TRCK Track Group Inc (QB)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”, or, this “Report”) contains information that constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, the statements contained in this Report that are not purely historical can be 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.

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.

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.

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.

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.

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.

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.

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).

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.