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, 2022, 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.
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 and was certified in 2020 by the Federal
Communications Commission and PCS Type Certification Review Board. 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 is our predecessor device which had 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, 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.
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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, 2022, filed with the
SEC on December 16, 2022. During the three months ended December 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.
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 in the past 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. In addition, both our Chile office and the corporate
headquarters in the greater-Chicago area have been open nearly fifteen months.
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 December 31, 2022 Compared to Three Months Ended December 31,
2021
Revenue
For the three months ended December 31, 2022, the Company recognized total
revenue from operations of $8,855,691 compared to $9,595,656 for the three
months ended December 31, 2021, a decrease of $739,965 or approximately 8%. The
decrease in monitoring revenues is driven principally by fluctuations in court
proceedings where active devices are assigned to customers in Illinois,
California, the Bahamas and Canada, partially offset by an increase in
monitoring revenues for customers in Nevada and Panama.
Product sales and other revenue for the three months ended December 31, 2022
increased to $565,909 from $125,927 in the same period in 2021, an increase of
$439,982 or approximately 349%, primarily due to a periodic purchase from a
partner in Saudi Arabia.
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
improved significantly in the second half of calendar 2022; however, long lead
times remain with certain parts. 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 December 31, 2022, cost of revenue totaled
$4,675,013 compared to cost of revenue during the three months ended December
31, 2021 of $4,795,427, a decrease of $120,414 or approximately 3%. The decrease
in cost of revenue was largely the result of lower depreciation and amortization
costs of $90,830, lower monitoring center costs of $90,352, lower outside
services costs of $48,876, partially offset by higher server costs of $40,457
and higher device repair costs of $74,797.
Depreciation and amortization included in cost of revenue for the three months
ended December 31, 2022 and 2021 totaled $773,019 and $863,849, respectively, a
decrease of $90,830. 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 software amortization of our new software
monitoring platform and other new software initiatives of $39,118, as well as a
decrease in device depreciation expense of $51,712. 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 December 31, 2022, gross profit totaled
$4,180,678, resulting in a gross margin of approximately 47%. During the three
months ended December 31, 2021, gross profit totaled $4,800,229, resulting in a
gross margin of approximately 50%. The decrease in absolute gross profit of
$619,551 or approximately 13% is due to lower revenue, partially offset by a
decrease in certain costs of revenue.
General and Administrative Expense
During the three months ended December 31, 2022, general and administrative
expense totaled $2,754,520 compared to $2,498,359 for the three months ended
December 31, 2021. The increase of $256,161 or approximately 10% in general and
administrative expense resulted largely from higher bad debt costs of $139,434
due to significant credits taken in 2021, higher insurance costs of $89,814,
higher stock-based compensation of $61,750, and higher payroll and payroll taxes
of $116,973. These costs were offset by lower legal and professional fees of
$135,204.
Selling and Marketing Expense
During the three months ended December 31, 2022, selling and marketing expense
totaled $729,470 compared to $697,872 for the three months ended December 31,
2021. The increase in expense of $31,598 or approximately 5% is principally the
result of higher travel and entertainment cots of $28,331 and higher payroll and
taxes of $8,372, partially offset by lower trade show costs of $7,650 and lower
consulting and outside service expenses of $5,229.
Research and Development Expense
During the three months ended December 31, 2022, research and development
expense totaled $589,805 compared to $590,852 for the three months ended
December 31, 2021. The nominal decrease in expense of $1,047 was primarily due
to a decrease in payroll offset by increases in consulting and outside services
expenses.
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Depreciation and Amortization Expense
During the three months ended December 31, 2022, depreciation and amortization
expense totaled $247,710 compared to $416,801 for the three months ended
December 31, 2021, a decrease of $169,091 or approximately 41%, largely due to
fully amortized intangible assets.
Total Operating Expense
During the three months ended December 31, 2022, total operating expense
increased to $4,321,506 compared to $4,203,884 for the three months ended
December 31, 2021, an increase of $117,622 or approximately 3%. The increase is
principally due to the factors disclosed above.
Operating (Loss) Income
During the three months ended December 31, 2022, operating loss was ($140,828)
compared to operating income of $596,345 for the three months ended December 31,
2021, a reduction of $737,173 or approximately 124%. This reduction was due to a
decrease in gross profit of $619,551, which resulted from lower revenue,
partially offset by a decrease in certain costs of revenue.
Other Income (Expense)
For the three months ended December 31, 2022, other income (expense) totaled
income of $63,601 compared to other expense of ($587,838) for the three months
ended December 31, 2021, an increase of $651,439. The increase in other income
is largely due to positive currency exchange rate movements of $589,429 between
the US Dollar vs. the Chilean Peso, compared to the first fiscal quarter of
fiscal period of 2022, and higher interest income, net of $62,011.
Net Income (Loss) Attributable to Common Stockholders
The Company had net income attributable to common stockholders of $36,384 for
the three months ended December 31, 2022, compared to a net loss attributable to
common stockholders of ($305,322) for the three months ended December 31, 2021,
an increase of $341,706. This increase is due to positive currency exchange rate
movements, higher interest income, partially offset by lower operating income.
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 the PPP Loan
received pursuant to the PPP enacted by Congress under the CARES Act,
administered by the SBA. On December 8, 2020, the Company filed the application
for forgiveness with the Lender and on January 8, 2021, the Company received a
notification from the Lender that the SBA remitted funds to fully repay the PPP
Loan, and that the funds were utilized to pay-off and close the PPP Loan and
that the PPP Loan was fully forgiven.
On October 21, 2020, the Company requested, in writing, an additional extension
to the maturity date of the $30.4 million 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 extended the maturity
date of the Amended Facility Agreement to July 1, 2024, capitalized the accrued
and unpaid interest which increased the outstanding principal amount and reduced
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 note payable for total principal of $42,931,556. Conrent forgave
$67,556 of the amount due and the new Amended Facility principal and interest
became $42,864,000. Interest payments were 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
September 30, 2022, $42,864,000 of principal and $876,331 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.
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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 remodeling a temporary monitoring
center. The loan bears an 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. 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 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.
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 an 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 of 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 an interest 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 with the construction of the Gendarmeria monitoring
center in Puerto Montt, Chile. The loan bears an 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 three months
ended December 31, 2022 or during the year ended September 30, 2022.
Management will continue to seek other sources of capital, refinancing options,
prepayment of debt at a discount, extending the maturity date of the debt 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 of these alternatives prior to July 2023, no assurances can be
given.
Net Cash Flows Provided by Operating Activities.
During the three months ended December 31, 2022, we had cash flows from
operating activities of $2,328,423, compared to cash flows from operating
activities of $1,281,637 for the three months ended December 31, 2021,
representing a $1,046,786 increase or approximately 82%. The increase in cash
flows from operations was largely the result of decreases in our net operating
assets and liabilities, mainly driven by decreases in inventories, and increases
in accounts payable and accrued liabilities.
Net Cash Flows Used in Investing Activities.
The Company used $2,188,616 of cash from investing activities during the three
months ended December 31, 2022, compared to $875,540 of cash used for investing
activities during the three months ended December 31, 2021. The increase in cash
used for investing activities was primarily related to purchases of monitoring
and other equipment to complete the swap of 3G devices and meet customer demand
during the three months ended December 31, 2022.
Net Cash Flows Used in Financing Activities.
The Company used $126,316 of cash from financing activities during the three
months ended December 31, 2021, which was the result of loan principal payments
on Chile's long-term debt.
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Liquidity, Working Capital and Management's Plan
As of December 31, 2022 the Company had unrestricted cash of $5,543,340 compared
to unrestricted cash of $5,311,104 as of September 30, 2022. As of December 31,
2022, we had working capital of $5,939,368, compared to working capital of
$7,296,297 as of September 30, 2022. This decrease in working capital of
$1,356,929 is principally due to the purchase of monitoring equipment and an
increase in operating liabilities.
On October 21, 2020, the Company requested, in writing, an additional extension
to the maturity date of the Amended Facility Agreement. On November 25, 2020,
the Noteholders held a meeting to address the Company's request and approved a
new maturity date of July 1, 2024. On December 21, 2020, Conrent and the Company
signed an Amendment to the Amended Facility Agreement which extended the
maturity date of the agreement to July 1, 2024, capitalized the accrued and
unpaid interest which increased the outstanding principal amount and reduced the
interest rate of the Amended Facility Agreement from 8% to 4%. On June 30, 2021,
the Company restarted interest payments to Conrent which have been made
semi-annually since that time.
During the fiscal year ended September 30, 2021, the Company borrowed
approximately $1.95 million though 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. No additional funds were borrowed in the three months
ended December 31, 2022 or borrowed in the fiscal year end September 30, 2022.
Inflation
The rise in inflation in 2021 and 2022 has adversely impacted the Company's cost
of labor, materials and other operating expenses as well.
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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