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 (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.

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.

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.

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.

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.

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.

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.

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.