue
from operations of $8,974,082 compared to $10,307,820 for the three months ended
June 30, 2021, a decrease of $1,333,738 or approximately 13%. The $1,333,738
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, Virginia, and the Bahamas, partially
offset by increases in revenue in Canada and Chile.
Product sales and other revenue for the three months ended June 30, 2022 was
$137,460 as compared to $124,687 in the same period in 2021, an increase of
$12,773 or approximately 10%.
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 June 30, 2022, cost of revenue totaled $5,009,869
compared to cost of revenue during the three months ended June 30, 2021 of
$4,671,969, an increase of $337,900 or approximately 7%. The increase in cost of
revenue was largely the result of higher depreciation and amortization costs of
$287,849, higher device repair costs of $290,794 and higher communication costs
of $70,646. These increases were partially offset by lower monitoring center
costs of $275,008 and lower device lost stolen and damaged costs of $55,513.
Depreciation and amortization included in cost of revenue for the three months
ended June 30, 2022 was $809,235 compared to depreciation and amortization of
$521,386 during the three months ended June 30, 2021, an increase of $287,849.
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, 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 June 30, 2022, gross profit totaled $3,964,213,
resulting in a gross margin of approximately 44%. During the three months ended
June 30, 2021, gross profit totaled $5,635,851, resulting in a gross margin of
approximately 55%. The decrease in absolute gross profit of $1,671,638, or
approximately 30%, is due to lower revenue and increases in certain costs of
revenue, including depreciation and amortization, device repair costs
and communication costs, partially offset by lower monitoring costs and lost,
stolen and damaged costs.
General and Administrative Expense
During the three months ended June 30, 2022, general and administrative expense
totaled $2,734,162 compared to $2,868,839 for the three months ended June 30,
2021. The decrease of $134,677, or approximately 5%, in general and
administrative expense resulted largely from lower bonus expense of $368,834,
lower bad debt expense of $141,905 and lower severance expense of $54,405. These
costs were offset by higher payroll and related taxes and benefits of $132,558,
higher insurance costs of $104,748, higher stock-based compensation costs of
$94,340, and higher outside service costs of $93,961.
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Selling and Marketing Expense
During the three months ended June 30, 2022, selling and marketing expense
totaled $778,656 compared to $703,014 for the three months ended June 30, 2021.
The increase in expense of $75,642, or approximately 11%, is principally the
result of higher travel related costs of $47,841 and higher trade show expense
of $30,997.
Research and Development Expense
During the three months ended June 30, 2022, research and development expense
totaled $583,492 compared to $332,588 for the three months ended June 30, 2021.
The increase in expense of $250,904, or approximately 75%, resulted largely from
continuous improvements of our existing software, resulting in increased payroll
and related tax expense of $199,246 after the implementation and subsequent
amortization of our new monitoring software, increased outside service costs of
$32,363 and increased travel expense of $9,078. As a result of the
implementation of our new monitoring software on July 1, 2021, capitalization of
developed technology decreased to $249,642 during the three months ended June
30, 2022, which represents technology projects currently in development compared
to the $407,839 which was capitalized in the three months ended June 30, 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 June 30, 2022, depreciation and amortization
expense totaled $400,062 compared to $434,348 for the three months ended June
30, 2021, a decrease of $34,286 or approximately 8%, largely due to fully
depreciated assets.
Total Operating Expense
During the three months ended June 30, 2022, total operating expense was
$4,496,372 compared to $4,338,789 for the three months ended June 30, 2021, an
increase of $157,583, or approximately 4%. The increase is principally due to
the factors disclosed above.
Operating Income (loss)
During the three months ended June 30, 2022, operating loss was $(532,159)
compared to operating income of $1,297,062 for the three months ended June 30,
2021, a reduction of $1,829,221, or approximately 141%. This reduction was due
to a decrease in gross profit of $1,671,638, which resulted from lower revenue
and higher cost of revenue directly related to the amortization of our new
monitoring software platform, higher device repair costs and higher
communication costs. These increases were partially offset by lower monitoring
center costs and lower device lost stolen and damaged costs. In addition, the
Company incurred higher selling and marketing and research and development
costs. These increases were partially offset by lower general and administrative
expenses and depreciation and amortization expenses in operating expense.
Other Income (Expense)
For the three months ended June 30, 2022, other income (expense) totaled an
expense of $2,793,805 compared to an expense of $277,897 for the three months
ended June 30, 2021. The increase in other expense for the three months ended
June 30, 2022 is largely due to the settlement of litigation of $1,600,000 and
unfavorable currency exchange rate movements of $941,182 compared to the third
fiscal quarter of fiscal 2021. See Note 23 to the Condensed Consolidated
Financial Statements.
Net Income (Loss) Attributable to Common Stockholders
The Company had net loss attributable to common stockholders of $(3,605,059),
for the three months ended June 30, 2022, compared to net income of $1,198,041
for the three months ended June 30, 2021, a reduction of $4,803,100. This
decline is largely due to lower operating income and higher income taxes.
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Nine Months Ended June 30, 2022 Compared to Nine Months Ended June 30, 2021
Revenue
For the nine months ended June 30, 2022, the Company recognized revenue from
operations of $28,053,857, compared to $29,571,555 for the nine months ended
June 30, 2021, a decrease of $1,517,698, or approximately 5%. Of this revenue,
$27,148,837 and $29,197,152, respectively, are from monitoring and other related
services, a decrease of $2,048,315, or approximately 7%. The decrease in revenue
was principally the result of a decrease of our North American monitoring
operations driven by clients in Illinois, Virginia, the Bahamas and Indiana,
partially offset by increases of our customers in Saudi Arabia, Canada and
Chile.
Other revenue for the nine months ended June 30, 2022 increased to $905,020 from
$374,403 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, due to the potential inability to meet customer demands.
Cost of Revenue
During the nine months ended June 30, 2022, cost of revenue totaled $14,750,430
compared to cost of revenue during the nine months ended June 30, 2021 of
$13,287,916, an increase of $1,462,514, or approximately 11%. The increase in
cost of revenue was largely the result of higher depreciation and amortization
costs of $930,915, higher server costs of $328,456, higher device repair costs
of $215,392, higher contract software maintenance costs of $130,821, higher
communication costs of $129,944 and higher product sales costs of $105,734,
partially offset by lower monitoring costs of $292,518, and lower lost, stolen
and damaged costs of $89,658. 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 nine months
ended June 30, 2022 and 2021 totaled $2,465,998 and $1,535,083, respectively.
The increase in depreciation and amortization costs of $930,915 is largely due
to the amortization of our new software monitoring platform and other new
software initiatives of $947,268, which began on July 1, 2021 and a slight
decrease in depreciation expense related to devices. Devices are depreciated
over a one to five-year useful life. Royalty agreements are 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.
Gross Profit and Margin
During the nine months ended June 30, 2022, gross profit totaled $13,303,427,
resulting in a gross margin of approximately 47%, compared to $16,283,639, or a
gross margin of approximately 55% during the nine months ended June 30,
2021. The decrease in absolute gross profit of $2,980,212, or approximately 18%,
is due to a decrease in revenue of $1,517,698 and increases in certain costs of
revenue, including higher depreciation and amortization costs of $930,915,
higher server costs, higher device repair costs, higher software maintenance
costs, higher communication costs and higher product sales costs, partially
offset by lower monitoring costs and lower lost, stolen and damaged costs.
General and Administrative Expense
During the nine months ended June 30, 2022, general and administrative expense
totaled $8,003,178 compared to $7,583,410 for the nine months ended June 30,
2021. The increase of $419,768, or approximately 6%, in general and
administrative costs resulted largely from higher legal and professional fees of
$259,343, higher payroll and payroll taxes of $251,278, higher insurance costs
of $168,140, higher consulting costs of $148,866, higher stock-based
compensation costs of $94,340, higher fees and licenses of $65,777, higher
travel and entertainment costs of $67,472 and higher training and recruiting
costs of $31,237. These costs were partially offset by lower bonus expense of
$493,344, lower bad debt expense of $147,153 and lower severance expense of
$61,611.
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Selling and Marketing Expense
During the nine months ended June 30, 2022, selling and marketing expense
totaled $2,197,237 compared to $1,867,880 for the nine months ended June 30,
2021. This increase of $329,357, or approximately 18%, resulted largely from
higher payroll and related taxes of $115,839, higher consulting and outside
service costs of $52,691, higher travel and entertainment costs of $78,699 and
trade show costs of $48,517.
Research and Development Expense
During the nine months ended June 30, 2022, research and development expense
totaled $1,799,821 compared to research and development expense for the nine
months ended June 30, 2021 totaling $ 974,451, an increase of $825,370, or
approximately 85%, resulted largely from continuous improvements of our existing
software, resulting in increased payroll and related tax expense of $743,348
after our implementation and subsequent commencement of amortization of our new
monitoring software, higher outside service costs of $51,992 and higher travel
costs of $28,000. As a result of the implementation of our new monitoring
software on July 1, 2021, capitalization of developed technology decreased to
$560,167 during the nine months ended June 30, 2022, which represents technology
projects currently in development compared to the $1,305,520 which was
capitalized in the nine months ended June 30, 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 nine months ended June 30, 2022, depreciation and amortization
expense totaled $1,231,634, compared to $1,476,178 for the nine months ended
June 30, 2021. This decrease of $244,544, or approximately 17%, was largely due
to fully depreciated assets.
Total Operating Expense
During the nine months ended June 30, 2022, total operating expense increased to
$13,231,870 compared to $11,901,919 for the nine months ended June 30, 2021, an
increase of $1,329,951, or approximately 11%. The increase was largely due to
higher general and administrative expense of $419,768, higher selling and
marketing expense of $329,357 and higher research and development costs of
$825,370 as disclosed above. These costs were partially offset by lower
depreciation and amortization of $244,544.
Operating Income
During the nine months ended June 30, 2022, operating income was $71,557
compared to $4,381,720 for the nine months ended June 30, 2021, a reduction of
$4,310,163, or approximately 98%. This decline was due to a reduction in gross
profit of $2,980,212 and an increase in operating expense of $1,329,951.
Other Income (Expense)
For the nine months ended June 30, 2022, other income (expense) totaled
$(2,809,979) compared to other income of $460,183 for the nine months ended June
30, 2021. The increase in other income (expense) of $(3,270,162) was a result of
negative currency exchange rate movements of $(1,593,933) and a decrease in
other income, net of $(1,960,410), which was partially offset by a reduction in
interest expense of $284,181. In the nine-months ended June 30, 2022, other
income, net, largely represents a litigation settlement of $(1,600,000),
partially offset by $633,471 of accrued expenses forgiven by a vendor. See Note
23 to the Condensed Consolidated Financial Statements. Other income, net for the
nine-months ended June 30, 2021 largely represents a gain on forgiveness of
loans of $1,000,756 in the nine months ended June 30, 2021.
Net Income (Loss) Attributable to Common Shareholders
The Company had a net loss from continuing operations for the nine months ended
June 30, 2022 totaling $(3,458,140) compared to a net income of $4,705,766 for
the nine months ended June 30, 2021, representing a decline of $8,163,906, or
approximately 173%.
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
(the "SBA") pursuant to the Paycheck Protection Program (the "PPP") enacted by
Congress under the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C.
636(a)(36)) (the "CARES Act") administered by the SBA (the "PPP Loan"). 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.
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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 June 30, 2022, $42,864,000 of principal and $0 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 (the "HP Note 1"). To
facilitate the HP Note 1, the Company entered into a Note Payable Agreement with
HP Financial Services Chile Limitada as the lender. The HP Note 1 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 "Santiago Monitoring Center" and "Puerto Montt
Monitoring Center", respectively). The HP Note 1 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 (the "Banco Santander
Note"). To facilitate the Banco Santander Note, the Company entered into a Note
Payable Agreement with Banco Santander as the lender. The Banco Santander Note
was used for the construction of the Santiago Monitoring Center and remodeling a
temporary monitoring center. The Banco Santander Note 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.
On February 2, 2021, the Company borrowed 247,999,300CLP ($338,954USD), net of
2,000,700CLP fees ($2,734USD), from Banco Estado (the "Banco Estado Note"). To
facilitate the Banco Estado Note, the Company entered into a Note Payable
Agreement with Banco Estado as the lender. The Banco Estado Note was used for
the construction of the Santiago Monitoring Center and computer equipment for
Gendarmeria branch offices. The Banco Estado Note 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 (the "HP Note 2"). To facilitate the HP Note
2, the Company entered into a Note Payable Agreement with HP Financial Services
Chile Limitada as the lender. The HP Note 2 was used to purchase computer
equipment for the Santiago Monitoring Center. The HP Note 2 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 (the "Banco de Chile Loan 1"). To
facilitate the Banco de Chile Loan 1, the Company entered into a Note Payable
Agreement with Banco de Chile as the lender. The Banco de Chile Loan 1 was used
to purchase HVAC equipment for the Santiago Monitoring Center. The Banco de
Chile Loan 1 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 (the "Banco de Chile Loan 2"). To facilitate the Banco de Chile
Loan 2, the Company entered into a Note Payable Agreement with Banco de Chile as
the lender. The Banco de Chile Loan 2 was used as working capital and to
complete the construction of the Puerto Montt Monitoring Center. The Banco de
Chile Loan 2 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 in July 2024, no assurances can be
given.
Other than the above-mentioned items, no borrowings or sales of equity
securities occurred during the nine months ended June 30, 2022 or during the
year ended September 30, 2021.
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Net Cash Flows Provided by Operating Activities
During the nine months ended June 30, 2022, we had cash flows from operating
activities of $188,511, compared to cash flows from operating activities of
$3,678,049 for the nine months ended June 30, 2021, representing a $3,489,538
decrease, or approximately 95%. The decrease in cash from operations was largely
the result of lower operating income and a decrease in accounts payable and
accrued liabilities, partially offset by a lower use of cash related to
performance bonds and monitoring center assets and a decline in accounts
receivable.
Net Cash Flows (used in) Investing Activities
The Company used ($3,042,088) of cash from investing activities during the nine
months ended June 30, 2022, compared to ($3,771,867) of cash used by investing
activities during the nine months ended June 30, 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 nine months
ended June 30, 2022. For the nine months ended June 30, 2022, capitalized
software decreased by $745,353 compared to the nine months ended June 30, 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 $62,769 compared to the nine months ended June 30, 2021.
Net Cash Flows (used in) Provided by Financing Activities
The Company used ($399,649) of cash from financing activities during the nine
months ended June 30, 2022, which was largely the result of loan principal
payments of $(378,775). The Company was provided $1,517,060 of cash for
financing activities during the nine months ended June 30, 2021, which included
net cash proceeds of $1,672,129 from four lenders related principally to the
construction of two monitoring centers in Chile, partially offset by loan
principal payments of $155,069.
Liquidity, Working Capital and Management's Plan
As of June 30, 2022, the Company had unrestricted cash of $4,914,133, compared
to unrestricted cash of $8,421,162 as of September 30, 2021. As of June 30,
2022, we had working capital of $7,641,438, compared to working capital of
$9,190,430 as of September 30, 2021. This decrease in working capital of
$1,548,992 is principally due to the purchase of monitoring equipment and parts,
partially offset by cash provided by operations.
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, as outlined above, 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 with the current balance of the
six notes totaling just over $900,000 at June 30, 2022. 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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